Watts Water Technologies Q4 2007 Earnings Call Transcript

| About: Watts Water (WTS)

Watts Water Technologies Inc. (NYSE:WTS)

Q4 2007 Earnings Call

February 12, 2008 5:00 pm ET

Executives

Kenneth Lepage - Assistant General Counsel

Pat O'keefe - CEO

Bill McCartney - CFO

Analysts

Amit Daryani - RBC Capital Markets

Curt Woodworth - J.P. Morgan

Steven Nissan - Mindflow Capital Investment

Keith Hughes - Robinson Humphrey

Christopher Glynn - Oppenheimer

Andrew DeAngelis - Keybanc Capital

Francesca McCann - Stanford Financial

Todd Vencil - Davenport

Richard Paget - Morgan Joseph

Ryan Connors - Boenning & Scattergood

Operator

Good day, ladies and gentlemen, and welcome to the quarter four 2007 Watts Water Technologies Earnings Call. My name is Ankida, and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) I would now like to turn the presentation over to your host for today's call Mr. Kenneth Lepage, Assistant General Counsel. Please proceed, sir.

Kenneth Lepage

Thank you. Good afternoon, during today's presentation we may make various remarks about the company's future expectations, plans, and prospects which constitute forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various factors including those discussed under the heading Risk Factors in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission and other reports we file from time to time with the SEC.

Any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we disclaim any obligation to do so.

During this call we may refer to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principals. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release dated today relating to our fourth quarter 2007 financial results, a copy of which maybe found in the Investor Relations section of our website at www.wattswater.com under the heading press releases.

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

Pat O'Keefe

Thank you, Ken and good afternoon everyone. Thank you for your continued interest in Watts Water Technologies. Following my remarks Bill McCartney our CFO will provide the financial highlights for the company in total and Bill will also discuss the individual sector results, then we will open up the forum for questions.

I would like to provide you with an update on some key initiatives we have undertaken. First, you may recall we announced a $13 million restructuring in Q3. Q3 charges of $4.3 million pretax related mainly to product discontinuance. In Q4 we took an additional pretax charge of $800,000 related to severance, relocation costs and asset write-downs.

In the quarter we announced to employees the closure of a manufacturing facility on the west coast whose operations will be absorbed into another US plant. We expect the relocation will be completed in mid-2008.

We also announced a right sizing of one of our Chinese plants, which we concluded in the fourth quarter. At the end of this month we will have successfully moved our Chinese join venture operation, whose physical plant was taken over through eminent domain by local Chinese governments and we will right size the operation into one of our wholly owned Chinese enterprises located in the same area.

The move reduced headcount and improved our manufacturing efficiencies. As part of that relocation process we expect to receive $2 million from our joint venture partner to reimburse us for the land use rights we lost in the forced relocation. From an accounting perspective the receipt of that $2 million will be treated as an equity infusion.

In general we are in target regarding the timing and implementation of these various programs. We expect nominal savings in 2008 from the restructuring exercise, with most of the savings roughly $900,000 pretax being realized in the second half of 2008.

Secondly in December we entered into a contract to purchase the remaining 40% of our Chinese joint venture mentioned previously. We expect that transaction will close no later than the middle of March depending on the timing of the government approvals. We will pay approximately $5.2 million for our partner's interest.

Having this operation fully under Watts's umbrella will allow us to control this company in the same fashion we control our other wholly owned business units. We will be able to realize synergies with another wholly owned entity that has similar products and sells to domestic Chinese infrastructure markets.

The next initiative I would like to mention concerns our stock repurchase program. On November 9th, we announced a program to repurchase up to 3 million shares of our class A common shares. As you may recall at our third quarter conference call couple of weeks prior to that we were somewhat reticent about implementing any type of stock repurchase programs.

Subsequent to the conference call the news media continued to report on further declines in the housing market and related financial markets. It was clear to us that the general malice in the residential markets due to the financial crisis was continuing and would have a near term negative effect on our stock price. Therefore with the Board's approval we implemented a 10b5-1 plan under the SEC rule to take advantage of purchasing our stock and what we believe is a discounted price.

As of last Friday February 8th, we had repurchased approximately 2.1 million shares in the open market and we had invested approximately $58.1 million to repurchase those shares. The effect on earnings per share from repurchasing the shares in Q4 is minimal. We expect the effect on earnings per share from the repurchase program to be approximately $0.12 per share in 2008 for the entire year.

We still have enough capital flexibility in the form of existing cash and through available credit lines to be opportunistic in the acquisition market place going forward.

Speaking of acquisitions, in November, we purchased the assets of Topway Global Inc. a California manufacturing and distributor of water softeners point of entry filter units and point of use drinking system for the residential, commercial and industrial marketplace.

Topway has annual revenues of approximately $18 million and will expand our distribution network of independent water quality dealers, distributors and OEMs. The purchase of Topway will allow us to extend our existing water quality platform into the southeastern part of the United States.

This area of the country, we believe will continue to be a fertile area of growth for water quality and water conservation products. To-date Global Topway has performed in line with our expectations.

Now, I would like to give you my observations on the acquisition landscape. When we spoke last during the third quarter conference call my overall impression was that there was a lack of good acquisition candidates and the pipeline was not as robust as it had been in the past.

My expectations at that time and one I still believe is that the acquisition marketplace will begin to pickup this year with companies coming to market with more reasonable expectations with regard to EBITDA multiples.

Our focus most recently has been on European candidates where we have been following some potentially interesting companies both on the type of acquisitions and those with complementary product offerings.

Presently, we have a high level of potential deal activity in Europe and we feel that we have the needed cash and available borrowing capacity to get these deals done. As far as the domestic US marketplace is concerned we have seen less activity in recent months but would expect the pipeline to pickup, as we move forward throughout 2008.

And finally, in China, our focus in the near-term has been on operational improvements and the physical move of our joint venture operation, but we will certainly keep our eyes open for acquisitions going forward.

As far as our outlook goes for 2008, I'd like to make the following observations. Looking at the domestic residential channels obviously much of the news has been bad and may stay that way for while longer.

Home construction permits were down in December 2007 by 8.1% from November of 2007, and 34.4% below December 2007. Single family construction starts with less than 800,000 units the lowest level in 16 years. An economist from Banc of America recently forecast residential construction growth in 2008 would be anywhere from a minus 2% to plus 2% with a turnaround beginning late in 2008.

I tend to agree with this assessment. I believe that we are coming close to the bottom of the residential issue and this channel will provide us with only minimal top-line growth for us in 2008. If we turned to the commercial marketplace, we believe, we have positive growth but not to the extent that we have experienced over the last two or three years. And our Banc of America comments recently said they expect the commercial marketplace to increase between 3% to 7% this year.

One of the indexes that I look at is the architectural billing index which is a leading economic indicator of non-residential construction equity and is published monthly by the American Institute of Architect. The ABI index for December was 55.4 any score above 50 indicates that architectural billings have improved billing from the prior months. So their billings are increasing above 50.

This quarter it has been a 50 or above for 34 consecutive months and provides us an approximate 9 to 12 months window into future non-residential construction activity basically from the time to design takes place and the architecture offers until the constructions happen.

But we see continued growth albeit at lower levels in the domestic commercial marketplace for the better part of 2008. We really don't have visibility beyond 2008 at this point and don't issue an opinion.

Remember too that a good portion of our business, 40% to 50% of our business is predicated on the replacement markets which we believe will continue to be firm. We expect that we'll introduce new products into the marketplace in 2008. Further, I'd like to point out we are closely involved in plumbing code regulations and expect to see expanded growth in that area as well.

To touch on Europe for a moment, we see growth in a general economy slowing due to an impact of reduced export to the US and to some extent the impact of the credit crunch, and particularly see the German marketplace continuing to have difficulties. We are seeing that slowness in Germany slowly creep into our business in Eastern Europe as well.

In Europe, the under floor heating is becoming the preferred choice and traditional boiler manufactures are moving into renewable energy offering. We see this as a positive trend for Watts because we are well positioned to capture market share with various packages, we sell and offer to these type of applications.

We see the continued Pan-European consolidation of wholesalers and larger customers as a plus to watch as well. Because as they consolidate purchasing, we expect that the breadth of our product offering and our brand preference will differentiate us from other European competitors.

Finally, in 2008, we are focused on organizational improvement and efficiency. We have hired several experienced managers to improve our manufacturing and procurement process in both North America and China.

In China, we have hired a key individual to expand our sales channels into the Chinese marketplace. We expect 2008 to be a relatively challenging year. So, operational improvements and maximizing cash flow will be two of our top priorities. You should note that we have increased our quarterly dividend by 10% to $0.11 per share for shareholders of record as of February 25, 2008.

Now, at this time, I would like to turn the proceedings over to Bill McCartney, who will take you through the financial highlights then we'll open that line to questioning. Bill?

Bill McCartney

Thank you Pat, Just providing the overview on the financials to that quarter. Revenue on a consolidated basis was up 4%. We close the $345 million from an organic -- or looking at the factors of their growth from an organic standpoint.

We were down about 1%, it's about $3 million. The foreign exchange was favorable primarily due to the strengthening of the Euro that was about 4.8% and then we had some contributions from Topway Global about $2 million, so that all comes to 4%.

When you look at the organic growth of minus $3 million or minus 1%, the retail, North American retail market was down $2 million. The European organic revenue was down $4 million, China was down too.

This is offset by growth in the North American wholesale market and we'll go through those in a little bit more, in more detail in a moment. On the earnings side continued net income on our GAAP basis was $0.55 a share; that's an 8% improvement over the last year's fourth quarter.

Well, if we look at net income from continuing operations when we back out our restructuring charges, net income was $0.57 which is compared to $0.54 last year and consensus estimates were $0.54 on a quarter and even though we started our share buyback during the fourth quarter, we still had $0.02 of dilution in the numbers from our offering we did in Nov. '06.

On the restructuring numbers in the quarter, we booked $800,000 pre-tax mostly associated with some severance in asset right down.

Now, I'd just like to talk about some of our segments. North American sales were up 4% and total which is about 1% organic foreign exchange was one and acquisitions were one and totally it does round to 4% though. But inside of North America, we like to break it down between our wholesale and retail markets.

Looking at wholesale it was up 6% which includes the contribution from Topway global. On an organic basis, we were up 3% backing out the FX in the acquisitions.

So, basically what we are seeing here in the residential market is similar to what Pat has mentioned on the outlook and what you're hearing from other companies. And that we're seeing a decline in the residential units somewhere between the mid-to-high-single digits, offset by growth on a commercial basis and the commercial units which are up sort of high-single digits.

And then, we have pricing net coming through as well to make the wholesale positive. And if you recall that we had two price increases recently on the wholesale, we had June of 5% and a September of about 4% and the September one was primarily to offset, now the changes in the VAT taxes in China.

On the retail side, we are down and total by 5%, the total revenue was up $44 million there. The few things happening here on retails, first of all, during the course of the quarter, we had different price increases that rolled at different periods of time ranging from 5% to 7%.

Additionally, as you recall we discussed in prior quarters, we have exited some low-gross margin business in the retail sector here and that had an impact in the quarter of about $8 million, and that was $29 million on the year. That will become a much smaller issue as we go forward.

At the same time, we are doing some rollouts and picking-up some market share, so we think that made a contribution of about $4 million. And then obviously the impact from what's going on in the residential marketplace had an unfavorable result of about $2 million. So just the economy alone we think is about $2 million or 5% impact on retail, but in total again retail was off about 5%.

Looking at Europe, total revenue of $118 million, that's an increase of 8%. Basically we had unfavorable organic revenue there of $4 million or 4% offset by some favorable foreign exchange and the combination of the two nets to 8%.

Again, the story here is very similar to what we've discussed with you in prior quarters. We see continued softness in the German housing market where housing starts the year down quite a bit. And at the same time we have a large OEM business in Europe and we are seeing the boiler production down in Europe depending on the manufacturer and the type of boiler, but those declines in boiler production range anywhere from 25% to 35%.

Now we are down a fraction of that in Europe, so we believe that we are picking up market share and that's because we are moving product line our (inaudible) in Europe have moved the product over the last couple of years more towards a system's approach, more value-added in the product line, and at the same time moving towards more controls and solar and geothermal applications, away from just being a manufacture of components.

So all things considered we think we are doing fairly well in Europe given the softness in the German market. And of course, we all know the Euro is at an all time high, so the high Euro combined with softness in the US housing market puts a lot of pressure on all companies in Europe relative to exports back into the US or the US housing market.

When we look at the markets in Europe that we serve, we see an increase in the wholesale of 5% and the OEM is down about 13% and that's where we see the impact of the boiler manufacturers and the housing being down. And then we have a nice increase in the do-it-yourself market of about 10% and that is where we are starting to realize some of the synergies with the ATS acquisition that we did in May of 2006.

On China revenue, sales of $14.6 million, that's a decline of about $1.2 million or 8%. There are really two issues here. Well, first of all lets backup from an organic standpoint we had a decline of $2 million or 13% offset by some strengthening of the R&D, which offset that about 5%, so that nets to an unfavorable 8%.

But again looking at the reasons for the debt decline, first of all, if you recall back in May of ’06, we acquired Changsha Valve Works and what we did at the end of 2006 for Changsha is we recognized four months of revenue in the quarter and that was because it took us a couple of quarters to get their accounting system current and caught up after the acquisition.

So, if you adjust for that and make a comparison without that extra month of revenue in 2006's number, it would say that our sales into infrastructure market in China were up about 10%. So again that business is going along time and we believe it’s a healthy business and we are optimistic on that.

The other issue is our sale of exported products in China has declined about $1.5 million and that decline is the result of some production issues we had at one of our plants which prohibits us from meeting our production requirements. The order entry rates were fine on that product line; it was more related to some production issues. Just to talk about the gross margin for a moment. In total the gross margin at 35.3% after an increase of 200 basis points compared to last year's fourth quarter.

I think if you recall what our discussion on the gross margin has been during the course of this year. We said that from the first quarter forward what we expected to see was sequential improvement on the gross margin throughout the year. For the first couple of quarters, we were unfavorable relative to the prior year now we've turned favorable.

I think that's particularly impressive this quarter because during the fourth quarter we realized the $30 million reduction in our inventories. So, we also had to observe during the quarter some unfavorable manufacturing overhead variances and that happened across all three of our segments.

We look at the North American gross margin at 38.1%; that's an increase of 320 basis points and that's really driven by two things, one is the price increases that we experienced in wholesale and the retail that I mentioned earlier. And then we also had a bit of favorable mix if you will, because the retail was soft and we walked away from some of that lower margin business. We had a favorable mix towards the wholesale and then inside of wholesale a little bit of favorable mix towards the commercial side. The combination of pricing and mix in North America helped us.

In Europe the margin was 29.8%. That's a small improvement from last year, which was 29.5% and again similar to North America, we had some improved pricing as well as a little bit of favorable mix towards the wholesale side, because the sales to the OEM market had declined a little bit.

In China, the margin was 12.4%; that's a decline of 9.7% versus last year's fourth quarter. A couple of things are happening there; first of all, we mentioned the production issues we had that hurt our export sales, so we did not cover all of our fixed expenses in that factory. As Pat mentioned earlier we are in the process of moving our joint venture from one side of Tianjin to the other. So, that factory was in the state of [Fluxville ] during this quarter with all the production equipment moving.

So, we did not have a strong margin there. And then one other factory also a captive machine shop that we have in Tianjin as well, had some absorption variances due to the lower production levels to reduce our inventory. So, in China it's really, most of it is driven by some of the volume as well as the absorption going into.

On our SG&A, consistent at 25% of revenue at $85.8 million, that's an increase of $4 million. Looking at the components to that from an organic standpoint we had an increase of $400,000, and then the change in the foreign exchange rates predominantly the Euro had an impact of $3.1 million and then the SG&A of Topway Global that we included in the quarter was the difference.

So, really the thing is the SG&A increase driven by the change in the foreign exchange rates. Operating earnings $34.9 million, that’s an increase of 21% versus last year and it represents 10.1% of revenue that's $6 million increase. When we look at the components of the improvement in operating earnings from an organic standpoint, $2.5 million increase which is primarily due to the improved gross margins. The foreign exchange contributed about $2 million.

The acquisitions or the acquisition of Topway Global had a negative impact in operating earnings because they had a loss in the two months that we owned them and that's the result of amortizing the purchase price accounting issues as we go into the first quarter Topway Global will be making money. Those issues are now behind us and then we had fewer restructuring charges during the quarter versus last year, so $6.1 million improvement in operating earnings.

The tax rate was essentially flat at 31.50%. So a net income from continuing operations at $21.7 million that’s an increase of 20%. So with that I think we can now open it up for any questions that you might have.

Question-and-Answer Session

Operator

(Operator Instruction) And your first question comes from the line of Amit Daryani of RBC Capital Markets. Please proceed, sir.

Amit Daryani - RBC Capital Markets

Thanks, guys just a quick question of production issues in China thinking about $1.5 million headwind. Is it the same size that we're trying to right size at this point and also are those issues resolved over here or are they going to continue in Q1?

Bill McCartney

Amit, it's a different site, the site that we move right sizing is up Tianjin where we make more of the infrastructure related valves. The site that we are talking about with the production issues, is down in Southern China and we have made a lot progress on those issues, we think they are behind us.

Amit Daryani - RBC Capital Markets

All right. And then, I just want to make sure that I got the things right but last you spoken about $20 million headwind on revenue because of the product line divestures. You said $29 million, so does that mean we have incrementally walked away from $9 million more of product line or did I just hear you wrong?

Bill McCartney

No, I think $20 million might have been year-to-date number, I am not sure, but there is only one issue here. And this is some low gross, unacceptably low gross margin business we had with some of our retail customers that we chose to exit.

Amit Daryani - RBC Capital Markets

All right. And then just, regarding Europe, you highlighted especially softer trends in Germany, I think, of pretty big headwind on the organic growth line. Could you just talk about what you're seeing in other parts of the Europe, especially France, which is probably one of your bigger markets?

Pat O'Keefe

Yeah. This is Pat, I think what you are seeing is a general slowdown. It didn't flow into a lot of the same things that are hitting the United States which is their credit and severance and other issues.

Bill McCartney

You're right. We have been concerned primarily about Germany, but you're seeing some of that trickle down into Italy plants and even to a certain extent into the U.K. So, this has been a relatively slow quarter for Europe. Beginning of the year was much stronger and the end of the year was much slower. We are seeing that slowdown really sort of predominantly in Germany but also towards lesser extent in the other countries.

Amit Daryani - RBC Capital Markets

And then just my final question, looking at the inventory turns, they have been sub three for a while, by all initiatives set 2008 would be a challenging year. So other initials of plan and place to get those inventory turns moving in a higher direction and if you give any targets for '08 that will be helpful?

Pat O'Keefe

The answer is yes. In my opening comments, I made some comments about the fact that we hired two key executives, one which is the Vice President of North American operations and the other which is Supply Chain Head for the North America and China operation. So, the major focus is on that. I don't think at this point in time we are prepared to give you a specific estimate in terms of what kind of improvement but I can assure you that if you look at operating efficiency, improvements in cash flow, those are two top priorities for us this year.

Amit Daryani - RBC Capital Markets

All right , thank you.

Pat O'Keefe

Thank you.

Operator

And your next question comes from the line of Curt Woodworth of J.P. Morgan. Please proceed sir.

Curt Woodworth - J.P. Morgan

Good evening.

Bill McCartney

Hi Curt.

Curt Woodworth - J.P. Morgan

If you adjust for the dilution of the stock offering, it looks like your EPS this year was about flat with where it was last year, which seems like a pretty good performance given what happened in the end markets and some of the commodity pressures earlier in the year. So, my question is in terms of framing the year; is there a right way to think about it, that growth in the wholesale commercial side, basically offset all the weakness that you saw in retails, some of it with DIY channels this year?

Pat O'Keefe

It offset softness in the DIY channel. It really offset softness in the wholesale residential sector as well, is the way I would look at it.

Curt Woodworth - J.P. Morgan

Right. Okay.

Pat O'Keefe

That strengthened other markets but not in the residential and I think most of the retail in that residential sector.

Curt Woodworth - J.P. Morgan

Right. And so looking to 2008 and kind of given this quarter is the first quarter you comp positively on margins and we are going to be lapping some of the residential comps? Is your feeling that the commercial wholesale market is going to hold, the comps get easier on the wholesale residential and DIY channel? So, from a margin and earnings growth perspective, this year should shape up to be more favorable than 2007?

Pat O'Keefe

Your headwind is still going to be there for almost the entire year on the residential side. Right? I think our visibility on the commercial side says the commercial marketplace will stay strong so, our visibility is through the end of the year and we think that the commercial marketplace will continue to show strength through at least the third and into the fourth quarter.

So, I would say, overall, I would say, it also depends a little bit, Curt, in terms of, if we get some stability in metal pricing, because as you know, there is always a lag between metal pricing moving and our ability to pass it on to the customer just because of the fact that they are hurting overall because they are missing out on the residential piece of the business. So, they tend to resist pricing more today than they did a year and half go.

Curt Woodworth - J.P. Morgan

Okay. The margins in this quarter, moving on the gross side were very strong. So, in terms of the price of raw material delta, do you feel like you are still behind the curve on that or I know you had some higher cost copper that flowed through, may be just talk about what you need to do in 2008 to get, may be to reach parity?

Pat O'Keefe

Curt I think, on the wholesale side, we are probably much better shape on that past price portion then we are on the retail side. And it just we have to -- as we look forward, we are really looking to build the lot more efficiency into the organization here with some of these management upgrades.

We have been selective this year with some of the product line improving that we have done. So it’s just more of the same, just keeping those for the grindstone and all these issues really. But we really made a big push over the last couple of months here that really has brought in some fresh talent experience from bigger companies etcetera to help us do a much more, more lean, more efficiency in the factories that kind of stuff.

Curt Woodworth - J.P. Morgan

Okay. All right. Thank you.

Pat O'Keefe

Thank you.

Operator

Your next question comes from the line of Steven Nissan of Mindflow Capital Investment. Please proceed sir.

Steven Nissan - Mindflow Capital Investment

Yeah, thank you very much. Congratulants on good results Patrick, you always seems to do a very good job. A couple of things, you had talked about one of your main priorities for 2008 operational improvement. Can you provide a little more color to us on what you are doing in terms operational improvements revolving around lean and Six Sigma and how do you expect to see more output throughout your plants and the benefits to your bottom line?

Pat O'Keefe

Yeah, we are getting quite serious about implementing, win techniques and Six Sigma type of techniques in our organization. I hired a new Vice President for manufacturing who is well seasoned in the area.

We probably have to add some additional training and talent to our organization in order to get the momentum on that. So, I would consider at this point in time Steven to be in infancy with regard to our development in that area. I think down the road you will probably see some significant benefits from what we are doing. I look at 2008 as a tough year and sort of the year that you are sort of battened down your team and you go to hard -- you get into some things that in better times you might not have approached. So, I think, at the moment, I still consider as to be our infancy, but I think in long-term it's a very viable program and has long-term positive impact on the organization.

Steven Nissan - Mindflow Capital Investment

As we go into 2008, how you guys going to measure yourself? Are you looking at [RONA or OE], what's going to tell your company that you are ahead of the game and this is what you need to be in terms of metrics? What are you going to be looking at?

Pat O'Keefe

So, you got it right. We are looking more at ROIC kind of measures and return on investment type of measures. We personally, I think, I've said this a number of times, we need to squeeze a lot of cash off of our balance sheet in terms of inventory position and I think we are dedicated to doing that. I think it is going to take us some time to get some traction. But I think we are disciplined about what we are trying to do. And I think you are going to see us, end up with the better ROIC and a better return to our own equity at the end of the day.

Steven Nissan - Mindflow Capital Investment

And we -- as you start these initiatives for '08. Are there certain plans around the world that concerning more than others and how do you plan to address those first over may be a more successful plan?

Pat O'Keefe

We need to go through an education process. We have finances that are quite honestly, really at the top of the game and have implemented lean techniques and Six Sigma techniques, and very much have taken it to heart. We have others that are lagging seriously behind. So, right now we are going through that initial introduction phase, the training phase, it will take us a while before we get the engine running.

Steven Nissan - Mindflow Capital Investment

So you are thinking probably by next quarter, you may have some more update with us, you think it will be at least a year long process?

Pat O'Keefe

I think it's going to be a gradual process as we go through the year.

Steven Nissan - Mindflow Capital Investment

Okay. And going forward for remainder of '08, what systems and solutions would you like to put in place to accelerate you CI initiative to really affect your bottom line and improve on shareholder value?

Bill McCartney

I've got to be careful, because I don't want to note things in too much detail. We've a number of initiatives at each one of our plants and that's a process we're really putting in place now. So I think it's a little bit premature to answer that question, but we'll be prepared to answer that in further calls.

Steven Nissan - Mindflow Capital Investment

Okay, and final question. For 2008 you have some operational challenges ahead of you -- what's your number one goal as CEO Watts Water that you want to tell the shareholders in this call that you want to light their confidence a year from now? So you come back to us in February of 2009, and say I promise you guys and I hit this goal, I did this goal and we're all successful because of that. What would you like to accomplish?

Pat O'Keefe

I think there are sort of two initiatives. One is to put additional focus on continuous improvement is by clean initiatives and things of that nature and the other is to seriously drive the improvement in our cash flow. I think those are two that I think we can look back on a year from now and think that we made substantial progress on.

Steven Nissan - Mindflow Capital Investment

Great, I wish you continued success throughout this year.

Kenneth Lepage

Thank you.

Operator

And your next question comes from the line of Keith Hughes of Robinson Humphrey, please proceed.

Keith Hughes - Robinson Humphrey

Yes, I just want to make sure I got a number right. You had said the US commercial business was up high single-digits. Is that correct?

Bill McCartney

Yeah.

Keith Hughes - Robinson Humphrey

Did you see any change in pace in the quarter or any occupancy that was better than another one during the period?

Pat O'Keefe

I'd say that the growth rate was a little bit less than we had seen in prior quarters Keith, but this is a selective, we are talking about selective product lines here. These are the products that are clearly commercial only large diameter valves and what not and I'll say the growth rate is down a little bit from what we would be seeing earlier in the year.

Keith Hughes - Robinson Humphrey

Okay and generally was pricing in your wholesale channel in the United States on an apples-to-apples basis better than what you saw in the retail channel?

Pat O'Keefe

It’s been there (inaudible)

Keith Hughes - Robinson Humphrey

Not comparing the two, but I know you’ve been raising price. Where you able to get more price in the wholesale channel versus retail?

Pat O'Keefe

Not really, let me explain the price increases that we announced had an effective of date of June of 2007. It took effect and bid in a little bit earlier. So that we saw that pricing firm up in August and September, so we saw, let's call it the latter part of third quarter. So, you had the full effect of that in the fourth quarter. So, those prices were -- the retail sector really those prices were implemented in September probably became effective in a realistic basis in late October early November, now that’s what you're seeing. I think we've got price movement in both channels.

Keith Hughes - Robinson Humphrey

Okay. Final question what was the ending share account, diluted share account?

Pat O'Keefe

38,800.

Keith Hughes - Robinson Humphrey

And that was the average, correct?

Pat O'Keefe

Or you want the …

Keith Hughes - Robinson Humphrey

That was the average, correct.

Pat O'Keefe

Or you want the …

Keith Hughes - Robinson Humphrey

Yeah, because you brought buyback shares in the quarter, where do we end that?

Pat O'Keefe

I only have the average in front of me right now.

Keith Hughes - Robinson Humphrey

Okay, I'll get you later, thank you.

Kenneth Lepage

Thank you.

Operator

And your next question comes from the line of Christopher Glynn of Oppenheimer. Please proceed, sir.

Christopher Glynn - Oppenheimer

Hi. Thanks good evening. North America margins just really strong segments there (inaudible) the best in years I believe, does that signal anything strong about the margin direction in '08 comparatively to '07 as a whole?

Pat O'Keefe

Well, I think it tells you that we worked hard now we’re catching up with regard to the escalation in raw material costs. I think that's one thing that clearly is happening. I think the other thing that's happening is that it says something about the mix because your residential mix is very soft and your commercial mix is relatively strong. So, you have a positive shift with regard to the mix of product in that quarter as well. And I think overall given the fact that your production levels weren’t at the highest levels and you had someone absorbed overhead. That you worked hard in terms of some other costs -- containing cost in other areas.

Christopher Glynn - Oppenheimer

Okay, and then in the replacement exposure that you have, how much of that, anyway to break that down versus pure replacement versus maybe remodel activity?

Pat O'Keefe

We don't have very good visibility on that; think about our products. It's going through channels where we loose the definition of where the end customer is. We have a fairly good feel in terms of the breakdown between residential and commercial, but after that we lose it. But traditionally Watts has done very well on the replacement, repair, and remodeling market even in times where housing starts are at a historically low periods. We have seen that stabilize and the primary reason I think is because when homeowner isn't willing to move into a new home, they make decisions regarding whether they want to upgrade their existing home.

Right now, I think there is probably a lot of consternation in people's minds because they are reading the bad news in the paper everyday, but come later this spring, when they decided that they are not going to move to a new home but they are going to upgrade their existing home, they may improve their laboratory or they may improve their kitchen and we would probably see a piece of that action. So, we are looking at that piece of our business which is really some place between 40% and 50% of our business as a relatively stabilizing influence.

Christopher Glynn - Oppenheimer

Are you aware of any dynamic whereby, since it's really tough to sell a home right now, people are actually investing more in their homes to get it ready for sale?

Pat O'Keefe

I don't think they are doing that yet. I think they'd probably do that here later in the year. I think right now they are probably a little bit trying to figure out what's going on with the markets, the availability of credit, I think right now they are probably confused.

Christopher Glynn - Oppenheimer

Okay, and then so without the $8 million drag from product exits you actually had unit volume growth in the quarter. That will be correct, right?

Bill McCartney

No, we still would have had slightly negative unit volume growth even without that.

Christopher Glynn - Oppenheimer

Okay, I guess well what's the carryover from the product exits, and then on the other side the new rollouts and the share into ’08 relative to the total impact in '07?

Pat O'Keefe

We'll have a little bit of that product exit stuff in '08, but it’s mostly behind us. Most of that's gone. And we do have several programs that we are rolling out, we are continually rolling out new products into those retailers. How much share we are going to get during '08 I can’t say, but we are still very active with new products, new rollouts, etcetera.

Christopher Glynn - Oppenheimer

Okay, and then finally a number of companies are talking about really resurgent raw materials increases, are you seeing that for the first half?

Pat O'Keefe

We saw copper for example, which is our number one input, copper based alloys, bronze and brass and things of that nature. And we saw it drop until early December and now it’s gone the other way and it’s gone back up so, our best guess is that you are not going to see it beating any time soon.

Christopher Glynn - Oppenheimer

Okay, thank you very much.

Kenneth Lepage

Okay.

Operator

And your next question comes from the line of Andrew DeAngelis of Keybanc Capital Markets. Please proceed Sir.

Andrew DeAngelis - Keybanc Capital

Hi, good evening guys.

Pat O'Keefe

Hi Andrew, how are you doing?

Andrew DeAngelis - Keybanc Capital

Great, just a cleanup question on the restructuring. First of all, where did that hit the segments the $1.2 million on the consolidated sheet?

Bill McCartney

I would say if we get we get $800,000 it’s actually $100,000 favorable in North America, and 900 China, 800 pretax. We had $100,000 sales because some of the inventory that we disposed of we had a little bit better recovery than our estimates.

Andrew DeAngelis - Keybanc Capital

Okay. On the income statement it showed $1.2 million charge and you are saying there was another I guess favorable item of $400,000 embedded somewhere?

Bill McCartney

It would be in cost of goods, yes.

Andrew DeAngelis - Keybanc Capital

Okay.

Bill McCartney

Your point two was SG&A and is $400,000 favorable in since about $400,000 to $500,000 favorable up in cost of goods.

Andrew DeAngelis - Keybanc Capital

That's really helpful. I guess could you sequentially maybe take us through what happened in North America. It sounds like based on some of your prior responses that you were able to capture a little bit more price within the quarter, but I mean clearly the margin on a sequential basis improved notably despite the fact that you are roughly comfortable on a sales basis. I guess other than pricing any other notable shift on a sequential basis that may be we should be thinking about?

Bill McCartney

I mean I think the main issue really relative to the margin is much better pricing than we had in the prior quarters. We are doing better on that cost price relationship the mix was a factor because, the retail was down that as our lowest gross margin area and wholesale was up. And then you still have favorable mix within inside of wholesale towards the commercial side.

Andrew DeAngelis - Keybanc Capital

Okay.

Bill McCartney

So, that was all favorable, and that was somewhat offset by some absorption variances because we did lower our production levels to get out some of this inventory.

Andrew DeAngelis - Keybanc Capital

Okay. How should we be thinking about price next year, obviously you have carry over benefit from your late '07 increases, but any other additional increases planned or being expected by the market at this point?

Pat O'Keefe

Now the market actually is interesting when copper prices dropped in December. You actually had requested to go the other way. We didn't expect those because of the fact that we understand that markets are volatile and metal is volatile and it jumps up and down. But right now we don't have anything on the schedule at this point in time. One of the issues I think is going to be though is where does copper go throughout the year and if copper continues to go on a direction its going over the last 45 days we'll have to take additional actions.

Andrew DeAngelis - Keybanc Capital

Okay, that's helpful. Okay, that's all I had. Thanks a lot guys.

Kenneth Lepage

Thank you.

Operator

And your next question comes from the line of Francesca McCann of Stanford Financial. Please proceed.

Francesca McCann - Stanford Financial

Hello, good evening.

Pat O'Keefe

Hello Francesca, how are we doing?

Francesca McCann - Stanford Financial

I am doing well, thanks. I think the last part of that answer kind of dwindled off, I didn't quite hear it. But kind of getting on our prices, nothing planned for this coming year, I know we talked a lot about what happened in '07. Are there any areas though providing copper does remain high -- are there any areas that you kind of anticipate that it would be more difficult to push through price increases?

Pat O'Keefe

Yeah. I think in general it’s more difficult to push through price increases now because most of your customers at least on the wholesale side and on the retail side are suffering volume restrains. Okay, so they are losing their volume like we are on a residential side. So their natural tendency is to push back against all price increases a little bit harder than they have in the past.

They do recognize the reality of metals and they all track metals like we do and they are all fully aware of what's happening with metals. So if it's appropriate to move it through and you have a good argument, I think we've demonstrated I think over a long period of time that we compared pricing onto the market when it's appropriate to do so.

Francesca McCann - Stanford Financial

Okay. So despite the premium that some of the products already sell out that can still hopefully be kind of maintained and passed through?

Pat O'Keefe

Sorry, we've demonstrated I think right over four years now because of escalation and raw materials started almost four years ago. And so far we've kept our nose just above the water line.

Francesca McCann - Stanford Financial

Okay, all right. Back to European market what percent of your European business is has Eastern Europe comprised?

Pat O'Keefe

Of the total Eastern Europe about 6% to 7% I think.

Bill McCartney

Yeah.

Francesca McCann - Stanford Financial

6% to 7% okay.

Pat O'Keefe

It's a nice, small but growing piece of our business.

Francesca McCann - Stanford Financial

Okay. But you are seeing some slowdown there?

Pat O'Keefe

Yeah. What's happening is it seems to be exhibiting itself in the terms of some of the wholesalers that we sell to and we've [helped] a lot of premium wholesalers that we sell to in Eastern Europe. But they seem to be running in their credit worthiness problems, it might be the fact that they grew so fast they outgrew their financial capacity. So it relates more to credit worthiness than it does I think end demand it's sort of an unusual situation that's developed.

Francesca McCann - Stanford Financial

Okay.

Pat O'Keefe

We often require these guys to post letters of credit and in many cases recently they have been struggling to do that.

Francesca McCann - Stanford Financial

Okay. And then sorry, just to confirm a little bit, 6% to 7% of the total European business.

Pat O'Keefe

That's right.

Francesca McCann - Stanford Financial

So, 2% or so, okay. And then within Europe the breakdown of commercial versus residential, and then replacement versus new for each of those, if you can get that?

Pat O'Keefe

The mix is the same as the US, I mean sort of half-and-half residential-commercial and, if anything the replacement business might be a little heavier over there because they are more heating orientated and heating is a big replacement business. Now when we say 40% to 50% replacement we'll sign up the whole corporation. So, Europe is probably a little bit at the higher end of the range.

Francesca McCann - Stanford Financial

Okay, and 40% to 50% for both commercial and residential approximately?

Pat O'Keefe

Right.

Francesca McCann - Stanford Financial

Okay. And then, how is the COO search coming, or is it?

Pat O'Keefe

No it's not very active.

Francesca McCann - Stanford Financial

Okay.

Pat O'Keefe

I have candidates in here I think tomorrow, Thursday, and Friday.

Francesca McCann - Stanford Financial

Okay. Anybody you are excited about?

Pat O'Keefe

Well I think there are some well qualified candidates in the process, it’s a process that you take seriously and you go through it very methodically. Want to pick somebody who is going to be able to come in and have an impact.

Francesca McCann - Stanford Financial

Okay. So that’s progressing and good. All right, I think that's it for now. So thank you.

Kenneth Lepage

Thank you, Francesca.

Operator

And your next question comes from the line of (inaudible) 27-1.59 of Robert W. Baird. Please proceed.

Unidentified Analyst

Good evening guys.

Pat O'Keefe

Hello.

Unidentified Analyst

If we could just go back a little bit to your outlook on the housing market. You definitely seem a little bit more cautious then last quarter but sounds like you generally still feeling like we've hit a bottom. Just curious if you have actually sort of adjusted your plans for '08 from last quarter, maybe assuming a little bit lower level of volume or have your plans generally stayed the same?

Pat O'Keefe

I think if you look at our forecast for '08, I think we are cautious because the residential side and I'll say we're nearing the bottom. I'm not good enough to forecast when we're at the bottom. If you can give me a couple of lessons in that I would appreciate it. But I think we're nearing the bottom here.

I think specifically one of the reasons, I think, we're nearing the bottom is because one of the factors I take into consideration is what wholesalers are doing with inventories. And I think in the third quarter of last year and into the fourth quarter of last year, you saw a lot of reduction in inventories that won't replicate itself. So, you're probably going to see a little bit of the market demand itself falling off but you won't see a repeat of -- what I call the DEM inventory cycle. And they're taking inventory levels in lower it. So that's part of the reason. I think we're close to the bottom of the cycle as that to a certain extent what we saw in last years numbers was some of the inventory reductions that naturally take place when the markets contract.

Unidentified Analyst

And then, when you look at just specific forecast for the new construction market and remodeling. Just curious what your internal forecasts, are you kind of still on the housing on the new construction side looking at about a 1 million units or you are little bit more optimistic than that?

Pat O'Keefe

We're talking -- we're thinking that 900,000 units or so will be the level we'll see in 2008.

Unidentified Analyst

And then the remodeling side, are you still expecting positive growth there or do you think you will see some declines in remodeling as well?

Pat O'Keefe

Probably see some softness there but not substantial.

Unidentified Analyst

Okay. And then…

Pat O'Keefe

Remember, we do better in that market than we're doing in new housing market.

Unidentified Analyst

Right. And then just wanted to get back to the North American margin, obviously with the fantastic margin there, definitely saw some nice improvement. Just wanted to just kind of contrast your pricing in versus what actually you saw in the raw materials front because I believe sequentially you actually saw a tougher raw material comparison just kind of based on FIFO accounting and kind of the inventory that is coming through on top of purchase etcetera. I wanted to say that it actually was higher this quarter, is that fair, and even if I thought you're able to put growth margins even more?

Bill McCartney

Yeah, cost of copper for us is somewhat higher in Q4 versus Q3, that's right. You can sort of just started copper chart if you will and lag it about six months, five or six months and that's sort of flow through as a rule, it is a very general statement that we try to be smart and do smart buys when we have the opportunities et cetera but that's what we've been saying for long time, five to six months lag.

Unidentified Analyst

And so actually when you go forward into the first couple of quarters of '08 actually I think it should improve for you the comparison there. So, is it fair to say that given the same level of demand you may actually see margins improve from here even further on a sequential basis or is that a little bit too strong of a statement?

Bill McCartney

I mean, there are so many factors that affect that margin, besides copper for us. I mean, you have mix you have volumes, and absorption, absorption issues. I mean, everyone loves to talk about copper but there is a lot more things that impact our margin than just copper, even though copper is a major factor though.

Unidentified Analyst

And then just in the quarter could you guess roughly how much you benefited from mix versus price, was it primarily mix or primarily prices to get an idea roughly of where the benefit came from?

Bill McCartney

Primarily, pricing.

Unidentified Analyst

Primarily pricing? Okay. All right. Thanks guys.

Bill McCartney

Okay.

Operator

And your next question comes from the line of Todd Vencil of Davenport. Please proceed.

Todd Vencil - Davenport

Hey guys nice quarter.

Pat O'Keefe

Thank you.

Todd Vencil - Davenport

Just to kind of beat this one fully to death, but I want to ask it in a little bit different way when I look to '08. Basically if I put all the pieces together, you're basically saying you had a better price cost relationship in the fourth quarter, just overall due to the price increase that went through, and you feel like you've caught up on lot of that, a lot of fight you were fighting with the escalating raw material's cost.

My question would be, how much additional benefit from those price increases are we maybe going to see as we go into the first part of '08? And then from there, are we sort of looking at a status close situation with regard to at least that elements impact our margins until and unless metal prices move up or down at which point you will react to those?

Pat O'Keefe

Yeah, Todd that’s the way I see it.

Todd Vencil - Davenport

Okay. And do we have any additional sort of incremental benefit that we are going to get this year? Sort of, if this price increase is continuing to roll through?

Pat O'Keefe

I think it’s relatively small.

Todd Vencil - Davenport

Okay. All right. That's helpful. And then most of my questions did get answered, but can you guys have projection for the tax rate for the year?

Bill McCartney

We are budgeting about 33%.

Todd Vencil - Davenport

Okay. And what about CapEx and D&A?

Bill McCartney

CapEx will be approximately $35 million and D&A is about $39, '08.

Todd Vencil - Davenport

Okay. Thanks very much.

Pat O'Keefe

Thank you, Todd.

Operator

And your next question comes from the line of Richard Paget of Morgan Joseph. Please proceed.

Richard Paget - Morgan Joseph

Good evening everyone.

Pat O'Keefe

Hello Richard, how are you doing?

Richard Paget - Morgan Joseph

Doing all right. I know you said that the ABI as a leading indicator saying that non-res commercial was going to hang in there. But if I look at some other industry stats whether it's the McGraw-Hill construction starts or some of the industry forecast, I mean, they are saying '08 could be flat to down. I mean what are you seeing in terms of whether its inventories or backlog of orders that would tend to make you believe to have a more positive outlook?

Pat O'Keefe

Well, now, for example, I spent a quite a bit of time with the sales organization here in the first month of the year, because we have a number of different sales meetings and things of that nature and I deliver, I go out there and spend my time with them.

And the question I am asking is, what are you seeing at the architectural level because you understand that one of the things that we do as an organization is calling the architects, contractors and the engineers, that's an important part of specification selling.

And what we're getting repeatedly back through our channels of distributions and back to our reps is that that channel is still -- there are good projects out there that will be completed.

Now the question is, what's the input now as 2008 unfolds. Our new projects being delayed or new projects going to get approved and passed through and funded. So, what we are seeing is the backlogs are good and solid and what's in the engineering firms is favorable toward us in terms of the type of project that has high occupancy, high, sanitary processes.

So our visibility is really probably six to nine months, something like that on a realistic basis. I just -- reason I quoted the ABI, because I think it's a more authoritarian, more accurate than my casual input from my sales organization and from the channels of distribution.

Richard Paget - Morgan Joseph

Okay. I mean, I would agree in terms of some of the engineering firms, their backlog is continuing to grow but you'll also hear anecdotal evidence that some of these projects are getting delayed just due to tougher financing out there. So I mean there could be the chance of a pause at minimum in some cases.

Pat O'Keefe

That's a concern we all have. But even if that happens, it's going to be in the second half of the year.

Richard Paget - Morgan Joseph

Okay. And then, I figured everyone else has kind of harped down on margins but I mean you talked about mix and benefits of that and pricing, I mean you've had some good sequential improvement throughout the year, I mean, is there further sequential improvement or have we hit kind of a plateau here in terms of the gross margins?

Pat O'Keefe

I don't want to say it’s plateau, but I don't think you will see the rate of improvement just because pricing is, a lot of the pricing is in, and we'll still get some additional pricing, but we're looking at further inventory reductions looking to probably have some absorption variances going forward. So, I mean, the rate of the margin in North America right now, that's pretty much near a high, so I don't want to predict that we are going to go higher than that in this environment that would be dangerous.

Richard Paget - Morgan Joseph

Right, but I guess you don't think that's really a significant falloff.

Pat O'Keefe

Well, not really into mood here Richard of giving this kind, this level.

Richard Paget - Morgan Joseph

Yeah, I know, okay.

Pat O'Keefe

Gross margins by segments, I mean, it's difficult to predict.

Richard Paget - Morgan Joseph

Okay, thanks. That's it for me.

Pat O'Keefe

Okay, thanks Richard.

Operator

Your next question comes from the line of Ryan Connors of Boenning & Scattergood. Please proceed.

Ryan Connors - Boenning & Scattergood

Good evening.

Pat O'Keefe

Hi, Ryan.

Ryan Connors - Boenning & Scattergood

Most of my things have kind of been covered, it's been very comprehensive call. But just a couple of quickies just on the gross margins. Bill you mentioned quickly in your prepared remarks that the mix shift due some of the discontinued lower margins product lines was contributing factor, was that -- but I haven't heard you mentioned that again in several kind of follow-ups in the Q&A. So I wondered -- was that a meaningful contributor, and if so has that sort of run, of course, or some of that's went to the first quarter?

Bill McCartney

I don't want to over state it, I mean, some, one of the callers asked was it mix of pricing that was predominantly the contributor to the improvement and it definitely is pricing. Mix helps, because we've always said the wholesale is higher than the retail and then inside the wholesale commercial is higher than residential. And so, you had a mix towards wholesale and then towards the commercial.

And then at the same time, with that mix, the product lines that we exited were very low gross margin products, so that accentuates that mix shift, if you will, more so than just a normal movement of the business, right. But all that being said, pricing was definitely the main contributor to the improvement.

Ryan Connors - Boenning & Scattergood

Got it. And then on China obviously pretty weak, I'm wondering, you mentioned that the organic growth was down quite a bit, but the order trends were strong is there a snapback sort of there, I mean, does some stuff sort of get pushed into the next quarters and then suddenly you see some real nice numbers coming out of China going forward or is it sort of that is not yet?

Bill McCartney

I think that they have that potential but it's a small number, I mean, you're only talking $2 million of commodity products. So, it's not something that's going to move the needle one way the other that much.

I mean, we had a good quarter, this quarter on the gross margin, and we had that unfavorable and so and that snaps back. I don't think it's going to push us over the top.

Ryan Connors - Boenning & Scattergood

Sure. And then just finally, in the past calls, you've talked a lot of about your PEX tubing, your plastic tubing lines and how those have sort of been getting some traction with the copper being where it is. Certainly, we see a lot of anecdotal evidence of that out there. So, I'm wondering whether that's still the case whether that product line is still doing well, and if so what is the impact of that is on profitability?

Bill McCartney

I'd say in general tax is the positive growth area for us. I think as we get better at manufacturing and our efficiencies improve as well. So, our cost is coming down, so I think long-term that's a positive contributor to both profitability and sales growth.

Ryan Connors - Boenning & Scattergood

Okay, great. Well, thanks for all the time guys.

Bill McCartney

Thank you.

Operator

(Operator Instructions) And your next question comes from the line Andrew Deangelis of Keybanc Capital Markets. Please proceed.

Andrew Deangelis - Keybanc Capital Markets

Hey, guys. I know this has been a long call, but I just figured lower on. You mentioned several European acquisition candidates that you're looking at?

Pat O'Keefe

Yes.

Andrew Deangelis - Keybanc Capital Markets

We're just wondering about the size of those properties?

Pat O'Keefe

It ranges all the way from low of maybe EUR15 million up to quite substantial EUR150 million type of business. There is a quite bit of activity interestingly not just happened at the moment the more activity is happening in the European greater than it’s happening in North America. I think it will take a little bit a wild here before some good properties become available on the US market.

Andrew Deangelis - Keybanc Capital Markets

And I know you mentioned in Europe they were kind of built-on some complementary focused. I guess on DIY wholesale OE.

Pat O'Keefe

Most of these deals that we were looking at the moment are more wholesale oriented.

Andrew Deangelis - Keybanc Capital Markets

Okay. Okay thanks.

Pat O'Keefe

Thank you.

Operator

Your final question comes from the line of Christopher Glynn of Oppenheimer. Please proceed sir.

Christopher Glynn - Oppenheimer

Thanks. I think you paid a little debt down in the quarter. Any help on the interest line for '08?

Bill McCartney

Let see, I'd say that most of that debt we have, Chris, is fixed, it's in the US. For the debt that is variable and is pre-payable as in Europe, so it we successful with this cash improvement, cash flow improvement. You will see the debt go down in Europe a little bit. So, I'd say you could see interest expense go down a little bit, but not a big number.

Christopher Glynn - Oppenheimer

Okay. Thanks again.

Bill McCartney

Okay.

Pat O'Keefe

Thank you, Chris.

Operator

There are no further questions at this time. I'd now turn the call over to Pat O'keefe for closing comments.

Pat O'keefe

Thank you. I wanted to just thank everybody for joining us today. Thank you for your continued interest in Watts. We look forward to talking with you here at the end of the first quarter when we cover our results for the first quarter of 2008. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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