Watts Water Technologies, Inc. (WTS) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Watts Water Technologies Earnings Conference Call. My name is Taheisha, and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Kenneth Lepage, General Counselor. Please proceed.

Thank you, and good morning. 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 may make during today's call about the company's future expectations, plans and prospects constitute forward-looking statements under the Private Securities Litigation Reform Act in 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, 2011, and other reports we file from time to time with the SEC. In addition, forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any future date. While we may elect to update these forward-looking statements, we disclaim any obligation to do so. During this call, we may refer to non-GAAP financial measures. These measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release dated July 31 relating to our second quarter 2012 financial results, a copy of which may be found in the Investor Relations section of our website at www.wattswater.com, under the heading Press Releases. I'll now turn the presentation over to David Coghlan.

Good morning, everyone, and thanks for joining our quarter 2 earnings call. We appreciate your interest in Watts Water. I'd like to start by providing a brief overview of the quarter. I'll follow with our latest view on market conditions in our key regions and a sense of where we see those markets flowing in the second half of 2012. I'll then hand you over to Bill McCartney, who'll provide more color on our performance for the quarter. And after Bill's discussion, I'll summarize and we'll open the call to your questions. So let me start by recapping the quarter. We believe we delivered a solid quarter for our shareholders in quarter 2 particularly given our disappointing results in quarter 1 and the continued economic malaise in Europe which, as you know, is about 40% of our business. Our adjusted operating margins were up 1.5 percentage points sequentially from quarter 1 and were just slightly below those of quarter 2 2011. We're off to a good start in the year on the cash flow front with an increase of 65% in the first 6 months of the year versus the same period last year. And we also completed our previously announced share buyback, purchasing about $63 million of shares in the quarter. European sales in the quarter were up organically by about 6%, much of that related to our Italian business which fell significantly in the quarter. Despite those headwinds, we saw growth in the European drains business and in our under floor Heating business while Socla continued to deliver strong performance. We were also pleased with our performance in Eastern Europe and the Middle East. Furthermore, we were encouraged to see order rates pick up towards the end of the quarter. And finally, our European team made progress in reducing operating costs in response to the slowing economy. In North America, our organic growth rate doubled from quarter 1, albeit from a slow start with sales gains in both the retail and wholesale channels. We made progress on a number of the issues affecting our quarter 1 performance including non-commodity cost increases, a spike in our product liability costs and the costs associated with our conversion to lead-free. The North American team attacked these issues during quarter 2 and made good progress on our lead-free conversion program and reining in non-commodity cost increases and driving productivity improvements, on instituting new freight cost coverage programs and in taking additional steps to reduce operating expenses including some selective reductions in force. The sum total of these efforts helped to increase our North American gross margins by 60 basis points versus quarter 1. Finally, I should mention that although a smaller part of our overall business, our Asia team delivered a very strong quarter with earnings up 133% from quarter 2 last year. This result was driven by our focus on attractive segments within the plumbing and HVAC markets, by better absorption in our plants and by improved productivity. In general, pricing was not a major issue during the quarter although we were -- although we are still facing pricing challenges in certain markets including some European markets and North American DIY. Regarding commodity costs, copper-bearing product costs have been fairly stable so far this year and we believe near-term copper costs may provide some upward bias in gross margins. However, this may be muted somewhat by the seasonal falloff in volume that we typically experience during the second half of each year which can impact plant absorption. We do expect gross margins in North America to still be affected by lead-free preproduction costs in quarter 3 as we complete the conversion of our main facilities to lead-free production. We will continue to mitigate cost increases as much as possible in both Europe and North America by improving our productivity through various VAD projects and lean activities. We anticipate that these programs would lead to improved margins over the next several quarters. Now let's discuss the current market conditions and where we see things trending into the second half of 2012. First, let me talk about Europe. Recent expectations for the Eurozone in 2012 are forecasting a slight contraction in GDP of about 0.4%. The U.K. and Spain are in recession, Greece's issues likely won't go away soon, and the Italian economy is struggling. To add to the confusion, new governments have taken over in France and the Netherlands. So from a macro perspective, there are many data points that suggest that Europe may experience further economic turmoil before things get better. As a pan-European company, our business was most affected by the slow economy in Southern Europe, especially in Italy where we experienced a slowdown during quarter 2. We expect this trend will continue for the foreseeable future which could put pressure on our Italian sales and on plant absorption there. However, despite the general gloom and doom, our key markets in France and Germany remain pretty solid and we are seeing growth in our Nordic, Eastern European and Middle Eastern markets. We also believe we're taking share in some market segments where we're focused on servicing [indiscernible] customers better than the competition, and with large pan-European wholesalers where we're working to be the wholesalers' one-stop shop. Finally, we are also seeing pockets of growth in some of our product lines including drains and under floor heating. So overall, our view of Europe remains the same. We remain cautious about the uncertain macroeconomic environment there and Southern Europe, particularly Italy which is an important market for us, remains a concern. However, we believe the repair/replace/upgrade business should continue and we're pleased with the results of our efforts to date in focusing on geographic customer and product focus growth opportunities. Now let's talk about North America. U.S. GDP is forecasted to be an unspectacular 2.1% for all of 2012. But statistics on housing starts and new housing permits have remained positive through the first half of 2012, largely driven by multifamily construction. We still see foreclosure overhang, distressed sales and high unemployment levels as a barrier for significant growth in residential construction in 2012. We believe existing home sales should be steady in the $4.5 million range, which is encouraging for our repair and replacement business. Commercial construction expectations remain mixed, at best. The value of new commercial construction put in place in private nonresidential sector increased nicely in June. However, a key future indicator, the ABI, has been negative now for 3 consecutive months through June. So our feeling continues that commercial construction could have little to no positive effect in our end markets for the remainder of 2012, and likely, into early 2013. So in summary, we believe this portends slow but steady sequential growth for our North American business as we move into the second half of the year. Finally, let's look at Asia. As I mentioned in our last call, although small, we anticipate that our longer-term growth prospects in Asia are bright. We believe there is significant opportunity for us to grow in the domestic China marketplace and we're making some nice progress in laying the foundations for sustained growth there. China's economy is expected to grow by roughly 7.6% in 2012, and a significant portion of domestic GDP is accounted for by real estate including construction. We are really focusing on bringing to bear our worldwide capabilities into the Chinese markets for high-end construction contractors who want to emulate established European and U.S. plumbing codes when spec-ing their jobs, and for consumers who are increasingly focused on ensuring comfort and safety in their homes. Let me turn it over to Bill now, who'll provide you with more insights into our operating performance in quarter 2.

Okay. Thank you, David. Looking at -- on -- the numbers on a consolidated basis, revenue was at $371 million for the quarter, which is up from the first quarter but down from last year's Q2 by $5 million or 1%. Looking at the components of that growth, first of all, we had negative organic growth of about $1 million, slightly less than 1/2 of 1%. From the change in foreign exchange rates, our revenue declined $16 million or 4%, and the contribution from the acquired companies, we achieved $13 million of revenue or about 4%. So that's the 1 month extra of Socla that we had and the contribution from tekmar. So what we'll see when we look at the segments is that, basically, we struggled in Europe but we -- some of that growth or that decline was offset by improvements in North America and Asia. On the earnings front, from a GAAP standpoint, we're at $0.51 compared to $0.34 last year, significant improvement primarily due to the lack of acquisition accounting charges this year, which we did have last year in Q2 because of Socla. When we look on at it on an as-adjusted basis, removing the unusual special items, we achieved $0.53 compared to $0.50 last year and we compare that to consensus estimates of $0.54. Looking at these segments, first, North America. North American revenue had $222 million, an increase of $10 million from last year's Q2 or about 5%. And we also picked up about $11 million or $12 million -- $12 million versus the first quarter of this year. The components of that growth: $8 million organically, which is about 4%. We had a slight adverse impact from foreign exchange, which is the change in the Canadian rates, of about $1 million. And then the contribution of tekmar and a little bit of Socla in North America. That's $3 million or about 1.5%. So that totals about $10 million or 4.5%. On wholesale side -- breaking it down into wholesale and retail, the wholesale side, we had about $177 million of revenue, an increase of about $6 million or 4% versus last year and we picked up -- comparing the wholesale to Q1 of this year, we picked up about 7% revenue gain there. The retail at $45 million, was up $3.5 million or 8%. And if we look at the wholesale side without foreign exchange or acquisitions and so on, we grew about 2.5% or $4 million and the retail numbers are consistent at 9%. Europe, we closed the quarter at $143 million which is a decline of $15 million. So we have some unusual numbers working here but if you look at organically, we were down about $9 million or 6% from -- the change in foreign exchange rates adversely impacted us for $15 million or 10% and then the acquisition of Socla contributed $10 million or 6%. So that adds up to the $15 million decline or about 9.5%. When we look at the Euro -- this change in foreign exchange rates, the average rate we used during the second quarter of this year was about $1.29. We compare that to about $1.44 last year, so we saw the foreign exchange rate decline about 10.5% for us this year versus last year. And as David mentioned, the largest impact we saw from an organic standpoint is the softness in Southern Europe. Italy was particularly hard hit there. In China, small segment but still we saw some very nice performance there. $6.5 million of revenue, that's up 10% or $600,000. And that was evenly split between the 3 categories of organic, foreign exchange and acquisitions. We saw a small contribution from Socla in China, and again, as David mentioned, primarily due to entering some new Heating markets in Europe and setting up some new distribution teams there as well. Looking at the margins. On a consolidated basis, the margins were fairly flat with last year and flat with Q1 at 35.5%. However, looking at the segments, there's a lot of movement in between North America and Europe which offset in consolidation. But North America, the margin of 35.6% is down from last year by 60 basis points but improving by 60 basis points from the first quarter. So when we look at the margin in Q1, things that we talked about during our first quarter conference call of trying to address some of the inflation, we've done that. We've made progress on our no-lead initiatives where we're doing our preproduction runs with a little bit more efficiency and effectiveness. And we've made some progress on some of our increased freight charges, as well. So we made progress in all 3 fronts and so that's why we saw an increase in the margin of 60 basis points from Q1 of this year. Looking at Europe, the margin is down from last year by about 200 basis points and down from Q1 -- excuse me, and down from Q1 about 110 basis points. So again, what we saw in Europe, really, was the impact of the volume declining but we also saw some nice improvements in productivity and price versus cost. On the SG&A, $97 million of SG&A in the quarter and that's down a little bit from last year's Q2, about $1 million. The change in the SG&A versus last year, we saw a decline of $2 million from an organic standpoint. The foreign exchange rates, we saw a decline of $4 million and then the inclusion of Socla and tekmar for the full quarter, a $4.5 million increase. When we compare our SG&A to the first quarter of this year, we were $101 million, so we saw our product liability return to normal levels without reducing our SG&A by about $2 million. And then some of the progress we made on our initiatives around freight and headcount reductions and so on, reduced SG&A another $2 million which brings us down to the $97 million figure. Operating earnings on an as adjusted basis was down about $800,000. When we look at that, we saw -- from an organic standpoint, we were essentially were flat. We had an adverse impact from the foreign exchange of about $1.6 million and that's actually caused us -- affected our EPS by about $0.03, the foreign exchange rates. And then the acquisitions contributed about $700,000. So that comes to your $800,000 in total for the -- slight decline in operating earnings but again, primarily impacted by the foreign exchange rates. Looking at the effective tax rate in the quarter of 33.4%, that's down about 40 basis points. That's primarily due to a mix shift because we have Socla for a full quarter, more of our income is in Europe and the effective rate in Europe is somewhat lower than the corporate average. So again, that brings us back down to our bottom line, $0.53 versus $0.50. We did complete our share buyback in the quarter as David mentioned. Our average shares outstanding was 36.6 million and as we go forward into Q3, we would expect that to be closer to 35 million shares. So with that, I think we can turn it back to David and open up to questions as well.

Thank you, Bill. In our first quarter call, we told you that our focus for the remainder of the year would be on climbing back up the performance staircase following our slip in the first quarter while executing on our lead-free conversion and continuing to navigate through an uncertain macroeconomic environment. We believe we made some progress in this journey in the second quarter and we'll continue to stay very focused on this past over the coming quarters. So with that, why don't we open up the lines to your questions. Taheisha, can you open up the line please?

[Operator Instructions] Your first question comes from the line of Jeff Hammond from KeyBanc Capital Markets.

So I guess what I really want to focus on and understand better is just progression in North America. I think you said on one hand, there was some seasonality and seasonal weakness into the second half to think about -- but I think you talked about in outlook, sequential progression. So I just want to better understand how you think North America shapes up. And then also on the margin front, margins were quite good in the second half last year in North America and seem to be -- and you talked about maybe some favorable price cost and just kind of how to think about margins year-on-year in North America along those lines?

First of all, Jeff, let's remind all of ourselves on the call here that last year's third quarter was really a grand slam and that kind of performance -- we've been saying it even as we had our 3 quarter, last year, phone call or web call, that that's not likely to be repeated. So that we kind of view this year as are we making progress on a sequential basis, which we did in -- from Q1 into Q2 and when we think about North America, we are committed to doing that again. So some of the factors that are in play there, you do have -- the summertime tends to be a little slow in our business but then we start into September with the heating season and that's usually good. The seasonality on the Heating business is usually a very positive thing for Watts, both in Europe and in North America. So that should be a positive for us. We're continuing to focus on the initiatives from Q1 that we discussed in the call -- the material inflation, improving productivity, converting to lead-free in a more efficient and effective way. And then we should be continuing to make additional progress on our freight issues as well. So I think all that bodes well for continued improvement in North America for Q3 versus Q2. Is that answering your question?

Yes, but I guess 2Q looks like, I guess, your seasonally strongest quarter from a revenue perspective, so is most of the sequential progression on the margin side?

Yes.

Okay, great. And then can you -- I guess, maybe just remind us what the quantification of those 3 issues -- where the freight -- the lead in the first quarter, and then what that number would have been in 2Q and maybe where it was relative to your expectations going in?

What we talked about in terms of the second quarter was we had a $6 million issue, if you like, caused by 3 factors and it was roughly $2 million a piece. I'm sorry, in the first quarter. And so the first issue was the impact of the lead-free conversion and, if you like, the opportunity cost it caused for productivity efforts in our plants due to our people's focus on lead-free conversion. The second issue then was a much faster ramp up in non-commodity costs than we had anticipated. So that included non-commodity-related material costs. It also included freight, et cetera. And then the third one, was what we regarded as a one-time true up in terms of our product liability reserves which cost us about $2 million. And so if we go back through those and -- on the first one, we still have a lot of our folks focused on lead-free but we are moving forward with our lead-free conversion, as Bill said, in a more efficient and effective way. And so we are seeing those costs come down a little bit. With respect to the second issue, we have attacked some of the non-commodity cost increases we experienced and we are winning some of them back. And we've been offsetting a significant portion of the freight cost increases through increases in freight charges. And then, as we said, the third item is a one-time true up so it didn't reoccur. As we look into the third quarter, we will of course continue to try and be as efficient and effective on lead-free as we can and we will continue to be working extremely hard to go after and eliminate the impact of the noncommodity cost increases and freight increases.

Okay. So the 6 was more like 2 to 3 this quarter and will diminish a little bit further into 3Q?

Right. That's a good way of looking at it.

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

This is Zoran Miling in for Garik. First, I was just hoping you could provide us with some additional color on how much of your sales growth, preferably by geography, was driven by volume and price during the quarter?

Well, I'd say in the -- in North America, there was very little in terms of pricing. It was primarily driven by units because we had our last major price increase during Q2 of last year. And then in Europe, obviously, we did have some modest price increases. As we talked about in our Q1 call, it's one of the first quarters we had seen some positive pricing in quite a while. So that -- it was very minor but it was still positive in Europe. And obviously, when you're down, the 6%, that's primarily driven by lower unit sales which is, again as we discussed, primarily driven by Southern Europe. So it's mostly units, both U.S. -- North America and Europe.

Okay, good. Could you just give us a sense of where you stand with the spread between your pricing and raw materials right now?

Spread -- well, I mean, we had our last price increase last year, so I guess when you say spread, I mean, we would view ourselves as we have recovered on the wholesale side in North America. On the retail side, it always is a bit of a struggle. And then, as we also said a little earlier, we are seeing copper being relatively stable and so that should give us a little bit of tailwinds as we look forward.

Your next question comes from the line of Nick Prendergast from BB&T Capital Markets.

I just have one quick question here. Regarding the $1.2 million in restructuring, was that entirely in Europe or was that split between North America and Europe?

No. Actually on a pretax basis, it was $400,000 in North America, $800,000 in Europe.

$800,000 in Europe. All right. And also on FX, do you guys have a rule of thumb, perhaps, as to -- depending on how much the Euro moves and how much that would affect your bottom line?

Well, we saw the Euro decline 10% this year, right? And that -- so it went from $1.44 to $1.29 and that impacted us $0.03. So I think you can...

Your next question comes from the line of Ryan Connors from Janney Montgomery Scott.

A couple of questions. First, on the issue of -- I wonder if you could talk to us a little bit about inventories in your channels, specifically wholesale in North America and whether the kind of modest improvement there in demand is leading to any restocking in your -- among your distributors?

I'll answer that question and throw in a little bit more about Europe, if I may. In North America, we've not seen any indications that our customers, either wholesale or retail, are increasing their inventory levels. We continue to see our customers operate very tight inventory levels and we continue to see relatively small order volumes. And so the large stocking orders that might have been traditional several years ago are nontraditional today. If we switch to Europe, we did see some de-stocking among some of our OEM customers. We saw some of that in Q1 and we saw it continue into early Q2 as they recovered from a relatively soft heating season in Europe. But we did see order entry pick up towards the end of the quarter and we entered into the third quarter with a pretty nice level of backlog from our OEM customers in Europe. But again, our customers there are focusing extremely heavily on the low inventories and that's one of the reasons we believe we're picking up some share in Europe because we're able to service them very quickly and very effectively in a way that's a little bit better than some of our competitors. So no significant movement to increased inventory, and in Europe, just a little bit of de-stocking as some of our OEM customers get rid of their overhang from the last winter.

Okay, great. And then secondly, on the issue of pricing in Europe, obviously very encouraging to see a somewhat disciplined pricing environment there and even a modest increase. Pretty surprising given all the headwinds and can you just talk a little bit about what you think is driving that and what your outlook is for the pricing in Europe, whether that continues or whether that sort of dissipates?

Well, look, I think it very much depends on what markets we're looking at. Obviously, with the significant fall off in the wholesale market which we saw in Q2 in Italy, people are competing for every piece of business they possibly can. However, as we move into some of our other large markets, places like France, Germany, et cetera, those markets, by and large, have been relatively stable. And so that's given us a platform to try to push for some price improvements wherever we can. And we think it's going to remain the same going forward. We're going to scrap for every little bit of price that we can get, wherever we can get it so that we can continue to move towards the parity between price cost. And so no overall trends. It's market-by-market, segment-by-segment, customer-by-customer.

Your next question comes from line of David Rose from Wedbush.

This is Michelle in for David. My first question, when will the company complete the preproduction process for lead-free? Do you have any sense of timing and what impact it will have on the quarter?

Yes. There's 2 large pieces to the preproduction, if you like, or the preparation for lead-free. First one is the preproduction rooms, and we're going to be pretty much through them in the third quarter. There'll be a little bit of overhang into the fourth quarter, but we will be predominantly done in the third quarter. And then the second piece is that we've previously announced that we decided to build a dedicated lead-free foundry in New Hampshire and we're in the midst of that project and that project will complete early next year.

And on my next question, what is your capacity utilization in North America and how does that compare to Europe?

I guess it depends on how you measure it and so throwing out numbers might be more misleading than helpful. But I guess that the way to answer it is that in terms of capacity for a pickup in demand, we're pretty comfortable that we're well placed for that. If we switch to Europe, we also feel pretty comfortable that we're well-placed. We do believe there's opportunities to continue to rationalize our footprint. And one of the areas we are a bit concerned about, as it did hurt us in the quarter, is that the Italian market fell off. We did have some absorption issues in our Italian facilities, and so we're looking to take action there to do deal with that. For example, we shut down all of August. So hopefully, that gets at your question.

Okay, and then my final question, is there any sense of the timing rollout of lead-free product in North America? What are your customers telling you?

The law requires that all water-bearing products convert to lead-free by January 1, 2014. Obviously, we're in discussions with our customers. The last thing we want is for our customers to be stuck with leaded inventory heading into that transition and so we're working with our customers to manage the transition during the course of next year.

[Operator Instructions] Your next question comes from line of Sid Panda from RBC Capital Markets.

The first question I had was regarding the European business. How much is Italy in the European business?

Italy is about 10% of our total business in Europe.

Okay. And what about the rest of Europe, like the Northern Europe, the Germany, France, Nordic regions, et cetera? How confident are you in the stability of those regions going forward?

Well, I guess I'd start with how confident are any of us with respect to the macroeconomic environment in Europe? And obviously, significant changes in that macroeconomic environment can have a significant impact on our markets. So for example, were Greece to default and drop out of the E -- out of Europe, that could have a huge impact. But absent any changes in the macroeconomic environment, which we can't forecast nor can we plan for. What we can talk about is that if we look across our major markets, France remains stable and Germany remains stable. We're seeing some growth in Nordic. We're seeing some nice growth in Eastern Europe. We're seeing some growth in the Middle East. U.K. is in recession but our sales there are relatively stable. Spain is in recession. Our sales there have come down but they are stable in the quarter. And so the area that changed for us significantly was Italy where the wholesale market contracted substantially in the quarter. And then the last point I'd make is that if you cut across those markets -- I referred earlier to the fact that we saw some de-stocking following the weak heating season by some of our OEM customers across Europe. How confident can we remain on that? I think it all ties back to the macroeconomic environment and you're probably a better judge of that than we are.

And you mentioned building a new lead-free foundry in New Hampshire. I was wondering if you could give us some idea about the CapEx expectation for the year?

Yes, we've talked about that a couple of times in the past and we talked about a capital investment of an excess of $10 million. However, the amount of money we'll spend this year will not be significant. A significant part of that will come in towards the end of the year, beginning of next year.

Okay. And with your facility footprint with respect to the deterioration in demand, are you considering some additional actions, going forward, if that continues?

In Europe?

Europe, as well as North America.

Well, we're not seeing a deterioration in demand in North America. As we mentioned on the call earlier, we're seeing a pickup in organic growth in North America, a significant pickup from the first quarter. However, we are seeing a slowdown in organic demand in Europe and we are looking at our footprint. We are looking at what actions we can take, but obviously, in Europe you have things like workers council discussions that you have to have. And so we'll be working through that in due course.

Your next question comes from the line of Stewart Scharf from S&P Capital IQ.

Regarding Europe again or generally, your foreign sales, the percentages come down a bit from last year and I was wondering if there's any change in strategy or would you try to focus more on the areas where there's growth in Eastern Europe -- Germany and so forth? Or you just, sort of, wait it out, the macro environment?

Well, we said Germany was stable. The areas where we are seeing growth, we're obviously pursuing them. And as I've tried to indicate in the call, we've got some targeted initiatives around some geographies where we see opportunity, and those geographies would be Nordic, Eastern Europe and Middle East. We've got some initiatives around product segments where we see growth opportunities and we referred earlier to drains and under floor heating. And we also had some initiatives underway with specific customers where we think we can take market share either because we believe we can serve them better than our competitors given their very low inventory rates, or where we can serve them on a pan-European basis, such as the large pan-European wholesalers. So those are the 3 strategies that we're pursuing.

But Stu, when you look at it, Europe as a percentage of the total did decline but it's really driven more by the foreign exchange rate. It's not a reflection of any change in strategy and so on that we have.

Right. Okay, and you said the copper is generally stable. So how do you look at that as far as your pricing strategies or pass-through costs and you're just basically -- there's usually a lag. There's a spike. You'll have like 4 or 5-month lags. So you basically just -- keeping an eye on it? Just hoping it stays the where it is?

Yes, as you know -- Stewart, you've followed the company for a long time, and you know we do watch copper very closely as it is one of our most significant material costs -- inputs into cost of goods sold. So it has been stable for several months now. And if copper was to have a spike and it was to be maintained, we would have to consider a price increase. But I don't see anything like that happening. If anything, copper is going to be, we believe, a slight favorable tailwind for us for the remainder of the year. And even if copper were to increase it wouldn't -- the increase wouldn't hit our cost of goods sold at this point until early next year. So I think we're in good shape for copper for the remainder of the year.

And Stewart, the other thing I'd add is that we've done a pretty decent job of covering costs with price in North America -- copper cost with price in North America. But we still have work to do in Europe. And so we saw some forward progress in the first quarter. We saw some modest forward progress in the second quarter and we're going to continue to work that by market, by product segment and by customer.

Okay, and you said that you had some pricing in Europe but not North America? Your regular -- is that right?

That's right. The last price increase in North America was last year during the second quarter. So there, we've anniversaried on that price increase. So there's very little pricing in North America right now.

Okay. But you were able to push through prices in Europe despite the situation there?

Yes. And again I'd just say that it's not a broadbrush approach. It's product-by-product, customer-by-customer, market-by-market.

Ladies and gentlemen, we have no more questions in queue. I would now like to hand the conference back over to David Coghlan.

I'd just like to thank all of you for your continued interest in Watts Water. Very pleased that you could take the time to join us on the call. We wish you all the best for the rest of the summer and we look forward to seeing you again on our third quarter earnings call in October. Thank you very much, and goodbye.

Thank you.

Ladies and gentlemen, and that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.