濱特爾 (PNR) 2002 Q3 法說會逐字稿

Good morning.

My name is Melanie and I will be your conference facilitator, at this time I would like to welcome everyone to the Pentair third quarter conference call.

All phones have been placed on mute.

After speaker's remarks there will be a question and answer period.

If you would like to ask a question press star and the number one.

If you would like to withdraw your question, press star and the number two.

Thank you.

Mr. Harrison, you may begin your conference.

Good morning and thank you for joining us to discuss Pentair's results for the third quarter of 2002 I'm Dave Harrison, Chief Financial Officer and your host for this call.

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

Before we begin this call, we would like to remind you that any statements made about the companies anticipated financial results are forward looking statements subject to risks and uncertainties.

Such as but not limited to economic and market risk.

I would like to refer you to the risk outline in our 10-K as of December 31st, 2001.

Forward looking statements included herein are made as of today and the company undertakes no obligation to update those statements.

Actual results could differ materially from anticipated results.

At this time I will turn the program to Randy Hogan.

Good morning.

Thank you for joining us.

Generated fall results during the third quarter despite a tougher economy than anticipated.

Along the highlights from last quarter are the following.

Third quarter 2002 earnings per share was 75 cents, 14% gain of 66 cents in the same period last year on an equivalent basis.

Third quarter net sales totaled $629.3 million in the quarter down slightly from prior year, reflecting the current economic weakness.

Particularly in water and enclosures.

Operating income for the quarter totaled $61.6 million, 2.4% greater than the $60 million of operating income of last year's third quarter on an equivalent basis.

Precash flow totaled $110.1 million and $197.2 million on a year to date basis.

Dave will address our progress in cash flow in more detail.

Looking back we see our cash flow firmly established and generating record cash.

We are now seeing activity in support of our commitment to growth in form of new products, new channels and new geographies.

We recently announced two complimentary acquisitions to further support our growth objectives.

But we are disappointed with our cost productivity during the third quarter.

With a more challenging economic environment, pricing pressures in key markets and higher promotional costs we must pick up the pace in cost productivity and market growth.

We are taking more aggressive action to regain the marginal that we had in these business earlier in the year.

Let's move onto the operating group discussion.

The tool group net sales of $265.7 million finished $24 million or 10% ahead of last year.

Operating income of $26 million was $6.1 million or 31% ahead of 2001.

In the third quarter, R.O.S. of 9.8% was 160 basis points improvement over the same period in 2001, but a 40 basis point decline from second quarter of 2002.

Looking at this situation in greater detail we see it's a mix issue that reflects higher sales of delta product, which have low margins and more aggressive promotional pricing in a marketplace that's wrestling with the affect of a 9-year low in consumer confidence.

Issues related to product mix and pricing were offset somewhat by continued strong cost productivity in the tools business.

The group also made headway on its growth initiatives.

We continue to see the revitalized delta brand gain sales during the third quarter.

Delta unveiled the shop master branding initiative was well accepted by end users-- and distributors. [Inaudible] the $99 tool program, initially launched for Father's Day continues to be very strong.

Delta's new 12-inch laser mitre saw, 14-inch band saws, cordless drills and quick change grinders were all launched at the national hardware show and were also well received.

The new 14-inch bandsaw earned an innovation award from Popular Mechanics magazine.

These new Delta products carry higher margins, we expect to see an upward trend in Delta's overall profitability.

Pressure washers were once again the star-performing product and we estimate the market share has increased more than 5 points this year.

Material cost productions in the third quarter approached $10 million.

The group's lean enterprise efforts generated Labor productivity gains of more than 10% at the [inaudible] plant and 8% of Porter cables jacks.

A total of 78 [inaudible] exams this year has freed up 120,000 feet of floor space across the tools group.

And the group is on track to deliver total cost productivity savings of over 5% for the full year 2002.

We're also pleased with acquisition of Oldham saw, it's a perfect fit with our tools business and strategy.

It more than meets our acquisition criteria and has the effect of almost doubling our power tool accessory offering.

They designs and manufactures router bits, circular saw blades and related accessories for the do-it-yourself professional power tool market via home centers, lumber yards and hardware channels

They hold the leading share in the router bit category.

And the second place position in the circular saw blade category in North America.

The company's sales over the last 12 months were approximately $65million.

We are please today have their management team on board and working with us to grow our tools accessory offer.

Final note, we acquired the Oldham business and the previously announced Plymouth Products business using our record free cash flow from the first three quarters of this year We are confident that these acquisitions will be accretive- in the first twelve months of our ownership.

And frankly, they're likely to be accretive much sooner than that.

Turning to the enclosures group, we remain on track with our cost reduction efforts while markets remain weak.

The group reported net sales of $139.9 million and operating income totaling $8.9 million, both declining from the same period in 2001.

But if we compare to third quarter of 2002 to the second quarter of this year, the sales are essentially flat, while margins have improved once again by 1330 basis points the third consecutive quarter of margin improvement in a business that has seen flat sales for almost one full year.

As we described in our second quarter conference call, the enclosures businesses have been focused on reducing the existing infrastructure and lowering operational costs, while driving growth initiatives.

In the third quarter we reduced enclosures group headcount in the U.S., Western Europe and Japan by a further 99 positions including 50 salary positions by staffing up Chinese operations by 50 people.

The total reduction of force since January of 2001 is now 34% or 1787 people.

Fees and other cost saving steps are expected to continue to read out and improve margins.

As for the groups' progress and growth initiatives, Hoffman appointed 26 new distributor locations during the third quarter.

This brings year to date total of new distributor appointments to 206 against the annual goal of 200, So we're resetting the goal.

There's still a couple of months left to build on the number.

You may recall that last quarter, we described our success markets to grow our position in security and defense markets.

Recent winds in this arena include projects for police, fire and emergency and transit system communications throughout the New York City area.-- We have also earned a prototype order for P.C.I. based controller system for the next generation platform for the armed services As well as a contract for the update of data and communication for the five Airforce bases.

This opens up the opportunity for similar projects at many other bases that are also updating their data and communication centers.

We've even secured some good wins for the depressed European market.

This month we earned a large order for power supplies to be delivered over the next 15 months and an even bigger order for 1100 cabinets with sub racks and heat exchangers to be applied in an on board training communication system.

Last week we had confirmation from Erickson's research center we won the mini-link business for use in a wireless point to multi-point broadband access system.

Last week we received an order from a Bosch subsidiary operating in the automotive test and measurement industry for products to be delivered next year.

We are broadening our offering with new products as well.

This includes a co development project with Intel for the upcoming A.T.C.A. Standard.

ATCA stands for Advanced Telecom Computing Architecture as the next generation Telecom architecture, which is expected to replace the current compact P.C.I.

North America Hoffman has introduced a new enclosure line directed as a food.

Beverage and pharmaceutical packaging market.

This is Hoffman's first specific enclosure product directed at this market.

We further differentiate ourselves by achieving certification from the national sanitation foundation for this new product line.

We had expected some up tick in the enclosures end market- during the second half but this hasn't been proven out.

It now seems we will be living with continued weakness in the market for some time.

Despite the challenges current market conditions present, our enclosures business continues to strengthen in profits.

And we will eventually emerge from the market down turn as a stronger leaner player.

In water technologies, significant seasonal decline in pool and spa sales was partially offset by strong pump sales during the quarter We expected the group's operating margins to improve year over year, but it was down 9% from last year's level, due to lower pool product sales, and significantly higher sales of retail pumps, which carry lower margins.

Last quarter, we said the pool business would decline as the season winds down, but the other core water businesses will likely offset that decline.

As it turned out, growth in the other core water businesses was not sufficient to offset the postseason decline in pools.

Although we are experiencing good growth in pumps, we face declining margins.

Most of the growth is this business is centered in the retail segment, which generates lower margins than in our commercial distribution business In addition the pump business pulled down inventory again in the third quarter by more than 11%, which had a positive impact on cash flow but a negative impact on margins.

Our municipal pump business was steady in third quarter.

During which we shipped the largest order of 36-inch turbine pumps in our history to Phoenix.

Three large flood control pumps were also shipped to New Orleans and another three large pumps were shipped to the Florida Everglades as part of a water control project These last two orders a particularly encouraging be cause they represent large orders in a recently re-entered market for us, the flood control market.

Margins in our large water treatment projects, especially international desalination projects remain low.

Despite this water treatment third quarter sales and margins were in line with last year's performance.

We are aggressively moving production in our code line pressure vessels to India to improve our cost position.

We are also streamlining our selling organization for international projects to improve proficiency.

Plymouth products recently became part of our water technologies Plymouth's broad range of filtration products will complement our Strength in pool and filtration, water conditioning valves and storage tanks and give give our Pentair water treatment business an even broader offering for O.E.M. distributors.

With operations in both the US and Europe Plymouth products also expands the breath and depth of our customer base.

This acquisition has been very well received by global customers of both Plymouth and Pentair. -- I am disappointed and so is our entire management team that margins in the water business didn't improve in the third quarter we are working hard to recover our marginal minimum, but despite these actions We expect margin in the water business to remain under pressure as we continue to reduce inventory.

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

Thank you Randy.

As he mentioned we closed the third quarter with strong free cash flow, generating $110 million in the quarter alone This brings our year to date cash flow to a record for any year. $197 million.

Obviously this puts us well on our way to achieving the $200 million target we set for 2002.

As a result we expect the year to come in higher than $200 million as we complete the 4th quarter.

Financial highlights in the third quarter include the following.

We paid down debts $78 million in the quarter.

Resulting in a debt to total capital ratio of 34% versus 44% in the same period last year Debt of $566.5 million has declined by $633 million from our peak debt position back in April of 2000.

This is a reduction of more than 50% in 2.5 years and it's all been from operating cash flow.

As anticipated working capital still continues to decline.

Average working capital productivity as of the third quarter has improved 20% or 12 days from the prior year.

Average receivables are down $54 million or four days and average inventory down $73 million or 11 days.

This is partially offset by accounts payables which was down 5 days.

Continued credit goes to the people in our operations, as cash flow management has become part of Pentair's culture.

Working capital reductions especially reducing inventory does come at a price.

For example, the impact of fixed cost absorption on our income statement and margins for the water business in the third quarter was over $3 million or 130 basis points.

We expect inventories to further decline in the fourth quarter.

Capital expenditures continue to remain low as each of our groups implement lean exercise practices.

We sent $8.4 million in the third quarter versus 12.5 million last year.

This brings our year to date capital expenditures to $23.7 million.

Our projection for the full year 2002 is roughly $50 million.

Appreciation reflects the lower capital spending and was $14 million in the third quarter, versus almost $16 million last year.

Year to date depreciation is $4 million below 2001.

And full year depreciation is expected to be roughly $60 million with the two new acquisitions included in the fourth quarter.

Operating income margins for Pentair in the third quarter was $9.8% up 30 basis points from the prior year on an equivalent basis This was driven by a 50% basis point improvement, as supply management efforts reduced material costs and businesses continue to work on their lean enterprise initiatives.

Administrative cost was 12.7% compared to 12.8% last year.

Administrative cost was 40 basis points lower and selling expenses including specific promotions to drive growth are up 30 basis points.

You may have noticed our income tax rate is below that of last year.

This is due to the secession of goodwill amortization in 2002, much of which was not tax deductible.

On a comparable basis, our tax rate in the third quarter is 150 basis points higher than last year.

We remain confident that our emphasis on cash flow has resulted in a more productive company.

We continue to get questions as to how much we can reduce the working capital.

Let me share the current positions in two major components of working capital.

Receivables and inventory.

We started in 2001 with average receivables of over $520 million and DSO's of 71.

Today our average receivables have declined to $425 million with a 13-month average D.S.O. at 62.

Our goal as we have stated is 55 days and we think we are well on our way to achieving lower days through management of terms and due dates.

Our average inventories were more than $400 million and 80 days through lean enterprise activities, which Generated process changes and better forecasting of our customer needs.

Our operating management has reduced average inventories to about $300 million or 66 days.

Our goal for inventory terms remains at 8 or 45 days.

In both categories, we have plenty of opportunity remaining.

Now I would like to turn the conference back to Randy.

Thanks, Dave.

The second half is turning out to be tougher than we thought when we raised our expectations.

The enclosure markets are weaker and show no concrete sign of strengthening.

Tools pricing is more challenging.

And lower price products look like they will dominate again.

Water margin has not expanded and is not consistent with our expectations.

That said, we continue to make great progress in cash flow.

We're confident we will regain higher productivity in water.

With recent acquisitions in a tepid fourth quarter, should be 2002 earnings per share of $2.60-$2.65.

Versus previous guidance of $2.80 and $2.90 cents per share.

Even if the current economic conditions continue and allow only modest sales growth for 2003, our initiatives will still drive EPS growth in the midteens next year.

In summary, the programs we put in place over the last two years continue to improve Pentair's prospects.

The proof of this is evident in our cash flow performance and the results that our lean enterprise programs are generating.

We've invested in and created top line growth opportunities and will continue to do so in order to capture growth.

And we've built an effective and efficient management team that continues to operate Pentair in a manner consistent with our goal of building shareholder value, not just for today but long term.

Economic improvement is a matter of when, not if and Pentair will take advantage of the recovery when it occurs.

Thank you your attention.

At this time I would like to remind everyone, if you could like to ask a question, press star then the number one on your telephone key pad.

We will pause for just a moment to compile the Q&A roster.

First question comes from Jim Lucas.

Thanks.

Good morning everyone.

Good morning, Jim.

Start first in the Tools segment.

You talk about pricing and promotion issues, which were negatively impacting margins.

In your closing remarks you talk about the opening price point continuing to be the focus.

Are you seeing any loss of market share or is it truly a market dynamic that consumers are gravitating toward the lower price point.

Third quarter we saw the roughest pricing.

I measure as price and we were down 1.5 to 2 points.

You may recall one of our competitors was talking about aggressive promotions.

First half of this year we had good pricing discipline and using our new products to gain share.

But we didn't want to lose shelf space.

We decided today get more aggressive on pricing and promotions.

That's point one.

The second point is delta, when you look at ten percent growth in tools in the third quarters, delta's growth was much higher than that.

And Develbis was next.

The delta margins are the lowest of the three groups.

A lot of the sales as we're getting into the holiday season were at the lower price point products.

I was trying to capture, last year we didn't have as many competitive products as the 99 dollar price point for delta, this year I think we have the best offering around.

We shipped a lot of it, that's what I was referencing when I said it looks like it will be another season in 99-dollar product.

Then if we can switch gear to the water segment.

Clearly margins are becoming an increased area of focus from a cost standpoint.

Bringing inventories down.

But can you talk about longer term, some of the initiatives you're taking to help stabilize and improve the margins?

In water, it has been our highest profitability, still was in the third quarter and I think it will remain so going forward.

We have short-term issues and longer term opportunities.

The short-term issues are adjusting fixed costs to reflect the fact that we're selling more retail products, but we also source a lot of that.

So we need to source that more effectively, but also need to take a look at our overhead structure, particularly pump as a result.

Longer term opportunities, I think our water business was our leader in supply management when we initiated that in earnest three or four years ago and we hit a little bit of a dead spot and we need to revitalize that effort.

Not only take more products overseas but also improve our sourcing of components to keep the plants here in the U.S. as competitive as possible.

It's not different, it's more effective results from supply management and lean enterprise effort that we need to see.

One final question on that topic.

Have you made any changes in the management?

Are you adding any new talent to the organization to help jump start and revitalize, as you say?

We actually invested a number of people on the growth side.

Particularly in Water.

Because we do think the growth opportunities are there in Water.

So we have a little higher cost from that.

We haven't really yet seen the results from those initiatives, particularly in the industrial Water business.

We've been making some investments.

International and business development we've made some investment.

We expect and are confident those will yield results.

We've had the cost of those without the benefit of those yet.

And we're always looking to improve our management team.

I feel pretty good about the management team we built and continue to look to strengthen.

Okay, thanks a lot.

Your next question comes from Larry Baker.

Good morning.

Can you talk a little bit more about some of the aggressive actions you were taking to regain momentum going forward?

In the case of Tools, because we're not giving up on our margin goals in Tools, the first thing is to take the success we've had in Delta, on the top line and draw that to the bottom line.

And that means focusing on our margin management and product management, number one.

Second increase Asian sourcing.

We still have great opportunities in our Tool business.

Even beyond that, products we make in Taiwan, we're looking at taking to China and are already under way in doing that.

The fourth element is to improve the mix.

With our acquisition, clearly we set a strategic intent to grow our accessory business, which we feel will enhance margins in the overall business.

But also new products.

We feel the new products are a key part of improving our margins going forward.

And as you know, we've been very aggressively invested and launching, 43 in Tools in the third quarter.

In Water, our code line business, basically long vessels used in reverse osmosis systems, we are growing our operation in India and using that as global source to have more effective cost.

Looking at overhead structures in pump.

We've made additional changes in the operations in our water treatment business, which includes the tank business.

And as I said, we're redoubling our efforts on the sourcing side to regain our momentum there.

Just two other questions.

One is, I saw that S.C.P. pool came across the tape this morning with a record quarter this year.

Can you sort of reconcile what their results were with your pool and spa results?

I think we can.

I don't think we've lost share at all, a lot of that is timing.

We had a record with them in the second quarter.

The fact they had a strong third quarter, may bode well for our early buy program in the fourth quarter.

Okay.

Finally for Dave, tax rate looks like you're running at 32% for this year?

Yeah, we will be finishing at 32% for total year, and next year looking at 34%.

The reason that's up, two reasons, one is we are losing the -- capability in terms of tax savings and the second is we expect to have greater profitability outside the U.S. which has a higher tax rate.

Okay thank you.

Next question comes from Steve Jacobs.

Good morning.

Morning, Steve.

On the Tools, could you talk about the different channels in how the business looks.

I imagine your comment with regards to losing shelf space is that.

What's going on in lumberyards and hardware stores and the industrial distribution channel?

We continued to make good strides with reestablishing our position in industrial distribution.

So I feel good about that and we did get growth from those channels in the third quarter.

Most did come from the retail side.

We really did reinvigorate the Delta business and got more than last year.

All are up, we continue to make head way with the lumber yards.

The one downer, if you will, was one large customer who went out of business last year, since last year, in our numbers that made the hardware channel look not too good in the third quarter.

But otherwise, I feel pretty good about progress in all our channels.

Are the new cordless drills and saws, are they taking away from Porter-cable?

We don't think so.

But I can't guarantee that.

They are really focused on a different price point and different channels.

We are getting placement of that product which we feel good about.

But we don't believe it's hurting our Porter cable business.

You mentioned a couple of businesses are new winds you received in Phoenix and New Orleans, but overall, what is the municipal/industrial markets looking like, versus the retail side right now?

I would say that the municipal business for us has been about flat.

We have a huge backlog of business we're looking at.

As I look at the order activity it's been about flat for the last 7 months.

And I would say it will remain flat for the next quarter.

Terms of the industrial business, that's remain soft, it's less than 10% of our business.

But it has remained soft for us.

Dave, could you give us a little bit of guidance of where you think your cash flow will end up for the year?

The fact that we're almost at $200 million now means we certainly expect to have additional cash flow in the fourth quarter.

My guess, is right now it will be somewhere in the $220 range.

That will include some additional funding that we might do, not for this year, but next year on our pension program.

Lastly, for the fourth quarter, tax rate, roughly 30%?

32 for the fourth quarter.

Okay; well just one general comment.

Your guidance, recognizing the trends isn't too much of a surprise, by my modeling, looking at a 200 basis point decrease overall in margins getting to your guidance in the fourth quarter versus what I had before.

That sure seems dramatic to me.

What can you do to, in a short period of time to kind of turn the ship around a little bit?

In a short period of time, it's difficult.

It is margin pressure, predominantly that gives us cause for concern in the fourth quarter in both Water and Tools.

And I hope we can do better than the current roll up, but as I said, I don't focus on hope.

Some of that comes obviously from volume.

We've looked at the quarter and we feel that we're sort of in the middle of a situation where a lot of companies are today in terms of trying to understand the economic environment and if the volume comes in better we will see better margins.

With respect to the fourth quarter, which segments will have positive sales growth?

You mean quarter over quarter or year over year?

Year over year.

Sales growth, which segments?

Do you expect?

I'm still expecting Tools to grow.

Water, I thought they would be flat slightly and they weren't.

Enclosures, we will be hard pressed to hold flat.

Yeah.

That's pretty much in line with my new estimate.

Thanks a lot and we'll talk to you soon.

Thank you.

Your next question comes from Dean Dray.

Good morning, I would like to come back to the water issue if we could and looking at the sequential margin hit of 310 basis points.

How should we be thinking of the components of that?

I know you touched on them, but try to size that if you could?

The factors were seasonal and where the spa business is down, said the mix was more of retail product and then the third issue was the under absorption of manufacturing because of taking more product from inventory, how does that break out?

Talking about from the second quarter to the third?

I've already mentioned that the element of the inventory reduction was roughly 130 basis points, so pretty close to half.

Okay.

What about between the seasonal issue versus a mix of more retail product?

Can you calibrate that at all?

I didn't run that.

I mean, I can but --

We generally have a pretty significant seasonal impact going from the second to third quarter.

My guess is 25% would be mix.

It's all mix, but from standpoint of pumps.

Really seeing pool margins versus retail margins in third quarters, it's a pretty big difference, I agree.

Okay and then, what's your view on municipal spending.

Remind us again what percent of the water business is predicated on municipal spending and what's the temperature these days?

We said it's about 10%.

I think it will be under pressure next year.

But with things like, we have entered new markets, the flood control market, we weren't in a year and a half go.

We're pleased with the Everglades and New Orleans.

It looks like from bidding activity, we'll be about flat for the next six months and beyond that we'll have to see a pick up in quoting activity before I can be confident.

There's two elements, the new equipment we're putting in for expansion of new facilities in the municipal area.

The other one is maintenance, I think new can be deferred.

Maintenance is probably one that can't be.

Just so I hear correctly, you said flood control is a new business, I thought you had previous pumps in the New Orleans area?

Fairbanks Morse, exited, I'm not sure why.

We reentered in the last couple years.

Just sold 3 really big pumps there.

We think flood control is one of those businesses, Dave talked about they will find funding when they need it.

Switching to Enclosures, you said you hit the goal on distributors, is there any benefit to filling the channel when you open up a new distributor?

The branches are small, it can be between $10-50,000 to start.

It's not a huge -- what's more important is the customers they see, the existing distribution doesn't see, so each one doesn't add a huge amount of sales, but in the aggregate, we believe it's one reason why our commercial business is up this year, even though we know commercial as a market is down.

Okay.

And then last, a quick question for Dave, what's going on in the corporate and other line in segment income that was down sizably in the third quarter.

Remember we talked last time about some issues we encountered in the second quarter particularly.

One was obviously the growth, spending investments we were making.

Another one that we talked about had to do with the fact that we doubled up on our internal audit function.

We had gone year and a half ago externally, and obviously we're changing back from Deloit to an internal audit function.

So we had fairly significant doubling up in the cost in the second quarter.

Obviously we don't see that in the third quarter.

Those are the main reasons.

What's the run rate for that line we should be thinking about for next year?

For this coming quarter, we're looking at something probably in 5 and a half maybe, run rate would be between $5 and $6 million depending on expenditures.

And increase in the fourth quarter relates to investments?

What's the increase?

To the fourth quarter?

Yes.

Right, we basically have a normal kind of run rate, which is around 5-6.

We're still continuing to invest in growth.

We're investing in people.

So, that's where it is.

Okay thank you.

Once again I would like to remind everyone if you would like to ask a question, please press star then the number one on your telephone key pad.

Next question comes from Don McDougal.

Good morning.

Good cash flow result, by the way.

Thank you.

I guess a bigger picture question, Randy, on the margins, talk about taking Tools margins up significantly in coming years.

Yet this year you're seeing some of this continued move toward lower price point products, $99 stuff flying off the shelf.

Is there some secular change in the industry that will limit your ability to raise those margins back to the low teens levels you all think you can get long term?

I thought that would be the first question I got.

Just to get everybody grounded, we set the goal of getting the Tools business back to 13-14 margins.

When we set our goal for this year, we set our expectations we really thought we would be exiting the fourth quarter in solid double-digit category, as many of your forecasts had also said.

And right now, I think, I hope the fourth quarter will be double digit, but you saw with 9.8% and backed up a little bit from the second quarter.

The main -- we're not giving up on our goal in the 13-14% but it looks like the road is tougher.

We still have a lot of degrees of freedom, the delta business is in the low single digits and it won't stay there.

If anything we have had more success in the top line faster than we thought we would have it, and we need to catch the bottom line up to it.

I don't want to estimate what more we can do with Asia.

The joint venture is really working well and we expect to leverage that more fully.

We have two plants in China we are moving product from Taiwan to.

And in terms of accessories and improving higher end product sales, we think that will come.

I'm confident that the team is focused on the right thing to continue and enhance margins, we're not giving up on the 13-14%.

But I think the fourth quarter will tell us a lot about the tracks to get momentum on our margins.

I'm not going to set a new goal at this point.

Okay.

Do you anticipate any restructuring actions, this quarter or coming quarters to help you get to that margin?

No.

Okay.

You mentioned acquisitions, Oldham and Plymouth as being creative in the first 12 months and eluding to sooner that that, can you share with us what you have in the fourth quarter if any at all?

It's the 15 now and we're taking a conservative approach, we're not assuming it's dilutive or creative at this point.

We will go back and provide same-store and total growth, like we did when we had acquisitions in the past, so you'll be able to see the impact in both Water and tools of those.

We feel confident that as we move forward, the first full year of the acquisition will be accretive as Randy said we don't expect it to be dilutive.

Taking that further out, you offered loss guidance on next year, double digit -- how much of that includes accretion from those two deals?

They are accretive in that most of us is not accretion from the deals, most is continued improvement in our base business, the issue with the fourth quarter are issues with the base business. -- I want to provide that guidance-- the level of change in the fourth quarter is significant.

I don't think that the prospects for Pentair are significant, that's why we provided that additional guidance.

I think if the market is strong next year we can do much better.

But I don't consider that guidance as much of an assurance that we have things under control and still committed to getting growth and earnings.

As a follow-up to my original question on Tools, perhaps you could make share with us a little bit of color on the different distribution channels, my guess is those $99 dollar price products are perhaps a more big bucks retail phenomenon, does it change your strategy on a longer term basis in trying to lift those margins by emphasizing more of the traditional distribution industrial channels versus the big bucks?

We separated delta -- One of the things we found is the industrial channels also brought the shop master programs because they want a full scope program to compete in the market place as well.

We sold surprisingly more than we thought in that industrial channel.

That channel sells the full line.

We haven't rethought our strategy in terms of how we focus on those two channels, if anything the change we made has reinforced our relevancy to that channel.

I don't know if that addresses your question specifically.

Yes it does, and the final question, I will turnover to someone else.

We've seen a pretty rapid degradation outlook in the last three months, I think you raised the number last in the second quarter and earlier in the year as well, is this all just kind of based on worse fundamentals in the economy?

Aside from a few specific things to your business and less margin opportunity in Tools.

What I really want to get a sense from you is how much has the world weakened that you are selling into?

If I can just simplify, we took the top end of our guidance up at the end of the first quarter and raised the bottom end at the end of the second quarter.

We thought the economy would be stronger, we thought the industrial economy would pick up in the second half and help Enclosures and Water and not hurt Tools.

I would tell you it's 2/3 environment and 1/3 not getting the results we should be getting from our actions.

I wouldn't lay it all on the environment, but we'll recommit to making sure we have better read out from our actions.

It's still predominantly environment, it's tougher from pricing standpoint and gaining shares standpoint.

I was at a meeting last week in Washington, talking to some economists and that didn't give me any better feeling.

I probably shouldn't talk to economists.

Thanks for the color.

You have a follow-up question from Jim Lucas.

Thanks.

If we can come back to Don's point on the tools.

If you go back in history in the power tool history, any time you got down to the $99 price point is the level where it becomes tough for manufacturers to make decent margins, going back to early to mid 80's as a perfect case in point.

When you look at Delta getting into the shop master brand, have you done any detailed work and what is your take on possible marginalization of the Delta brand by introducing that lower price point?

I would say we did a lot of work before we introduced the sub brand.

If you recall last year we were kind of out of the game on $99 price point.

We lost our point and we were moaning that fact because we didn't get the volume.

Having that product come out of China, having it be positive margins.

We're looking at this as a R.O.I.C. game.

We like the volume.

We view the volume that gives us with our Chinese operations as incredible leverage to lower the costs that we have across our entire line.

The Delta brand was also at those lower price points.

We feel and I think our distributors have voted in agreement with this, our professional distributors in particular, we are actually clarifying the brand.

If you look at current catalog, it's much clear what Delta stands for.

The other point is what we are doing is getting the lower price points but not lowering the quality.

I think we are delivering solid products at those price points.

So we're still holding the delta point high from a quality standpoint.

If we can come back to the Oldham acquisition, can you talk about your plans from a branding standpoint of what you're hoping to get from that business and in your acquisition you had talked about Oldham concerning as a platform going forward.

Can you expand and give more color on that.

Sure.

Oldham was a perfect fit for us.

Porter cable is a leader in making routers, they make router bits, we're a key player in making circular saws and a leader in making stationary saws -- they are the number two maker of circular saw blades, so it was a perfect fit.

In terms of branding, they have the Viper and hickory, which is the main brand.

We intend to use those.

We already sold source product under the Porter-cable and we continue to use Porter cable and delta as well.

We think those are great additions to our grand portfolio.

In terms of it being a platform, what Frank and the team's conclusion, we need to treat accessories as a different type of business, as opposed to a product line in a Tool business.

What we have with the Oldham team -- we get the synergy from our sourcing and reach in the different channels, but we will get their focus on providing a full coherent product line of accessories That's what I mean by that as a platform.

Okay, that makes sense.

As a final clarification point, could you give us at the end of the third quarter, in the Water business, the mix, either by in markets -- a rough take about the water business from a mix standpoint?

The Water business remained at the end of the third quarter over 70% residential and commercial and less than 10% industrial and less than 10% municipal -- commercial was down because of the relative strength of residential which is predominantly retail.

But we still remain predominantly residential and commercial.

Okay.

Great, thank you very much.

Your next question comes from Dana Walker.

Good morning.

Good morning Dana.

Back to Oldham, how the ownership of that brand and products will change the outlook in the market place for you.

The first is they will help us fill out the product line, the Delta and Porter-cable branded accessory line so we have a full and compelling product line there.

Secondly, we have much broader and deeper ties into the professional channel.

We have people calling on the professional channel.

They didn't have the breadth and depth of reach in that regard.

Those are really the two big reasons and they are big.

We're quite excited about the synergies we will get from the channels.

Would you expect Oldham to go through a growth surge --

Yes, we believe we can increase the growth -- it's been good and we believe we can increase it even further because of what we can do together.

You would define Oldham's more recent growth path to be what percentage wise?

It's been growing double digit, and been growing largely in what I would call the retail channels as opposed to the professional channels.

So we think that can continue and we can add the growth in the retail --

Dave, do you have a rough estimate what you expect the first 12 month EBIT to be from the first two acquisitions?

We don't give that information.

But as I said a while ago, we certainly expect -- [Overlapping speakers] we expect and I'll reiterate, we expect that two acquisitions together and even independently will be a accretive in the first 12 months.

Is it a fair statement to define both acquisitions as having mid teens operating margin profiles?

We expect that as we go through next year, the growth of the margins based upon the volume will get us to pretty close to mid-teens, that's correct.

Couple last quickies, Porter-cable versus Q3 and plan for Q4 you would define as how?

Porter-cable as a brand?

Yes.

As I mentioned earlier, Delta exceeded, it was the high growth brand, Devilibis was lower and -- I would say below plan, fourth quarter we expect that to recover some.

Any factors worth enumerating that it was below plan?

I wouldn't point to anything in specifics.

Finally looking out to '03 and defining a mid teens growth ambition if you don't get any further help from the economy, how would you break that up from operating income and interest expense swing and if we were to take the good, better, best, approach, which part of your segments would you expect to lead versus lag?

Can we come back and just clarify your comment, about 2003?

In the Tool business?

More broadly.

If you were to attribute operating income progress one way and interest expense positive swing the other and look at them at how they might contribute, which would lead, be in the middle and which would lag?

Contributing to income operating growth.

With regard to operating expense, below operating income, because of the acquisitions we would expect the interest expense to be similar to what we have seen this year, although I think it will be down, but not as major of a decline of what we saw this year.

We fully expect to leave this year with debt being equal to or less than what it was at the beginning of the year even with the acquisitions.

And we'll continue to take that debt down over the course of next year, which means we will see declines from where we end the fourth quarter, but comparison, year after year, it will be down a little bit, but not a big factor.

So when you look at the growth, the big growth in terms of operating income will come from continued reduction of cost, centered around our supply team management.

We have real professionals in each of our business that are going after cost reductions in terms of material costs and also from our lean activities.

Lean impacts us from the standpoints, kind of a double edged sword, where you see it today is in terms of cash flow, in terms of inventory reductions, which does ultimately find it's way into the interest cost, but as you take it down you have cost absorption, we are fixing the cost in the company as we are taking it down but it tends to lag as we go down.

Let me say, Dana I wouldn't characterize that as 2003 guidance.

I would characterize it if you will only cold comfort, the comfort to you that we still have the controls in place, we're on top of our businesses and I viewed most of those as coming from operations in the acquisitions, we didn't get down to the point of running a P and L against those numbers.

We will get much more specific guidance as how we see 2003 at the end of the fourth quarter.

Which I believe is a way of saying you would consider this being a base level of expectations based on now having all the granularity.

I wouldn't argue with that.

Very well, thank you.

At this time, there are no further questions, are there any closing remarks?

No I would just say thank you for the questions.

And we will endeavor to continue to drive the company forward.

Will you give directions on call-in please?

On replay, operator?

Sure.

Thank you for participating in today's conference call, it will be available for replay beginning today at 1:00 p.m. eastern time and ending on the 19th at midnight.

The conference ID number for the replay is 6042291, again the conference ID number for the replay is 6042291, and number is 800-642-1687 or 706-645-9291.

Okay, thank you and talk to you all later, bye now.