濱特爾 (PNR) 2002 Q2 法說會逐字稿

Ladies and Gentlemen, thank you very much for standing by and welcome to the Pentair second quarter of 2002 conference call.

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

Later we?ll conduct a question-and-answer session.

Instructions will be given at that time.

If you should require assistance during the conference, please press zero, followed by star.

As a reminder, today?s conference call is being recorded.

I?ll now turn the conference over to Chief Financial Officer, Mr. Dave Harrison.

Please go ahead, sir.

Good morning and thank you for joining us for this conference call to discuss Pentair?s results for the second quarter of 2002.

I?m Dave Harrison, Chief Financial Officer and I will be your host for this call.

With me this morning is Randy Hogan, our Chairman and Chief Executive Officer.

Before we begin this call I would like to remind each of you that any statements made about the Company?s anticipated financial results are forward-looking statements subject to future risks and uncertainties, such as, but not limited to, economic and market risks.

Also, I would like to refer you to the risks outlined in our 10-K as of December 31, 2001.

Forward-looking statements included herein are made as of today and the Company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances.

Actual results could differ materially from anticipated results.

At this time I?ll turn the program over to Randy Hogan.

Good morning.

Thanks for joining us.

As you saw in this morning?s news release, we reported good results for the second quarter of 2002 that reaffirm our belief that our prospects for the future are great.

Included among the highlights are the following:

The second quarter of 2002 EPS was 86 cents, a 15-percent gain over EPS of 75 cents in the same period last year on an equivalent basis.

Second quarter net sales totaled $708 million, up 3 percent over sales of $689 million in the prior year.

Operating income for the quarter totaled $74.6 million, 7 percent greater than the $69.6 million of operating income in last year?s second quarter.

Free cash flow in the first half of 2002 totaled $87.2 million, a $33.8-million gain over year-ago levels and 135-percent conversion of first-half net income.

The second quarter of 2002 marked the first time in the past two years that the Tools Group achieved double-digit ROS.

This is a significant milestone for our Tools business and signals the transition from recovery mode to attack mode in that company ? in those companies.

Indeed, all three of our businesses made major improvements during the second quarter, with Tools and Water Technologies increasing in both sales and operating income on year-over-year comparisons, and Enclosures strengthening operating margins sequentially for the second consecutive quarter on flat sales.

Looking back on the quarter, we?re very encouraged by the results that were generated.

We firmly established an emphasis on cash flow.

So much so that we believe it is now part of our culture.

Our lean enterprise and supply management initiatives are driving performance gains of all of our businesses and we are now committing to growth by defining concrete actions, organizing for execution and driving that execution for top-line results.

In fact, at a meeting of Pentair?s top 85 managers held just last week, we specifically addressed the subject of growth as it applied to new products, new channels to market, new geographies and other areas of opportunity.

I?ll have more on this topic during the operating reports, which I?ll start with now covering Tools.

The Tools Group net sales of $303.8 million finished some $29 million, or 11 percent ahead of last year.

Operating income of $30.8 million was $10.3 million, or 50 percent, ahead of 2001.

In the second quarter, ROS of 10.2 percent was a 270-basis point improvement over 2001 and marked the return to double-digit margins in the Tools Group.

Operating income improvement is due to higher gross margins, due primarily to cost improvements realized from both supply management efforts and lean enterprise practices and from volume.

The Group?s sales gains were led by DeVilbiss Air Power Company where all three product categories performed well ahead of prior-year levels.

The largest increase was in pressure washers, the sales of which were up over 30 percent over 2001, which results in an excellent year for this product line.

Porter-Cable and Delta both were also up year over year.

And service levels of both Porter-Cable and Delta are at record levels with full rates for Home Centers and major industrial accounts now at high 90-percent levels.

Also, key customers in both retail and important professional channels are experiencing strong sell-through of our woodworking equipment.

As a result, the Delta business had its best results in two years, as our team?s efforts to leverage the brand and renew the product line began to pay off.

In other areas, the Tools Group achieved very strong material cost reduction in the second quarter that totaled over $6 million.

And lean enterprise efforts also continue to read out with double-digit labor productivity improvements at both DeVilbiss plants and at Porter-Cable?s Jackson facility.

As a whole, the Group expected to deliver total cost productivity savings of over 5 percent in 2002.

000:05:36 On the growth side of the equation, we introduced a line of corded drills and drivers at the end of June.

This line represents an entirely new range of corded products for Porter-Cable that features two three-eights-inch and two one-half inch drills, along with two shears for cutting metal and cement siding.

We also started shipping a new line of laser products in June.

These new products are the first in a line of new products with laser features that will be introduced at the upcoming hardware show in Chicago.

000:06:03 Especially noteworthy is the news that Delta launched a new branding strategy during the second quarter.

This involved the creation of sub-brands, Shop Master and Industrial, which target two important market segments, the entry-level BI wire in the case of Delta Shop Master, and the Professional Craftsman in the case of Delta Industrial.

This development has been very well received by the respective channels and is sure to provide new growth for the newly reborn Delta brand name.

Delta recently introduced several new tools, including the exciting new 12-inch laser miter saw and innovative new 10-inch miter saw with front bevel lock, four new bandsaws, several new bench grinders, a redesigned air filtration unit, and a new mortising attachment.

Though we feel great about where Tools is, all three brands ? Porter-Cable, Delta and DeVilbiss ? grew in the second quarter.

We?ve got a lot of momentum and we?re pleased with how the team is doing down there.

Turning to the Enclosures Group, we reported net sales of $138.8 million and operating income totaling $7 million, a decline from the same period last year, which has just begun to reflect the downturn in capital spending that became painfully evident in the second half of 2001.

However, if we compare the second quarter of 2002 to the first quarter, Enclosures Group sales have been essentially flat while margins have improved 170 basis points.

What appeared to be a first-quarter rebound in domestic capital spending, particularly among industrial customers, seemed to stall in the middle of the second quarter as uncertainty in the marketplace slowed capital projects and motivated distributors to retrench.

Consequently, North America markets were down approximately 10 percent in the second quarter of 2002 versus 2001, and were essentially flat compared to the first quarter of this year.

In this environment, our [indiscernible] businesses has performed well with some modest growth in Q1 to Q2, and continued aggressive cost and share actions.

The telecom market continued to be hard.

Spending is severely depressed as the industry is focusing aggressively on cash flow.

Telecom now represents only a little over 10 percent of our business mix, down from a high of about 25 percent just over a year ago.

Expectations for telecom market recovery continue to be pushed out into 2003 at the earliest.

Looking at our global ? looking at our global markets, we saw some bottoming in Europe during the second quarter and Asian business activities increasing modestly.

Given the environment, efforts of the Enclosures business continue to focus on two areas: (1) reducing the existing infrastructure and lowering operating costs, the result of which you?re now reading out margin improvement; and, (2) executing growth initiatives that target strategically and volume, expansion on our product and service offerings, new geographic coverage, and opportunities in more attractive market segments.

For example, in the second quarter we finished closing five major Enclosure plants and five support facilities with a shutdown of the sixth unit, a warehouse, now underway.

These actions represent a savings of about $2 million in the first quarter of the year, and another $3 million in the second.

So we are on track for the $15 million in savings this year from the restructuring.

Our efforts to diversify our customer base in Enclosures have also generated results.

For example, in the security arena, we?ve received the first order under Motorola?s I-Module program.

This contract relates to outdoor [indiscernible] to provide a unified secure communication infrastructure for government and municipal use.

Also in the defense market we?ve received a 12-month contract for integrated Eurorack from [Tallis] a well-known name in the Civil and Military aviation and space industries in Europe.

We also have wins in the medical data storage and industrial OEM markets.

Despite the challenges the Enclosures market presents us, our business remains profitable and we will emerge from the market downturn as a stronger, leaner player, generating a return on sales of at least 10 percent.

In Water Technologies, sales were up by double-digit percentages during the second quarter due to record-high seasonal activity in the pool and spa equipment business, robust sales in retail and municipal markets and strong international sales.

Cash flow from this group also was at a high for the first half with a 68-percent improvement over the same period last year.

Second quarter margins were down slightly from year-ago levels due to unfavorable product mix and large from lower-margin international projects.

Quarter-over-quarter margin improvement is expected to resume throughout the second half of 2002.

Our pool and spa equipment business recorded strong seasonal sales and operating income versus last year?s second quarter, which, as you may recall, was slow until June and carried over into a strong third quarter.

The second quarter of 2002 was strong throughout the whole quarter.

As a result, we expect seasonal activity in this market to tail off in the third quarter much more than last year, but we think increased sales activity in the other Water businesses will remain strong.

In pumps the retail business was up more than 25 percent in the second quarter, with overall sales of residential pump products setting a new record in the month of June.

Our municipal pump business also was up more than 25 percent in the same period, and bid activity from the municipal marketplace stood at a four-year high late in the second quarter.

Even our commercial pump business was up slightly in a market that has declined some 13 percent.

We believe we?re taking share in these markets, which we hope will position us to benefit from any economic improvements that come to pass in the second half of the year.

In Water treatment, strong residential sales helped offset a decline in the commercial and industrial markets.

As I mentioned earlier, several large desalination projects contributed to the top line, although at somewhat lower than normal margins.

Looking at the business geographically, we?ve realized a 25-percent improvement in sales within our Asian markets and double-digit improvements in our European sales.

Growth initiatives in the Water business are focused on expanding our position in the industrial and commercial pump infiltration markets, principally through broadening our offering of packages designed for fire, HBAC, irrigation, boiler, and mobile applications.

We?re also using new technology to introduce [therma] plastic composite tanks for both cold and hot water that will perform far better than with steel tanks that currently dominate the market.

These efforts, combined with the exploration of new growth platforms within water-related industries, will help meet aggressive growth objectives in the Water Technologies Group.

Now let me turn the conference call over to Dave for some additional details on the quarter.

Dave?

Thank you Randy.

As Randy mentioned, our momentum in cash generation continued with first-half free cash flow totaling $87 million, a $34-million improvement over the first half of 2001.

This is the highest first-half cash flow we?ve had in over 10 years due to the emphasis placed on working capital with very positive results reading out in all three of our businesses.

This puts us well on our way to achieving the $200-million target we have set for 2002.

Financial highlights in the second quarter include the following.

We paid down debt $50 million in the quarter, resulting in a debt-to-total-capital ratio of 37.4 percent versus 45.9 percent in the same period last year.

In fact, debt is down $332 million from March of 2001 and has declined $555 million from our peak debt position back in April of 2000.

Working capital still continues to decline.

Average working capital productivity as of the second quarter improved 18 percent, or 11 days, from the prior year.

Average receivables are down $63 million.

That?s five days.

And average inventory is down $78 million, and that?s 11 days.

Accounts payable, which is at 52 days, was down three days.

Credit goes to the people in all of our operations as cash flow management has truly become part of Pentair?s culture.

Capital expenditures continued to decline as each of our groups implement lean enterprise practices.

We spent $8.3 million in the second quarter versus $12.3 million last year.

Our projection for the full-year 2002 is roughly $15 million.

Depreciation is starting to reflect a lower capital spending and was $15 million in the first quarter versus almost $16 million last year.

Operating income margins for Pentair in the second quarter were more than 10 percent, with a significant 200 basis point improvement in cost of goods sold as supply management efforts reduced material costs and the businesses continued to work on their lean enterprise initiatives.

SG&A as a percent of sales did increase from 11.8 percent, excluding the 2001 amortization of goodwill, to 13 percent in the second quarter of 2002.

This was primarily due to increases in selling expenses as we continued to fund brand awareness advertising in Tools and to roll out promotions in Water and target untapped industrial markets.

Also similar to the investments we made for our supply management and lean enterprise activities, we are now investing to improve our business processes and launch initiatives to fuel organic growth.

Finally, we are in the midst of transitioning our internal audit function back in-house and had some additional costs in the second quarter as we intentionally accelerated the outsourced audit and simultaneously began to recruit and hire internal resources.

Interest cost in the second quarter was $10.5 million, down nearly $6 million from the second quarter of last year.

The lower interest costs are a result of both our lower debt levels and lower interest rates.

000:16:37 As usual, our reporting today provides comprehensive financials, including balance sheet and cash flow details in the schedules accompanying this morning?s announcement.

We have included three additional pages in our news release in order to aid the understanding of the cessation of goodwill amortization for SFAS 142 and the adoption of EITF 01-9, whereby certain payments to our customers for cooperative advertising and certain sales incentive offers that were historically classified as selling expenses, are now shown as reductions to net sales.

000:17:14 We also filed an amended first quarter 2002 10-Q conforming our financial statements to EITF 01-9 in a separate SEC filing today.

There was no impact on our operating or net income as a result of this reclassification.

One schedule shows the quarterly breakdown for the total Company income statement for 2001.

The second shows segment breakdown for the four quarters of last year and the first two quarters of this year.

And the third provides supplemental information, showing sales and goodwill amortization back through 1996.

With the recent flurry of accounting pronouncements, we feel extremely ? we find it extremely helpful to have our numbers stated consistently on an apples-to-apples basis and thought it was important to provide this externally, as well as to allow for more clarity and better understanding of our financials.

Now I?d like to turn the conference back to Randy.

Thanks Dave.

Before wrapping up this conference call, I?d like to go on the record regarding issues of corporate governance and business ethics.

I speak for all the officers, management, and Board of Pentair when I say that we will continue to be forthright and ethical in all aspects of our business and especially so in manage-related to finance and accounting practices.

Pentair enjoys a reputation as a conservative, by-the-books business that operates in accordance with a longstanding code of business conduct.

That is a reputation that we value very highly and we will continue to paint-by-the-numbers and colorings by the line.

Further, we at Pentair stand in full support of the New York Stock Exchange initiatives aimed at strengthening corporate governance and oversight.

In fact, the most powerful of the Exchange?s proposal are already part and parcel of our routine procedures, and those few that aren?t soon will be.

In fact, we have no inside Board members on either our Audit or Compensation Committees and I?m the only internal member of the nominating committee and my term on that committee comes to end at the next Board meeting.

Finally, the SEC proposal that executives attest to the integrity of their financial statement is one that Dave and I endorse and are ready to do.

This too will be part of routine procedures for Pentair.

Our second quarter performance has demonstrated that our businesses are running well.

We?ve moved beyond recovery in our Tools business and we are now working to push the performance of that business beyond the high levels it achieved before.

Our Water Technologies business has built impressive margins that will generate excellent results as our core pump and water treatment markets continue to improve and our growth initiatives yield results.

Cost productivity actions in our Enclosures business have begun to improve the bottom line and we are encouraged that industrial markets appear to be stabilizing.

Looking forward, assuming our markets continue at their current pace of recovery, we will continue to build share on our Water markets and then Enclosures performing ? performs flat to up slightly in the second half.

We expect to remain ontrack with fiscal year 2002 earnings-per-share expectations between $2.80 and $2.90 per share.

I?d now ask the AT&T operator to come on the line and please provide our audience with instructions for the Q&A session of this call.

Ladies and Gentlemen, if you?d like to ask a question, please press the one on your touchtone phone.

You?ll hear a tone indicating you?ve been placed in queue.

You may remove yourself from queue by pressing the pound key.

If you?re using a speakerphone, please pick up the handset before pressing the numbers.

Once again, for questions, please press the one at this time.

Deane Dray from Goldman Sachs

000:21:03 Deane Dray: Good morning Randy and Dave.

My first question related to the Water business, and specifically the municipal business.

I know there were some questions earlier in the quarter with regard to how well this business would hold up, and the fact that you?re saying that the activity was at a four-year high.

If you?d just take a moment and walk us through how you view this business in terms of being a lagging indicator, where funding comes for the municipal projects, and when might this bid activity start translating into orders.

Randy Hogan.

OK, Deane, on the municipal market, the municipal bid activity is something we track every month.

And as I said, since the low ? the low really wasn?t the first quarter this year in terms of the bid activity.

Our order ? our build rate was still pretty good because we had some large projects in our backlog.

But from that low in the first quarter of this year, it?s more than ? it?s more than doubled in terms of the bid activity.

It?s really driven by several things: (1) There is a real solid need for upgrading the infrastructure in this country.

There are a lot of municipalities that basically can?t deliver water.

I?ll give you an example, even newer ones like Naples, Florida recently had an emergency because their pumps went down.

These are things that they have to do.

000:22:31 Secondly, they have multiple forms of funding.

Many of the water municipalities have their own funding, either through direct billing or through their own bonding.

So they have funded some, if you will, cushion from the overall tax ? more of the tax revenue declines that the general government sees.

And I think ? you know we?re doing a very good job in terms of fighting for our share of the market.

So we think, in terms of timing, your last question, we see about a six-month window for most of these things from conversions for mortars to sales.

So given our backlog, given the order rate activity, we?ve gone through the trough in municipal already and we?re looking at a good municipal market for the foreseeable future.

And what was the change of backlog in Water, quarter over last year?

At the end of the quarter it was ? it was down roughly 5 percent in backlog.

Some of that has to do with the efficiencies that are built into the business.

They are getting better.

OK.

And then moving to Tools, with regard to the new product launches, what?s the sense of the pricing power that you have for the Porter-Cable and Delta new product launches?

How does that compare to where we were, let?s say, two years ago?

Well, I think any time we introduce a new product and we target it right and target the price point right, you know, you either establish a new price point or strengthen an existing price point.

Our new product sales in the second quarter, we measure our sales as a ? what percent of our sales have we gotten from products we?ve launched in the last 18 months and the second quarter, actually over a third of our sales in the second quarter came from products launched in the last 18 months.

So we think that that has actually helped us in terms of improving our margins.

With that said, actually, when you look at Tools, of the price year over year, price was down slightly.

So, you know, the pricing pressures remain, but that?s no different than it?s been for the last 10 years.

OK.

And then, just the last question on the adoption of the EITF accounting standard, how does that ? is this a voluntary process for you?

And, just looking at the changes, it looked like most of the impact was in the Tools business, and then overall it is less than two percent of a revenue shift, is that correct?

Right.

Deane, it?s not voluntary.

It was something that we should have done with the first quarter.

We didn?t get it done, so we?re getting it done now.

And it?s largely related to retail, which is why it?s skewed towards the Tools business.

Thank you.

Can you just give us an example?

You said its cooperative advertising, how we might see than from the retail side.

You mean in the retailers? books?

No, no, no.

Just in terms of ? this would be like ? excuse me ? Home Depot advertising that would have embedded a Porter-Cable.

Right.

When we ? when we negotiate our deals with any of the retailers, it?s usually ? it?s volume rebates and there?s cooperative advertising that?s committed to.

And we, in the past, have booked that as a cost of sales, basically a selling expense.

And now the Emerging Issues Task Force (EITF) basically said that these should be treated in this way.

Before, their wasn?t guidance; you could treat it either way, and now they?ve said that they want it treated as a reduction to gross sales, so it?s above the net sales line.

So that?s why that will change our lines, basically just lowering the sales line a little bit.

And so it?s just a modest improvement in operating margin?

000:26:31 Randy Hogan: Correct.

Like 10 to 20 basis points.

Correct.

Great!

Thank you very much.

It?s exactly 10 to 20 basis points.

Thank you.

Steve Jacobs from US Bancorp.

000:26:44 Steve Jacobs: Morning Dave.

Just a couple of quick questions, Dave.

On the operating expense, there?s a corporate expense of $6.9 million.

Is that reflective of your in-house, your auditing efforts to bring them in-house?

000:27:02 Dave Harrison: A piece of that is.

There are some additional expenses for growth that we have incurred in the quarter and additional expenses for moving the audit in-house.

Because after the first quarter your guidance was for corporate expense to kind of be right around the first-quarter level of $5.3 million.

And I think at that point in time we didn?t realize that we were going to have the additional expenses specifically for audit.

000:27:29 Steve Jacobs: So, going forward now, what kind of a number would you feel comfortable with?

000:27:34 Dave Harrison: I think probably it?s going to be ? my guess right now, it?s going to be something above the five because we?re still ? we?re still spending for growth.

We?ll still have some additional audit expenses in this next quarter.

But it will eventually be lower.

About $5 million but not $7?

I think probably somewhere more in the range of $6 is what you could count on.

And then, the Water margin of 16.5 percent, Randy, in your opening comments did you say that you think margins can continue to improve even on a seasonal basis?

Yes.

You know, not sequentially, but you know, because in the second quarter we have the crescendo of the pool business, but basically, we expect that ? you know we have suffered with the downturn in the market; we?ve suffered declines in the operating margins from the Water?s very high levels to a little bit lower than their very high levels, but still the highest in the Company.

Our target in that business has been getting back to sequential year-over-year improvements and we expect to be back ontrack in the second half to do that.

As you can see, the gap, if you will, has been narrowing; the second quarter/first quarter narrowed, I mean narrower from the fourth quarter.

So our target is to get back into ? get back to our higher margins that we had a couple of years ago.

000:29:03 Steve Jacobs: And then on Enclosures, in terms of sales, Randy, you said Hoffman had some modest growth.

I?m assuming therefore, because, you know, sales were roughly down year over year, down from $175 million, that all of the decreases in the Schroff and European?

Yes, let me clarify that.

Hoffman was up low single digits first quarter to second quarter, but they were down year over year.

Oh, you?re still down year over year?

Yes, they were still down year over year, you know, about 10 percent.

The other businesses were down a lot.

Europe was down a lot;

Pentair Electronic Packaging was down a lot, and actually both of them were down first quarter to second quarter.

Great!

OK, thanks a lot.

Congratulations on a great quarter.

Ryan [DeLaney] from [indiscernible] Capital.

Good morning guys.

A couple of quick questions.

I?m trying to link some of the comments you?ve made about the pool and spa industry with some of the comments that were made on the SCP Pool conference call just a couple of days ago.

They had talked about a very strong April ? and this was in response to the question about their inventory levels ? a very strong April, but then it kind of slowed down in May and June and, I guess, in addition to what they had thought was going to happen.

So I?m trying to get a feel for just inventory levels throughout that industry.

And, you know, I see that you guys said that inventories, that the margins were slightly down.

I was just trying to get a feel for how much is for discounting and selling into kind of distribution channel, and?

Yes, Water margins were down in the group.

We don?t give out specifics for the group, but I?ll tell you that Water margins are not down in our Pool business.

Year over year our Water business was up in the second quarter.

Margins were stable.

We saw strength throughout the second quarter.

We do think ? that?s why I was talking about the fact that we think the third quarter is going to drop off more.

We?re a little bit concerned about the inventory in the channel.

And would it be at the distributor level that you?re concerned?

Because, you know, I looked back to your 10-K and you talk about the fact that the decline in margins was offset by higher sales volume in your pool and spa equipment business, but then if you look down at the distributor level, they?re talking about the reason we?re buying in advance is because of significant discounts that we?re getting.

But you do see a significant build at the inventory level on some of these companies.

So I?m just trying to get a feel if ? in-demand, how we?re doing in terms of in-demand for the products, and, you know, where do you see the risk being within the channel?

We think the in-demand was pretty good, pool starts was good.

But refurbishing of pools we think was up double digits.

And I think both ? I don?t want to speak for SCP, but I think both SCP and ourselves, we have comparisons year over year were ? you know last year?s pool season was later than it was ? than it was this year, and usually it?s big in the second quarter, starts to tail off in the third quarter.

Last year?s third quarter was really pretty strong, surprisingly strong for us.

I?m not sure if it was for SCP;

I think it was.

But you see ? when you said you see it as being a risk falling off it?s just because of the level of inventory that went into the channel?

Well, yes, and the seasonality.

I mean, the seasonality in general is ? we expect that from that fall-off.

The other thing is last year, you know, our ability to execute and our customer service levels were much better this year in our pool business than they were last year.

Last year because of the late buildup in the business, we had actually started to take people out, and then when the business started to boom in late May, we were scrambling in terms of customer service.

But this year, because of our lean enterprise practices, our customer service levels are at all-time highs, which we think is one of the reasons why we?re gaining share in the pool business.

OK, but you don?t see any change in trend in discounting and selling into, for pre-buys and such?

000:32:47 Randy Hogan: No, no.

000:32:48 Ryan [DeLaney]: OK.

And then just looking to your cash flow, when you look at a big portion of the increase in the cash flow year over year, it looks like a part of it is coming from those accounts payable and timing of accounts payables.

It?s about a $40-million swing year over year.

Is there anything specific going on with accounts payable in terms of, you know, are you guys, you know, stretching them out a little bit longer?

What is?

No, in fact, as I mentioned ? yes, as I mentioned on the call, we?re actually down three days this year.

But what you don?t see when you look at the cash flow statement, last year?s use of funds from payables came from the change that occurred in the prior year, and that?s what makes the change look bigger, is that you?re looking at it over a longer period of time.

It has nothing to do with this year.

This year?s increase actually came from the standpoint that in both our Tool business and Water business, the sales were up, the purchases were up, and therefore, the payables were up.

But the days were down by three.

OK.

Just one last question.

What are your estimates for free cash flow for this year?

$200 million.

$200 million, and your definition is operating less Cap ex.

That?s correct.

And your forecast for Cap ex for this year for the full year?

Is roughly $50 million.

Fifty?

Right.

OK.

Thank you very much.

That?s the high-end number.

000:34:08 Operator: Don Zwyer with Lehman Brothers.

Good morning, Randy, Dave, Don Zwyer.

Two questions, one follow-up on the municipal pump business, have you seen any signs of any delays in programs by some State or local governments?

No more than usual.

You know by the time ? by the time that they?re quoting the pumps, it means the funds are usually already earmarked.

So, you know, they would have already had the fight; they would have already, you know, they would have already had the design of the pump facilities.

So I wouldn?t characterize it as any more than usual, but it is not uncommon for municipal jobs to ship a little late because the inspector doesn?t show up or ? I don?t want to get into the difference between public and private.

But nothing because of any budgetary concerns?

No, we think that?s what ? you know that?s why ? that?s why the quotation activity was softer in the first quarter than the fourth quarter.

But as I said, it?s already picked up.

OK.

And what?s your view on using some of your cash flow to buyback stock here?

You know we have an enormous ? we spent ? we have an Annual Management Meeting, we spent most of the time on the annuals in the meeting looking at our growth opportunities and seeing how we could fund those.

And in terms of our cash flow, you know, we?ve been paying down debt and I want to fund growth because I think the opportunities we have for growth in this Company are enormous.

I guess that?s the long answer to say I?m not [indiscernible] to talk about that right now.

OK.

Thanks Randy.

Erin [Freemanhough] from Janney Montgomery.

000:36:08 Erin [Freemanhough]: Good morning gentlemen.

Your guidance is predicated upon Enclosure sales being flat in the second half.

If that doesn?t happen, how quickly can you react?

And if sales were down five to 10 percent, what would you do to your guidance?

000:36:23 Randy Hogan: I?m not going to speculate on that because our guidance is our guidance.

And then, you know, in terms of what we do, our Enclosures team is the top of their game and, you know, they?re moving to protect their forecast.

They?re looking hard at costs, you know.

For example, we?re already down headcount-wise in Enclosures beyond where we intended to be at this point when we set our restructuring plans because the lines haven?t come back.

So, you know, we?ve had three quarters now in a row around $140 million in sales.

Telecom can?t ? telecom is only a little more than 10 percent of our sales now.

They can?t hurt us a lot more.

Industrial capital spending, is it going to go down more?

Gosh, that would be surprising!

It?s already pretty low.

So, you know, we?ve ? we were ? we?re positioning our costs to protect our earnings and at the same time, we think that any upside is going to really go to the bottom line in Enclosures pretty fast.

So I would tell you there?s no change in my guidance until we change guidance.

OK.

And could you provide some color on your Porter-Cable business and are you gaining share?

In Porter-Cable, you know, I mentioned all three businesses were up in the quarter ? DeVilbiss, Delta, and Porter-Cable.

In particular, we think Porter-Cable is doing very well.

Margins look good, and in particular, the pneumatic side of Porter-Cable is doing pretty well.

I haven?t had a chance to analyze the Black & Decker announcement this morning to see what specifically their product lines are doing in terms of gaining market share, but Porter-Cable, is a strong, strong brand franchise and we think ? we think remains one of the premier market positions in the Tools business.

And to focus on the Delta business for a second, how much of your gains are coming from the high-end, high-margin traditional stationary Delta business versus the desktop ? tabletops?

Tabletop.

Actually, one of the most encouraging things about the second quarter was that Delta was up very strongly, and actually was up stronger in the Professional channels than it was in the Regional channels, and it was up in the Regional channels.

So we really ? the team there has done a great job of re-establishing Delta in the Professional channels and we had the best quarter in a long time on some of our larger equipment.

You know, some of the ? some of the high-end equipment had double-digit growth rate.

And now with the new sub-brand strategy, will you be dumbing down some of your high-end products, or it will be just more of a marketing?

It really isn?t a dumbing down at all.

If you look at the Delta product range as it exists today, we go from everything that gets ? everything in price points.

We have grinders that are $39 up to radialarm saws that are $2,500.

It?s a very, very broad range.

And what we?re doing is basically with the sub-brands is just clarifying what kind of product people are looking at when they?re looking at either a Delta industrial or the Delta Shop Master.

What you will see is, you will see an extended range of products under the Shop Master brand and a clearer definition, in terms of features and benefits, in the industrial sub-brand.

You know for example, we?ve announced that we are going to introduce some cordless handheld tools under the Shop Master name, which is the first time there will be any Delta product with ? that?s actually handheld.

So you?ll see some expansion and you?ll see some clarification of that opening DIY price point type product versus the higher-end industrial.

And we think that?s helpful because it had been closed up a bit.

And moving to the Water business, outside of pool and spa, are you picking up share in any of the businesses?

Yes, we think that we?re picking up share in pump.

We think our share is very good in valves and water treatment.

And we do believe we?ve gained share in water softeners as well.

As I said, you know, our water business was up 11 percent in the second quarter.

And we were up slightly in commercial pumps, which is our Aurora Company and we know the market was down.

And our pump business in general had a solid growth because of municipal and the retail side.

Thank you.

Larry Baker from Legg-Mason.

Thank you, good morning.

Just to go back to Enclosures for a second, if you would.

Would you talk a little bit about what trends you?re seeing at Hoffman, up from the first quarter and talk about what the outlook for that is?

Yes, Hoffman ? you know Hoffman is the premium franchise in the industrial and commercial Enclosures world.

And as I mentioned, first quarter/second quarter Hoffman sales are up slightly, you know, low single digits.

We?re taking a lot of action that will drive that.

We?ve added distribution; we?ve added service levels; we?ve added guaranteed service on some of the larger products, which has all gone very well.

The spending or the distribution is not spending, delaying a lot more inventory.

We?ve not seen, I would say, a bounce from the distribution channel restocking, so that?s still in front of us.

Frankly, I?m worried because of the impact of the stock market on the economy, what?s going to happen with capital spending.

You know capital spending is the key driver for Hoffman.

As I said, I don?t think it can go down much more, but we?re being cautious about how quickly that will come back.

That said, our Hoffman business is already back to double digit, ROS, and we have a strong franchise there, so I?m not the least bit concerned about our Hoffman business.

I think our upside there is enormous.

000:43:04 Larry Baker: OK.

And then just on pools, inventory levels do you think going through your various channels are where you want them to be?

000:43:16 Randy Hogan: They?re a little lower in some of the areas.

Some of our ? some of our product lines, in particular, Delta, is a little low in the channels right now.

The sell-through, the numbers I talked about earlier, we were talking about some of the Professional channels that have sell-through that are double-digit, and so we?re scrambling there.

And also some of the Father?s Day programs we ran on Delta emptied out the coffer, so I think we?re a little light on inventories there.

That said, one of the most amazing things I think our team down there has done is, even with much lower inventories than we ever thought possible, they?re achieving above 95 percent service levels.

And I?ve introduced a concept, which they call the ?perfect order,? which is not only measuring the shipment, but billing errors, shipping errors, ship lates on the part of the trucker.

That?s a much more aggressive measure and they?re ? they?ve driven that from being below 50 percent to being above 80 percent.

So the service levels that we?ve been able to get there have really allowed us to operate with lower inventories in our own house.

000:44:24 Larry Baker: Are you seeing reorders to fill the low inventories in the channels?

Yes, sure.

OK.

The third quarter is ? you know the next big load in our retail will be for the Labor Day.

There will be promotions around them too.

OK.

And then, Dave, the SG&A with the accounting change running at 13 percent in the quarter, what type of level does that ? do you see of sales going forward?

Well, you know, our goal is to continue to get productivity, so we would expect as we go forward to see the number, the percentage to sales decline.

OK, great!

Great!

Good quarter.

Thank you.

Dana Walker from Kalmar.

000:45:20 Dana Walker: I might be the last one because I just chimed in.

Could you talk about your Tools growth ? revenue growth expectations for the back half of the year?

000:45:30 Randy Hogan: We?re very pleased with 11-percent growth in the second quarter.

We think we have a lot of momentum and we think that, with the actions we have in place and the new products that we?ll continue to have strong growth in the third and fourth quarters.

The ? I?d say, you know, I don?t want to say whether we?d make it to double digit or not.

We do think it?s ? we do think the growth will continue.

I believe an issue last year was you didn?t have one of the popular price Christmas gifty-type programs with one of the big box retailers.

Are you already in the planning stages for that, or beyond the planning stages for that?

Yes, we?re in the planning stages.

Well, I guess we?re beyond the planning stages.

Do you expect there to be a better income this year?

We absolutely do.

Alright, very well, thank you gentlemen.

Steve Jacobs from US Bancorp.

Randy, on the Tools side, could you profile maybe the different channels, you know, the retail, the big box versus the hardware versus maybe in the lumber yards, give a little bit of a flavor in terms of what kind of growth you?re getting from those different channels?

In terms of growth, the ? this was the first quarter that we?ve gotten double-digit growth from the industrial channel for two years.

We?re very pleased to see that.

We think that?s partially market, but it?s also a lot to do with the strength of the offering we had.

You know we?ve been working hard to improve our service levels.

I mentioned earlier about the fact that we were above 90 percent.

That?s not just retail; we?re above 90 percent for a lot of our major industrials and we?re getting rewarded with market share for that.

So, for both Porter-Cable and Delta, it has improved.

Retail continues to be ? continues to be strong.

000:47:30 Steve Jacobs: If you were to separate retail between the hardware store and the big box?

000:47:34 Randy Hogan: Oh, it?s big box.

Yes, I mean, our hardware channel is pretty flat.

OK.

And the industrial growth was driven primarily by the Delta, by the rebound in Delta?

Primarily, but we also got Porter-Cable sales there.

Great!

Thanks a lot.

OK.

If there are no further questions, just one other comment, thank you for listening in.

We?re excited about what we did in the second quarter.

We?re confident about our ability to execute in any environment.

And I couldn?t be more excited about the opportunities we have.

So with that, I?ll turn it back over to you for replay instructions.

Very good.

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