Watts Water Technologies - Q2 2016

Transcript

Operator (participant)

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Watts Water Technologies, Inc.'s second quarter 2016 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press star then one on your telephone keypad, and to withdraw your question, press the pound key. Thank you. Tim McPhee, Treasurer and Vice President of Investor Relations, you may begin your conference.

Timothy MacPhee (VP of Investor Relations)

Thank you, and good morning, everyone, and welcome to our second quarter 2016 earnings conference call. Joining me today are Bob Pagano, President and CEO, and Todd Trapp, our CFO. Bob and Todd will provide their perspective and analysis on our second quarter results, provide a key initiatives update, and discuss our latest outlook for the second half of this year. Following our prepared remarks, we will address questions related to the information covered during the call. Today's webcast is accompanied by a presentation which can be found in the Investor Relations section of our website. We will reference these slides throughout our prepared remarks. Any reference to non-GAAP financial information is reconciled in the appendix of the presentation. Before we begin, I'd like to remind everyone that in the course of this call, to give you a better understanding of our operations, we will be making certain forward-looking statements.

These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Watts Water's publicly available filings with the SEC. The company disclaims any intentions or obligations to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. I will now turn the call over to Bob Pagano.

Robert Pagano (CEO)

Thanks, Tim, and good morning, everyone. I'm on slide three in the presentation, where I'll provide some commentary on the second quarter. Overall, I'm very pleased that in the second quarter, we continued the momentum in operating performance that we delivered in the first quarter. Organically, we grew revenue in all regions, and the pace of growth improved sequentially from the first quarter. We delivered a record quarter for operating margin and EPS as a result of the transformative actions we've taken as an organization. From a first half perspective, our results were generally in line with our full-year outlook for the company. Todd will review the quarter's results and our outlook for the second half in more detail. From a worldwide market perspective, we continue to see a mixed performance.

In the Americas, much of the construction data remains lumpy, but overall, we expect both the non-resi and resi markets to grow in the low to mid-single digits this year. EMEA continued to stabilize through the quarter. In terms of the potential Brexit impact, the UK represents only a very small portion of our business, approximately 2% of worldwide revenues, and the recent terror attacks and failed coup in Turkey have become the latest issues for Europe. The impact from all of these events is something we are watching closely, but it is still too early to make a call at this time. Finally, we are seeing growth in markets outside of China that is countering some softness in the domestic China commercial marketplace, which is consistent with what we saw in the first quarter.

Now, if you recall, back in February, I spoke about building on the foundation of our previously announced transformation efforts. We identified four areas of focus in 2016, including one, executing on announced operational programs, two, realigning our regional organizations and building out the team, three, reinvesting in growth, and four, driving top-line growth and operating a margin expansion. I'd like to provide an update on our progress. Please turn to slide four. Our transformation initiatives are on plan and continue to drive results. As a reminder, phase one focused on establishing a global sourcing initiative and enhancing our product portfolio. To date, we have recognized the expected global sourcing benefits and the positive margin impact from eliminating lower-margin product sales. In the second quarter, we finalized the sale of the China subsidiary involved in the production of undifferentiated products.

Most of the cash proceeds will be received in the third quarter, but this effectively completes phase one of the Americas Asia Pacific transformation. Phase two of the transformation is well underway. We have mostly completed the rationalization of North America's distribution facilities, and the manufacturing and rightsizing is on target to be completed by mid-2017. Expected savings for 2016 are being realized, with incremental savings in 2017 and beyond. Finally, the EMEA restructuring announced in February is moving ahead, and we expect to begin implementing the plan in the fourth quarter. Next are the organizational realignment and team development activities, which are moving along well. Within Europe, we recently announced the combination of two platforms into one, now called European Fluid Solutions, and we announced a new sales organization resulting from the European platform consolidation. The focus of this realignment is to become more customer-centric in Europe.

By realigning our sales team to regional leaders selling a full complement of products, we believe that we can drive improved customer focus, organizational accountability, and better leverage our wide product portfolio. Internally, we have also promoted global leaders for our drains, water quality, and electronics platforms to help drive those businesses on a worldwide basis. We continue to build out our leadership team. My immediate team has been established, as has the tier of leaders below my direct reports. We have identified qualified internal candidates for key roles.... and where we didn't have the internal candidates, we've hired people, mostly from larger, more mature organizations, that bring with them the skill sets we need to help us accelerate growth and become a leaner, more efficient company. I've spoken many times about reinvesting for growth and our goal to reinvigorate the front end of our business.

One example that we've mentioned previously is our new training center. We expect to train almost 3,000 people, either on-site or online, in 2016. The on-site training typically occurs over a 2- to 4-day period, which we have found invaluable in providing critical face time with and feedback on our products. So this key initiative is moving ahead as planned, and we continue to focus on enhancing the customer's experience with Watts. Also, in July, we completed our second innovation summit. Consistent with last year's meetings, the summit brought Watts sales and engineering teams from around the world together to understand our broad capabilities, share ideas, and help drive customer-focused solutions into product development and into our processes. Lastly, our final 2016 focus area involves driving top-line growth and margin expansion for the year.

Year-to-date, we have grown organically by approximately 3%, excluding the extra shipping days in the first quarter. Year-to-date, operating margins of 11.1%, again, excluding extra shipping days, are 150 basis points higher than the same period last year. In the second half, we expect to accelerate some of the investment spending, and as a reminder, we will feel the effects of fewer shipping days in the fourth quarter. We expect the magnitude of margin expansion will moderate from the first half levels, but still expect a strong year for the company. Now I'll turn the call over to Todd to talk about our second quarter operating performance and latest outlook in more detail. Todd?

Todd Trapp (CFO)

Thanks, Bob, and good morning, everyone. I'm on slide 5, which shows the second quarter results. Reported sales of $371 million were down about 4% quarter-over-quarter. This decline was driven by the exit of undifferentiated products in 2015, which impacted sales by $34 million, or 9%. On an organic basis, we grew 4%, driven by strength in Americas, EMEA, and Asia Pacific, and I will talk more about the regional performance in a few minutes. Adjusted operating profit of $44 million increased $2 million, or 5%. This translated into adjusted operating margins of 11.9%, up 100 basis points versus last year, and a record second quarter for the company. We attained this margin while continuing to invest in our growth initiatives, as previously communicated.

Higher volume, favorable sales mix, including the exit of undifferentiated products, and productivity were the main drivers of this Q2 strong margin performance. Adjusted EPS of $0.75 was approximately 9% better than last year. The $0.75 also represented a new record quarter for the company. The growth in EPS was driven primarily by strong operational performance, which more than offset a $0.06 headwind associated with the exit of undifferentiated products. For the quarter, the effective tax rate was 34.6%, about 80 basis points higher than prior year, some of which was driven by the mix of worldwide earnings. So overall, we are very pleased with our performance as we set new highs in adjusted operating margin and EPS in the second quarter. Now, turning to the regions on slide 6, let's review Americas results for the quarter.

Sales were $239 million, down 9% on a reported basis, all driven by the exit of undifferentiated products in 2015, which was a $32 million headwind for the region in the quarter. More importantly, organic sales were up 4% versus Q2 of 2015. We had strong performance out of AERCO, which was up double digits in the quarter. We also saw higher volume in our core backflow, regulator, and mixing valve product lines, which more than offset continued softness in our products that serve the industrial end markets. Adjusted operating profit was $39.5 million, a 2% increase year-over-year. Operating margin expanded 180 basis points to 16.5%, a new high for the Americas region.

The margin improvement was driven by higher volume, favorable sales mix, including the positive impact from the exit of undifferentiated products, and productivity, which includes the benefit from lower raw material costs. So again, another strong quarter for Americas and a continuation from what we saw in the first quarter. Let's turn to EMEA's results on slide 7. Sales of $117 million were up 5% on a reported basis and up 3% organically. Foreign exchange was positive during the quarter by about 2%. All of our European businesses grew organically in the quarter. HVAC led the way, primarily due to our electronics business, which benefited from new product introductions into the OEM channel. And we also saw modest growth in water and plumbing and drains business during the second quarter as well.

Providing some additional color by region, we saw solid double-digit growth in Italy, Scandinavia, and the Middle East, and minimal growth in France, basically in line with the French construction markets. In Germany, we continue to experience pressures in the OEM channel, although the rate of decline subsided from Q1. And in Eastern Europe was flat for the quarter, with growth in Czech Republic being offset by continued headwinds in Russia. Adjusted operating profit for EMEA for the quarter was $13 million, up 23%, which translated into operating margins of 11.1%, an increase of 160 basis points as compared to Q2 last year. The strong margin expansion was driven by volume and productivity, including lower material costs and benefits from ongoing restructuring initiatives. For Europe, this is the third consecutive quarter where we've seen some stabilization.

But as Bob mentioned, we'll be keeping a close eye on any potential impact of Brexit and other geopolitical issues affecting this region. Moving to slide 8, let's review Asia Pacific results. In the quarter, sales were approximately $14 million, up 19% on a reported basis, and up 5% organically over the same period last year. It's a similar story to what we've encountered in the first quarter. We continue to see softness in our traditional China-based valve business due to slower than expected commercial markets, which is partially offset by strong demand for our underfloor heating product used in residential applications. Our valve business outside of China continues to grow strongly through expanded distribution, with incremental growth in Australia, Indonesia, and Singapore. And the Apex acquisition performed well and contributed about $3 million in sales during the quarter.

Sales outside of China now represent about 50% of total Asia Pacific sales, versus 15% last year, driven by the addition of Apex and the growth in other countries I just mentioned. Adjusted operating profit for Asia Pacific decreased 19% to $1.3 million in the quarter, which translated into adjusted operating margins of 9.2%. The key driver of the decline was a 50% reduction in affiliate sales due to the exit of undifferentiated products. As Bob mentioned earlier, we finalized the sale of our China subsidiary that was involved in supplying undifferentiated products to the Americas. In the second quarter, for GAAP reporting, we booked an after-tax gain of about $8 million related to the sale, which we treated as a special item, so the gain is not included in our adjusted results.

Most of the gain was related to a cumulative currency translation adjustment as part of the disposition. Cash proceeds will be about $8 million, which we expect to receive by the end of the third quarter. Once this happens, phase 1 of the Americas Asia Pacific Transformation Initiative will be successfully completed. So in summary, Asia Pacific performed as expected during the second quarter, with increased organic growth driven by sales outside of China. On slide 9, a few items I'd like to point out related to free cash flow. Year-to-date, free cash outflow was $11 million, as compared to an inflow of $29 million last year. The incremental outflow is primarily driven by a planned working capital increase to support the Americas Transformation Initiative, including establishing buffer inventory to facilitate the opening of our new distribution center in Columbus, Ohio.

We also had cash outlays, which negatively impacted free cash flow in the first half, including product liability settlements and higher tax payments. From a deployment perspective, we funded about $7 million more in capital expenditures in the first half versus prior year, consistent with our plan to invest in growth and productivity projects. We also purchased approximately 91,000 shares of our Class A common stock at a cost of $5.2 million during the quarter. Year to date, we have purchased 359,000 shares for approximately $17.6 million, and we also announced a dividend increase of 6% during the second quarter. This is the fourth consecutive year we've increased our dividend.

Consistent with past few years, we do expect our cash generation will improve as the second half progresses, and we are focused on achieving 100% cash conversion for the year. Finally, turning to slide 10 and the outlook for the second half of the year. Overall, on a consolidated basis, we expect organic sales growth, excluding shipping days, in the second half will remain fairly consistent with our first half performance at approximately 3%. Just a reminder that the 3-day benefit we saw in the first quarter associated with the extra shipping days will be a headwind for us in the fourth quarter. By region, the Americas should see consistent growth from relatively stable end markets. We are approaching EMEA with a little more caution given recent events and some tougher comps in the fourth quarter, so we are forecasting flattish growth in the second half.

In Asia Pacific, sales pace should pick up in the back half of the year as our China valve business recovers, and we continue to see growth in countries outside of China. As Bob mentioned earlier, excluding additional shipping days, our adjusted operating margins grew by about 150 basis points during the first half of 2016. We expect margin expansion to moderate more in the second half as we compare against tougher comps and ramp up investment spending to fund some of our growth initiatives. We expect to attain 100+ basis points for the full year operating margin expansion, with the potential for some upside. Finally, we are forecasting that the second half should generate strong cash flows, consistent with our performance over the past several years.

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

Robert Pagano (CEO)

Thanks, Todd. To quickly summarize, we had a very good second quarter, which saw growth in organic sales with record margins and earnings per share. We continued to drive our various transformation programs and are focused on other key areas which we believe should drive continued performance going forward. We are anticipating a steady operating performance during the second half of 2016, delivering full-year operating margin expansion of at least 100 basis points with the potential for modest upside. Our goal is to drive 100% free cash flow conversion for the full year.... So with that, operator, please open the line for questions.

Operator (participant)

Thank you. At this time, I'll just remind everyone, if you'd like to ask a question, please press star, then one on your telephone keypad. The first question is from Ryan Connors with Boenning & Scattergood. Your line is open.

Ryan Connors (Analyst)

Great, thanks for taking my question. I wanted to talk a little bit about the pricing impact of some of the Commercial Excellence initiatives you're putting through, things like the new training center. You know, historically, I think Watts is already known in the contractor channel as a premium brand at a premium price, and presumably, that's even more so today, given the exit of some of the undifferentiated lines. So my question is: do you believe that there's still room for you to, you know, pick up pricing structurally in the marketplace as you get more disciplined on how you go to market? Or do you think you're more or less priced appropriately in the marketplace, and that the, you know, the bigger opportunity there is actually market share?

Robert Pagano (CEO)

So Ryan, I think there's both. I think we did see some, you know, little pricing pressure in Q2 as we adjusted some of our products. I think we've talked about in the past that for our OEMs, we do tie pricing to LME. So with some of the commodity prices coming down, we had to give a little of that back. But in general, you know, we feel good about our ability to pass along pricing. I think the reliability and quality of our product stands by itself, and I think that we'll continue to push price where we can. We continue to look at, you know, we test price elasticity. Sometimes we back off on that, and sometimes we push it.

So again, as we continue to look at our portfolio, we'll adjust our Commercial Excellence initiatives and our pricing accordingly, but overall, we feel good about it.

Ryan Connors (Analyst)

Okay. And then on the market share side, I mean, obviously, it breaks into a product-by-product discussion pretty quickly. But, you know, when you're doing things like the training center and other, you know, Commercial Excellence type programs, I mean, how do you look at the market share you have today in the product lines you're retaining and whether there's an opportunity to pick up share? Is there any way to quantify that side of the opportunity?

Robert Pagano (CEO)

So I look at, you know, the new training center has just started, right? So it opened up in April, so I think it's difficult to do that. But in the long run, we believe, you know, training as well as new product introductions will allow us to gain market share. So I think certainly that was the reason why we're doing it. We believe in to continue to train the industry and look for opportunities for growth because, you know, in the end, that's what it's all about. So, you know, I think it's a combination of training, new product development, and making sure our pricing is appropriately, you know, in the right markets.

Ryan Connors (Analyst)

Got it, and then one more, just on the operating margin. I mean, we're, we're almost 12% in the quarter, over 11%, I guess, year to date, which obviously is impressive and great progress against your initial target, which I think was, if I remember, you know, something like 12%-13%. So can you update us on your latest thinking about margin targets based on what you know, this much deeper into the realignment process?

Robert Pagano (CEO)

Well, certainly our goal is to, you know, get up into the 15% long term. Certainly, you know, some of the heavy lifting is going on with our portfolio readjustments and some of the, you know, overall restructuring initiatives. Longer term, I feel good about that. You know, the team's executing, we're working together, and we're starting to gain our stride. I think, as we continue to go, we'll see the continued restructuring and supply chain savings that we've talked about, and, you know, we feel good about longer term, those margins.

Ryan Connors (Analyst)

That's great color. Well, thanks for your time this morning, gentlemen.

Robert Pagano (CEO)

Thank you.

Operator (participant)

The next question is from Jeff Hammond with KeyBanc Capital Markets. Your line is open.

Jeffrey Hammond (Analyst)

Hey, good morning, guys.

Robert Pagano (CEO)

Good morning, Jeff.

Jeffrey Hammond (Analyst)

Hey, I just wanted to go at the margin in a question a little bit differently. You know, you Bob, you mentioned the 15% target. You're there in North America and certainly above prior peak, and Europe's been a laggard. So if you just kind of contrast the two, other than, you know, macro, are there structural issues for Europe getting to that same level? Is it just, you know, a matter of time? Maybe just compare and contrast kind of where you think you are and, you know, Europe's margin trajectory versus, you know, where you've come on North America.

Robert Pagano (CEO)

Yeah, I think, there is a little structural difference because a large portion of our business in Europe is through the OEM channel, which tends to be lower margin. But I do believe there's opportunities for improvement. We do have structural cost issues. We have a lot of plants in, I would call it, high-cost areas, and as you know, we've talked about it's difficult to shutter those costs and on a cost-effective basis, right? Long paybacks, et cetera. So I think structurally, we are a little bit challenged, but I do believe there's still opportunities, and, you know, we're making progress on our restructuring initiatives. We'll be implementing that in the fourth quarter, so we'll see the benefits, you know, inside of next year. So really, you know, the team's been making great strides.

It's unfortunate the Brexit thing happened, so I think that creates a little uncertainty in the region at this point in time. But, overall, our team is making great progress in Europe.

Jeffrey Hammond (Analyst)

So on that point, I mean, I think you've been a little nervous about Europe coming into the year, and you've been able to put up some organic growth and really nice margin improvements. So what's kind of inflected there, you know, where you've been able to put those results up?

Robert Pagano (CEO)

... Well, I think it all centers around our teams are now becoming more focused on the customer and understanding, you know, what parts of our business to push, you know, strategic accounts, all of that, and being selective on various pricing initiatives. So again, I think the team we reorganized it. We've eliminated what I call some redundant overhead and structural costs out of there. And really, the whole focus is getting close to our customers. So we saw a little bounce in Italy, which was nice. You know, France was, you know, up just a little bit, a tick, you know, basically flat, up a little bit.

But you know, I think once Germany stabilizes, I think when you know, we sell to a lot of OEMs in Germany that ship outside of Germany, in particular to Russia and other countries, and I think they're having some difficulty. So once that stabilizes, I'll feel better about that. So again, I have been cautious about Europe, and I believe rightly so. You know, the first two quarters, or actually even in the fourth quarter, we saw some growth. So we had three good quarters, and unfortunately, this Brexit thing, I think you know, we saw some softness in July a little bit, but it—we, we're starting to see that rebound a little bit. So again, I think it's natural for all the uncertainty to have happened, you know, given the end of the quarter.

The teams are feeling pretty good about as we go. But we're being a little cautious. We continue to be cautious and watch our cost structure and driving our growth.

Todd Trapp (CFO)

Great. Thanks a lot, Bob.

Robert Pagano (CEO)

Thanks, Jeff.

Operator (participant)

The next question is from Jim Giannakouros with Oppenheimer. Your line is open.

Jim Gianakaris (Analyst)

Hey, guys. Good morning.

Robert Pagano (CEO)

Morning, Jim.

Jim Gianakaris (Analyst)

I'll make it three for three, I guess, on Europe. I'll start with the margins. Again, just asking near term, can you give us where you guys see you're running at baseline on an annual basis if revenues stay flat, you know, once you've lapped the benefits of all the actions that you're taking there, but then I guess overlaying incremental investments, such as, such as building out your sales?

Todd Trapp (CFO)

So, yeah. Hey, Jim, this is Todd. You know, I think if you look at the margin rates in the second quarter is, you know, a little bit north of 11%. And I would say if volume kind of holds at these levels, I would say that's probably a pretty good range to keep it at this point in time. And they're gonna continue to benefit from some of the restructuring actions that have taken place in the quarter in the last couple quarters. So I think, you know, somewhere in that, you know, 10%-11% range would be how I'd categorize Europe's probably second half margin performance based on what we've seen so far in the first half.

Jim Gianakaris (Analyst)

That's helpful. Thanks. And just a little granular on Europe, the demand. You said you mentioned Germany, OEM channel softness. Was that destocking, or you're seeing a demand reset specifically in Germany? Thanks.

Robert Pagano (CEO)

I think it's a combination of both, actually. I think the German boiler manufacturers have been having a difficult time, especially on the residential side. And you know, so again, I think it's continued adjustment. I think they continue to rightsize. They have decided to in-source some of their products. So again, I think it's just a reset, because you know the difficult, the cost to reduce labor, et cetera. But our feedback is, you know, by the end of the year, we feel that that should subside, and you know, then the comps get more in line with what we've been seeing on a run rate basis.

Jim Gianakaris (Analyst)

Got it. Thank you. Switching over to the Americas. Specifically, you guys called out the res, non-res tailwinds and your leverage there, well understood. The continued softness in industrial end markets, understood, but where exactly? I mean, can you get a little more granular there on what you're seeing in industrial end markets and how much of that is oil and gas? Thanks.

Robert Pagano (CEO)

Yeah. I mean, our industrial business is about 3% of our overall business. It's a small portion of it, but yes, it is tied mainly to the oil and gas side of the business, where we have some product lines in that. So, you know, that continued to be soft, down double digits on us. But, again, it's a small portion of our portfolio, and, you know, hopefully, that starts stabilizing, at, you know, at some point here. But, probably in Q4, we'll lap comps again on that. So, again, we had some backlog coming into last year that didn't ship out till the end of the fourth quarter. So by the end of this year, I think we'll get back down into that, steady state, where we're lapping decent, comps on that.

Jim Gianakaris (Analyst)

That's all I had. Thanks, guys.

Robert Pagano (CEO)

Thanks, Jim.

Todd Trapp (CFO)

Thanks, Jim.

Operator (participant)

The next question is from Gerald Giordano with Cowen. Your line is open.

Gerald Giordano (Analyst)

Hey, guys, good morning. Thanks for taking my question. Like, I was curious in Europe, if Brexit winds up being worse than... I know no one has any real idea what that's gonna turn out to be, but if it turns out to be a little bit worse, are there additional programs that you guys kind of have in the back of your mind that you could just put through real quick to kind of rightsize that business even further than what you're doing currently?

Robert Pagano (CEO)

Yeah. I mean, when we look at it, less than 2% of our business. We're not real strong in the UK. It's really the question of what is the macro indicators, you know, all around Europe and the overall impact. I think, you know, we're constantly looking at our cost structure. We know, you know, we have some European restructuring initiatives going on, so we'll continue to look and monitor that. But right now, our teams, you know, they felt the noise, they felt the shock, but honestly, they, they believe we'll move on, and, you know, things will go forward with it. So right now, we're watching it closely, and we'll look for opportunities, further opportunities if we need to. But right now, the team believes we've got the right actions in place.

Gerald Giordano (Analyst)

... Okay. I wanted to talk about the One Watts push, things like global Drains. When you go through that process, is that mostly internal training, or how much is customer education? Like, what are the initial results like? Is it more just—are you just trying to push volumes and have your customers understand the full range of breadth of product that you guys have? Is that the ultimate goal there?

Robert Pagano (CEO)

Yeah, I think a lot of it is just we have a broad product range, and certainly, you know, literature needs to be changed. But a lot of our products are global in nature, where we can package them and put them together. And in the past, we've been very siloed, and the whole goal is to open up the portfolio for the entire organization. So it, you know, requires, you know, marketing materials, trainings from our customers, training for our internal piece. So it's, it's a combination of all of the above, and, and the goal is really to take a global look and a global, you know, product portfolio and provide a customer solution. And, and some of our customers, you know, large customers are global in nature, so we wanna follow, develop strategic relationships with them and bring our products global with them.

It's a combination of all of the above, and we're in the early innings of that initiative.

Gerald Giordano (Analyst)

Are you starting to see some product sales of, like, things in Europe that you were selling in the U.S. but not historically there? Are you starting to see some tangible evidence there so far?

Robert Pagano (CEO)

Actually, the biggest benefit we're seeing is products we make in Europe and selling them into North America in our stainless steel drains business. So, we're gaining some traction there. We've added resources and specializing on that. So that's where we, you know, are getting our early wins, but we believe there's just as much opportunity the other way around, bringing, you know, products into Europe right now. But right now, the other opportunity is bringing our products, both made in North America and in Europe, into the Middle East and in Asia. So all of those are initiatives that are going on right now.

Gerald Giordano (Analyst)

Great. And then just last for me on the Americas, how did sales trend throughout the quarter?

Robert Pagano (CEO)

When I look at trends, it was interesting for the quarter. April was soft, and we saw it ramp up in May and June. And it's funny, July started off a little soft, but again, our sales team is confident in it coming back. So it's trendy, and the teams feel good and confident. All the indicators that we look at, you know, construction in both non-res and res are looking positive. And as you know, 65% of our North America business is repair and replace, which tends to go with GDP. So again, on balance, our team feels good about that, and you know, we're, you know, somewhat, you know, we watch the ups and downs. Some of it's lumpy, depending on you know, the commercial type business.

So again,

Gerald Giordano (Analyst)

Mm-hmm

Robert Pagano (CEO)

... you know, cautiously optimistic.

Gerald Giordano (Analyst)

Good. Thanks, guys.

Robert Pagano (CEO)

Thank you.

Operator (participant)

The next question is from Ryan Connors with Boenning & Scattergood. Your line is open.

Ryan Connors (Analyst)

Yeah, thanks. Just a quick follow-up question. Bob, you mentioned in your prepared remarks this idea of having to go outside the organization to fill certain seats where you don't feel like you've got the appropriate internal candidate. And I know there's some examples of that in Franklin, for example. But can you talk about, you know, how you go about that? You know, is it a compensation part of the pitch you're making to some of these people from larger, more mature organizations, or, you know, what are the elements that you're using to try to bring people on board?

Well, Ryan, it has usually nothing to do with compensation. We really talk to the teams about what we're trying to do, what we're trying to build, the momentum we're starting to get, and they meet our leadership team and, you know, really see, you know, the opportunities inside the organization. So, you know, certainly compensation has to be a part of the discussion, but honestly, that's the very last thing we talk about. So really, everybody's excited to be part of this company. We have a strong 140-year history, a great brand, and, you know, we're now gonna capitalize on that brand to grow in the future. So people are excited to join us, and, you know, all the people that have joined us are excited to be here, so they wanna be part of a winning team.

That's great. Thanks again.

Robert Pagano (CEO)

Thank you.

Operator (participant)

Showing no further questions at this time, and this will conclude today's conference call. You may now disconnect. Thank you.