濱特爾 (PNR) 2003 Q1 法說會逐字稿

Good morning.

My name is Nicole.

I will be your conference facilitator today.

At this time I would like to welcome everyone to the Pentair Inc. first quarter 2003 earnings release conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question and answer period.

If you would like to ask a question during this time, simply press star then the number one on your telephone key pad.

If you would like to withdraw your question, press the pound key.

Thank you.

Mr. Harrison, you may begin your conference.

Good morning and thank you for joining us for this conference call to call to discuss Pentair's results for the first quarter.

I'm chief financial officer, David Harrison and with me today are Randy Hogan, Chairman and CEO.

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 growth.

We would like to refer you to the risks outlined in our 10-K as of December 31, 2002.

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 will turn the program over to Randy Hogan.

Welcome.

Thanks for joining us.

Let's go over the highlights for the first quarter of 2003.

Sales were up first quarter 2003 net sales totaled $637.5 million.

A 6% gain over the same period last year.

Earnings per share was up.

First quarter 2003 EPS was 56 cents, a 30% gain over that of the same period last year.

Operating income was up.

Operating income for the first quarter totaled $52.2 million, 14% higher on the same comparison.

EBIT margins were up.

We saw 8.2% margins versus 7.6 percent in the same period a year ago.

Return on invested capital was up.

Twelve month moving ROIC was 13.9 percent in the first quarter of this year versus 10 percent in last year's first quarter.

International profits were up.

The first quarter was a third consecutive quarter that we realized solid income gain in our European markets even excluding the effects of currency translation.

It was clearly an up quarter at Pentair.

In fact it was the fourth consecutive quarter of favorable quarter over quarter comparisons.

We are pleased with that progress.

Having said that, we have much more work to do.

Sales in our tools (inaudible) state of the economy and competitive pressures in the marketplace.

Margins in the water technologies group has not returned to acceptable levels and the enclosures group is still in a deep trough in their markets.

We are not running yet on all eight cylinders.

You can see from the growth in our water technologies group and the margin expansions in enclosures and tools that waters are definitely rising.

Let's address the performance of each of the operating groups.

The tools group first quarter net sales of 252 million were flat, compared to the first quarter of 2002.

Excluding the contributions of the Oldham Saw (ph) acquisition, the group sales were down in mid single digits.

Operating income of $18 million was 6% higher than in the same period last year.

In the first quarter, ROF of 7% was 40 basis points improvement over the same period of 2002.

In the quarter, low consumer confidence and reduced spending was exacerbated by the war in Iraq.

The decline in demand led to increased price pressure and increased promotional cost for the Pentair tools group.

(Inaudible) were down in single digit with industrial sales especially week.

Equipment was also down due to slow start in certain channels and the loss of (inaudible) pressure skews at one customer.

Aggressive efforts to secure new business to replace the lost revenue in compressors.

Shipments are not expected until the second quarter, resulting in first quarter loss of sales.

Despite the soft markets several bright spots during the quarter.

For example, (inaudible) at the home centers remained strong with nail-guns / compressor combination kits the best sellers.

Sell through of combo kits is expected to continue brisk as we enter the construction season.

The (inaudible) tiger claw product launched exclusively in the industrial channel has been ready for introduction in the home-center channel, the national advertising will begin in the second quarter.

We expect solid sales in the home-center channel as it did in the industrial channel in 2002.

Pressure washer business is off to a solid start this year.

The relaunch of the Porter Cable brand continues via the new smooth performance campaign.

In late February we unveiled new web sites for Porter Cable and Delta and activity has been brisk.

The highlight of the first quarter for the Delta business was the sweeping of the category in "Wood" magazine awards.

The Delta 13-inch 2 speed plainer won the Top-tool award and our 12 1/2 inch portable plainer won the top value award in this magazine.

We continue to offer quality industrial products that also align wood workers to pursue their interest an affordable quality shop master branded product.

According to ABC News women across the country are discovering do-it-yourself home improvement.

They represent an expanding market with women now accounting for 40 percent of all tool sales.

We expect to participate in this trend.

We secured the placement of a cord-less drill made by Delta for Tom-boy Tools, a tool and home improvement company that targets women DI wires.

New product introductions during the first quarter include a new electric pressure washer for the DIY market.

The highest performing electric pressure washer available in the market today.

We also introduced the new generator line.

This targets contractors and offers greater mobility and new user interface.

In the second quarter we will replicate these and other new features on a line of air compressors that will re-enforce our leadership in this category.

(inaudible) the supply chain efforts continue to benefit the tools group.

Material cost savings and labor productivity savings for the Pentair integrated management system, PIMS, totaled $7 million in the first quarter.

We are working to accelerate the rate at which we achieve savings which should again benefit our results in the second half of the year.

As you saw in the news release we decided to close our Delta woodworking equipment manufacturing facility in Tupelo, Mississippi.

While we appreciate the excellent work force at this position, marketplace pressure prompted us to relocate the product lines to improve operating efficiency.

The Delta product will be consolidated in Jackson, Tennessee or our joint venture operations in Asia.

The transfer to be completed in 2004 is projected to generate annual savings of more than $3 million.

Keep in mind Pentair is not just a tool company.

We have a vibrant high margin water business and quality industrial enclosures business that raised margins for five consecutive quarters on flat sales.

That represents 40 percent of our Pentair sales.

The fact is we are a focused, diversified manufacturing company.

Let me talk about those other two groups.

In water technology, first quarter sales were $246 million, 17 percent above the same period in 2002.

Excluding the contribution of the Plymouth Products acquisition, the group sales were up in the mid single digits.

This group was evident -- this growth was evident in retail pumps, pool and spa equipment and our international businesses.

The actual pump operations performed well in terms of sales in the first quarter.

Demand in the mid-Atlantic and New England regions drove pump sales.

We won an order for split pace pumps (inaudible).

We shipped the first of seven large pumps used in maintaining environmental balance in the Everglades.

Our municipal and industrial pump business introduced a quick shift program for vertical pumps, taking lead times from twelve weeks down to two.

Thus-far they are delivering at 100 percent of promise at these new delivery rates.

We continue to pursue an expanded range of package pump systems.

We (inaudible) a new fire pump package aimed at small commercial buildings.

This new product will be launched next month at the National Fire Protection Association Show and we are expecting to have keen interest in that product.

We also introduced the constant pressure HVAC booster system using vertical / stackable pumps and a new stainless steel suction pump.

The water treatment business felt the effects of the soft economy in the quarter.

But the Plymouth Products acquisition continues to perform well.

We are moving production of certain carbon block filters from Plymouth Products, Wisconsin location to Sue Joe (ph), China, where we already produce fleck valves and water softening systems.

This will establish a local supply and a new global source for lower priced carbon application.

(inaudible) in water will be supported by the two pool and spa product line acquisitions we announced in the first quarter.

Hydro-tech manufacturing designs and manufactures heat-pumps for swimming pool applications and Electro-products designs pool equipment as well as pool-cleaners.

The addition of electro-line fills a gap in our pool cleaner product offering and together with Hydro-tech heat pumps should accelerate the growth of our pool and spa business.

We are cautiously optimistic about the pools this season.

Operating income was $29.5 million this term, down slightly from the same period last year. (inaudible) for the quarter was 12%, down from 14% last year.

Declining margins is attributable to three factors.

First, roughly half was related to our ongoing recovery in pumps.

As I said before, we are taking aggressive action in this business to improve profitability via workforce reductions, supply chain initiatives and improving retail channel profitability.

Late in the first quarter we saw the results of these efforts beginning to hit the bottom line.

We reduced label cost by 10 percent in our Ashland operations and accelerated our (inaudible) supply initiatives throughout the group.

We are expecting these actions to gain momentum and deliver improved margins through the second quarter and into the second half.

Second factor, competitive pricing of our reverse osmosis pressure vessels and other tanks.

We are consolidating the manufacture of all our product line in the Indian operations which became the global source for large projects at the beginning of the year.

We are streamlining and pruneing the balance of the tank product line.

The benefit of the actions are expected to reach the bottom line in the second half of this year.

The third factor affecting margins was strategic investments to drive organic growth.

These focus on supporting international growth via business development and incremental sales support personnel.

Accelerating spending in the pool business in the U.S. and Europe for new product development and addressing the expansion of products for industrial markets.

We remain confident that these investments will pay off with substantial sales opportunities in the future.

You can see in the first quarter we are beginning to get that organic growth.

The key cause of our decline in water are known and being corrected.

We expect to see improved margins going forward.

Our initiative to grow the pump package systems are on track in Japan.

We are seeing positive results from the increased focus on engineered waste water systems in the residential market.

Our pool products distributor and dealers are positive about the up coming pool season and our Naysent (ph) European pool business is growing double digit as we gain share.

International prospects continue to look good.

Plymouth Products is doing great.

Turning to the enclosures group, sales were $139.3 million in the first quarter of 2003, flat, compared to the same period in 2002.

As sales and new markets offset continued weakness in base markets.

Group is working hard to reposition the business to take advantage of new growth.

In a few moments I will address the highlights of this efforts which is beginning to bear fruit in the medical, defense, and food and beverage markets.

As challenging as the base markets are, the Enclosures group is doing a tremendous job on profitability.

First quarter operating income $9.9 million, up 114% from the same period in 2002.

Margins improved by 380 basis points.

First quarter of 2003 was also the group's fifth consecutive quarter of sequentially margin improvement on essentially flat sales.

To illustrate how we are working to improve markets despite weak market conditions, consider these.

Under the PIMS program Enclosures completed (inaudible)in the first quarter.

These and other lean initiatives freed-up approx 12,000 square feet in enclosures facility bringing the total up to 200,000 square feet.

In supply chain management, the Enclosures group generated more than $1 million in incremental savings on non-steel material purchases.

Total employment was reduced by another 79 employees in the first quarter.

Total head count for enclosures is 4200 now, down 300 employees since this time last year.

We reduced first quarter days sales outstanding to 55 days for the group, down 7% since last year's first quarter.

The group's inventory turns in the first quarter improved 17 percent to seven turns.

Looking ahead, we continue to be encouraged with our progress in the sales arena.

For example, we are developing leading products in the area of advanced telecom and computing architecture, which is called ATCA in the industry.

We began winning business in this arena already.

Also there is a European outdoor cabinet, a wash down junction box that eliminates trapping of water around the door's edges, and a watershed product is also off to a solid start.

We doubled the size of the business in the networking market despite the lack of growth.

We've done this by expanding the product offering and distribution and leveraging Hoffman's (ph) brand clout.

Additional wins in the markets include the following: In security and defense markets we received an initial order from Los Alimos Lab for cabinets used in radiation detection.

Also cabinets and cabinet systems for a program focused on biohazards.

We provide large orders to an integrator supporting TSA and just last month we booked more orders, large cabinet orders, related to municipal security.

In total, just in the first quarter we secured $2 million in new orders in this business segment.

Medical market continued to offer a number of excite can tints opportunities for us.

We have been successful in securing a number of contracts for medical diagnostic and analysis equipment being manufactured by several U.S. and European medical technology OEMs.

In summary, the Enclosures team continues to (inaudible) on the cost side and continues to go after markets that offer concrete opportunities right now.

You also may be interested to learn both our Enclosures and water businesses are positioned to participate in projects related to the rebuilding of Iraq.

In our water treatment business has already supplied some equipment.

It may be awhile before Iraq is underway.

We are well positioned to help contractors in that business.

Let me turn the call over to Dave.

Dave?

As Randy indicated, the first quarter reflected gains in many key ratios.

We finished the first quarter in line with expectations that we gave you early in the year.

Our debt to total capital ratio ended the quarter at 40.9%, close to the target level of 40%, while supporting seasonal fluctuations in working capital, dividends, and four acquisitions over the last six months.

Free cash flow for the quarter was slightly negative at $10 million as compared to a positive of 15 at this time last year.

This is primarily due to variances in tax payments we received a $10 million tax refund in Q1 last year and made a $5 million tax payment in the first quarter of this year.

This is actually good news because it reflects higher income.

We again expect our cash flow will exceed $200 million this year.

As Randy mentioned we are continuing to improve our financial performance in a challenging business environment.

Our return on sales in the first quarter was 8.2%, a 60 basis points improvement from the first quarter of 2002.

Our gross profit in the first quarter increased 170 basis points.

In the first quarter, against the first quarter last year.

All of our businesses were able to obtain incremental material savings and are realizing cost reductions from restructuring, Lee (ph) manufacturing activities and general downsizing.

These important ongoing efforts are necessary to more than offset competitive pressures in the marketplace.

In addition, they will help mitigate increased costs in the areas of pensions and insurance.

While driving higher margins.

Our SG&A and R & D costs were intentionally higher compared to last year due to increased promotional costs in the tools business and expenses related to work force reductions and strategic investments for growth throughout all of our business.

Another element (inaudible) relates to contributions to the Pentair foundation.

For those of you who followed Pentair over the years you may know that we have a foundation whose focus is on promoting education and improving communities.

It has been our practice to donate a percentage of pre-pre-tax income each year to the foundation.

Our contributions to the Pentair foundation this year will be up approximately $2 million over last year.

This is commensurate with our improved earnings and we view this expense as an investment in the communities throughout the world in which Pentair operates.

Donations from this foundation are designed to help foster positive change and demonstrate our commitment to corporate citizenship.

Interest expense was lower by nearly $4 million compared to the first quarter of last year.

Due to more favorable interest rates.

Offset somewhat by the interest expense related to our recent acquisitions.

We have continued to maintain a 50% split on fixed versus variable debt in order to take advantage of the continued lower rates.

In 2003 -- excuse me, the 2003 effective income tax rate of 34% is one point higher than the 33% rate in the first quarter of last year.

The higher tax rate is cue due to anticipated mix of the 2003 U.S. and foreign earnings and the fact that many of our tax savings programs are relatively fixed and as our profitability improves, the effective tax rate trends higher.

We continue to make progress on working capital productivity.

For the quarter, total working capital was better by two days, driven by improvements in inventory management and lower receivable balances during the seasonal demand.

In fact, on a 13-month rolling average, working capital was down 12 days from the prior year.

Finally, the 12-month average return on invested capital which reflects the combination of productivity from asset management and operating operational results has improved from 10 percent at the ends of the quart first quarter of 2002 to 13.9% today.

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

Thanks, Dave.

All in all, it was a pretty good quarter for Pentair.

We are working hard to improve our businesses, target new opportunities and make our own way in a challenging business environment.

We have confidence we can maintain and build on our momentum throughout the remainder of this year and into 2004.

At this time we are reaffirming our earnings per share expectations of between $2.90 and $3.05 for 2003.

Our target in second quarter between 85 cents and 95 cents.

Thanks for your attention.

I now ask the operator to come on line and please provide our audience for instructions for the Q & A portion of this call.

At this time I would like to remind everyone shall in order to ask a question please press star then the number one on your telephone key pad.

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

First question comes from Brian Lygenburg (ph) of Lygenburg and Company (ph).

Good morning.

Just a minor question, getting back up to speed now.

Not that it was a huge number, but can you talk a little bit about the inventories and where the use of inventory was in the first quarter?

Brian, as you know we have two areas that are pretty seasonal or have somewhat seasonality.

One of them is in the tool area with our pressure washers.

The other one is in the pool business for water.

So we are always preparing and increasing inventory in the first quarter to cover the shipments that we are going to make erred early in the second quarter for those areas.

Would that be more in the water side for this case?

Or on a year-over-year basis?

I think you mentioned tools were actually down although year-over-year on a quarter basis.

Would it be more on the water side?

No, it's more on the tool side.

Brian, basically we weren't plans on the tools that came in.

We were planning on a higher level of tools.

We have the inventory on hand.

We ran it pretty fast, but -

Yes, thank you.

Brian, just so everybody knows, the inventory was only up 17 million from year end.

It was actually down versus the first quarter of last year.

Got it.

Thank you.

Your next question comes from Dan Wong (ph) of Lehman Brothers.

Good morning.

I had a question regarding the tools, organic sales performance.

Can you provide some comments about how much that was due to these one-time items?

Such as the air compressor placement loss?

Yes.

I think the market demand itself was down, probably caused at least half of the organic sales decline.

The other half was due to the compressors.

Okay.

And can you provide a little more detail on the compressor situation?

I mean, I don't know if you can disclose the particular retailer and a little bit more detail how that loss in compressor sales might be recovered in the quarters coming up?

Well, the, you know, the typical line review process, was one of the big home centers in the typical line review process.

There's always a competition and in particular, on these opening price .1s, pricing was pretty to have tough.

So I think we lost it on a competitive basis in a typical line review.

These things happen.

It's not, you know, it's obviously disappointing.

But as we look at compressors, we are the market leader in air compressors.

We have introduced every innovation that has been introduced in air compressors has been introduced by us in the re-tame and contractor world.

We are excited about a number of things we have coming out.

So are a number of our channel partners.

This is why we are pretty confident we will be able to rebounds in terms of sales on that.

But the loss in the first quarter was real.

Okay, great.

And to switch it over to water technologies, can you go into a little bit more detail about the trends in the commercial industrial pump and water treatment markets and when you might expect to see an up tick there?

The industrial side and the commercial side remains down, I think everybody knows that commercial trucks construction looks like it was down another 15 percent in the first quarter.

The dominant use of our pumps is in commercial construction.

And we do have some that goes into industrial.

That has remained solid.

I am not really equipped to progress no, sir prognosticate as to when things will bounce back.

I've always been loathe to do that.

But we are introducing new products.

And the systems thrust we have are aimed to drive growth and/or began I can growth.

I'm hopeful that things will look better on that side of pumps and water treatment going forward for the rest of the year.But on top of that, the residential and retail has been pretty good.

So that's helped us to drive organic growth.

I was pretty pleased with organic growth in water in the first quarter.

Great.

Thank you very much.

The next question comes from Jim Lucas (ph) of Jenny Montgomery Scott (ph).

Following up on the water side of the business, clearly we've got a mix.

There's concerns about municipal spending slowing, nonresident construction was just touched on.

In the pool business the biggest competitor was just changed ownership hands.

Right.

Can you talk a little bit about the pricing environment and the various segments within the water portfolio?

What you are seeing out there right now?

Yeah, I'll be glad to.

As we touched on before, particularly in the reverse osmosis and one of the biggest factors in water treatment is in fact price.

We decided to consolidate our O.R. systems from one system into two.

That will give us efficiencies.

We have seen sharp price declines in the last 18 months to two years in the RO systems.

They go mostly into large projects.

The rest of the tank business has been affected, particularly those on the higher ends going into commercial products.

Especially on the fiberglass tanks that we build, we have a very broad line.

Streamlining the product trimming again will help us get a much more competitive and face into what has been a difficult pricing environment.

Municipal right now, you know, the orders outlook is, I would call it flat.

It has been flat.

But the close rates are moving out maybe 90 to 120 days.

And as a result of that, pricing pressures have picked up.

We continue to win a good share of that.

And our productivity is keeping us in good Stead in the price pressures there.

In the residential arena, I would say pricing is nothing particularly to worry about too much right now, at least we are not.

I guess, I don't know if you have anything toed a, David.

I think that covers it.

On the industrial side, which has been probably where you've seen the most competitive pricing.

Yes, industrial definitely has been competitive.

The most competitive has been on those aquifer RO systems is where we have had the most competitive pricing.

We are a niche in industrial that has been very importance -- because it's our highest margin pump business.

But some of it like our pumps related to directional drilling, like those businesses, it has been more volume issue than price issue on some of those.

And on the pool side as we are getting ready to enter the new season, I know that the transactions just occurred recently, but is there any sort of preliminary indication of what the competitive landscape may look like?

Do you anticipate anything?

Is it going to be business as usual?

Well, I never assume business as usual.

We are focused on our execution in serving customers and we obviously have done very well against that competitor the last couple of years.

I think it's going to be b a interesting competitive environment going forward.[inaudible] really healthy price.

I want to keep earning good return on that price.

Okay.

On the systems as you move more towards that, is that more a function of driving sales or is there opportunity to improve margins there?

The reason I asked that is because that as you are assembling the systems doing the sourcing of the products, is there opportunity to improve the margin on that?

So far, and let me talk to what we've accomplished thus far.

Fire home systems is the one we made the most progress in.

And our original intent was to gain market share and get more intimacy with the end customers by getting into systems.

In fact, we have been able to hold or improve margins at the same time.

And the reason for that is a lot of these systems have been spoke, built on site, not particularly efficient.

We are using a more standardized approach and are able to leverage productivity in the factory beyond what anyone can do on site.

Our intent wasn't to get better margins, but in fact we have gotten better margins.

Again, now that we've learned that, we want to continue to do that.

And final question on the management bench strength and the turns throughout the organization.

Now that you have had your first year with the -- you are calling it strategy deployment, right?

Right.

With strategy deployment, can you give us an update of how it is being embraced throughout the organization?

Well, you know, I would say it's understood and accepted everywhere.

Some of the business is have really jumped on board and using it.

Two I would cite are often and tools.

And they also have been at it a little bit lock longer.

We have helped ourselves, I think, with the change we have made in our MIP this year.

This year those people who are in the management incentive program, bonus -- we are paying on three things.

One, on sales growth.

Sales growth, ROIC, cash flow, and strategy deployment.

So each person in the program has a set of strategy deployment goals which are actually, they are going to get paid about 20 percent of their potential bonus on.

So it's done, I think it's doing a good job of getting everybody focused in on it.

And its use.

I know it's early on, but are you tracking the number of break through objectives that you are 51ing?

We have a number of initiatives.

We've got growth initiatives.

I don't know if that's what you are asking, but we have six great initiatives in water, five in tools and four in enclosures.

Those growth initiatives impact I am tracking.

I don't have the break through on the you objectives broken out

No, that's enough.

Thank you and look forward to another good quarter next quarter.

Thanks.

Next question comes from Deane Dray (ph) from Goldman Sachs.

Hi, Randy and Dave.

If we can go back to pool for a moment, Randy in your prepared remarks about being cautiously optimistic.

Aside from the comments you made earlier about the competitive change, step us through what factors you are looking at and how you (inaudible) because the second quarter is the seasonally strongest.

I'll throw something out.

Housing, new products and maybe inventories at the dealer levels.

Just kind of step us through and help me to think about where the pop should be in the second quarter.

Sure.

Let me start actually at a higher level and then drill down into pool.

If you recall, last year in the second quarter, what I'm doing here, I am going to explain the comment of cautiously optimistic.

The second quarter last year we had three, what I consider to be home runs.

In terms of growth.

One was we had a dynamite pool business.

We had an awesome re-launch of Delta around the fourth quarter's day sales period.

And we had a great pressure washer business.

As we look forward in the third quarter, I female pretty good about all three of those.

The three home runs in one inning is something we should be cautiously optimistic about.

That is what informed comment.

Now, in terms of pools, as we look at it, what we -- we have a pretty broad look at the pool market.

Our distributors are very optimistic right now.

The back order or backlog of our water book for the pool builders around the country is very good.

Those two things usually mean a good quarter.

That said, it was more the fact that we had the three home runs last quarter and the second quarter that makes me use the word cautious.

Got it.

And then just, if we can get an update on your expectations for cap ex for the year?

And where that might be going?

Yeah, we are currently looking at something in the range of about $45 million for cap ex.

That hasn't changed?

No.

Remind us of where you are in terms of the move to low cost regions for manufacturing.

I don't know if you want to do it for the company as a whole or by segment.

I won't give you specific number numbers, but the shut down in Tupelo is another move in that direction.

For tools, we see over time having a much larger proportion of our products.

As you know, Delta advertise already pre-dominantly out of Asia now.

We continue to make products in the U.S. for Delta.

We think that's a strategic advantage.

That will be in Jackson, though.

We continue to drive our sourceing in the other businesses and we see more sourcing coming out of Asia in both enclosures and water.

That's one of the reason we moved the modeled carbon block business from ply mouth over to sue Joe and we are encourage encouraged about that.

In enclosures we have more than double our employment in low cost countries while taking out people in the higher cost places I mentioned.

No specific metrics, but all three are moving pace

How about percentage over how much you want to get done over the next few years?

Are you a third of the way through?

Halfway through?

I would say we are halfway through.

Okay.

What is the time frame?

Next couple years.

Thank you.

Your next question comes from Larry Baker of Legg Mason.

Good morning.

Good morning, Larry.

Good morning.

On the tool segment, can you talk about orders that towards the ends of the quarter, do you expect a reversal in your organic growth in the second and third periods?

We are driving to have organic growth be positive in the second quarter.

And our order rate, you know, building into the second quarter, pressure washers and leading up to fourth quarter's day are promising.

Okay.

Remember my cautiously optimistic comment again.

Right, right.

Fourth quarter's day is always in the same quarter, right?

It's not like Easter that jumps around.(Laughter)

Then in the water segment, I think you very quickly named a couple of the strategic growth initiatives.

Could you provide a little bit more detail on that?

Sure.

The first one I always like to mention, since we (inaudible) the product is the whole filtration category.

That's a whole new platform for us.

Filtration is one of them.

The second is industrial markets.

The third is Europe, and particularly the pool business in Europe.

China is another one which shows great promise.

India, we have a very entrepreneur iewrl team in India.

They are doing a good job and earned the right to be the global source for reverse osmosis.

We call backyard or landscape, we developed some products for pond usage and what I call the aqua scapeing or water scapeing.

Which one did I leave out?

Is that six?

That's six.

Finally, you are talking about 3 million in savings from the closing of Tupelo.

When does that show up?

Mid-year, next year.

Thank you.

Okay.

Your next question comes from Steve Mc Neil of State Street (ph).

I wanted to have you guys walk through the cash flow situation and just sort of what your expectations are for the linearity as we go through the next three queers are years of the year roughly.

And also your assumptions that.

Because if you hit, you know -- what is a $200 million target, we are actually down 15 million from '02 levels.

Yeah, as you remember, last year our conversion was about 180 percent of net income.

Uh-huh.

Which our target is 100% conversion of net income.

And the seasonality of our cash -- last year was the first quarter we ever had a positive cash flow.

That was, as Dave mentioned, had a lot to do with the fact that we had a tax rebate last year post as opposed to paying taxes, which we did this year.

Dave, why don't you provide a little more detail?

Yeah.

The first quarter generally is flat to negative.

Because of the plans, preparation and our working capital for the second quarter sell-sell-through.

And then the second quarter we have really good collections, and inventories go down.

So you'll see a fairly significant increase in cash flow as you did last year in the second quarter.

We expect to continue with working capital reductions as we go throughout the year.

Let me give you a couple of key areas that we will be looking at.

If you look at the quarterly average for receivables, we are now running just a little bit above 60.

Our expectation is to get down to 55 and we found plan on doing that over the next 18 months or so.

Okay.

So in the inventory area, we expect, again we are in the mid 60s.

We expect to get somewhere closer to the 45 range and again over the next couple years as we have more success in terms of profits, improvements in all of our plants and also understanding better the flow of the product and how we can continue to cut that.

So you know, we still have plenty of opportunity on the working capital side.

Obviously the other thing is higher income that we expect to generate

So net in '03 capital pickup would be how much?

I don't have an exact number for you, but you can work it out based on the estimates of earnings that is out there.

But I think it's somewhere in the range of probably another -- well, our guidance is 290 to 305 and we have 50 million shares.

That's 150 million bucks or so.

That basically assumes no working capital pickup?

Because the cap ex and the depreciation are roughly equal?

There will be some.

There will be some.

Yeah, okay.

Other areas of the balance sheet that changes, but ...

Lastly on the cash conversion cycle, it looks like it's down to about 69 days.

What is -- do you guys have a goal about where you would like to get that?

Is this the sort of -- are we at a level that is sustainable low and it probably won't go any lower?

We are constantly working on productivity in the cash conversion.

We are trying -- we are trying to identify and shorten all the areas that basically are between the order of the product by a customer to the collection.

So we are constantly working on that.

That's an area of productivity that we want to continually improve.

Okay.

Thank you very much.

Again I would like to remind everyone in order to ask a question, please press star and then the number one on your telephone key pad.

At this time there are no further questions.

Are there any closing remarks?

I would just like to thank everyone again for participating.

We will talk to you all again soon.

If you could give the replay instructions now, I would pressure it, Nicole.

Thank you for participating in today's Pentair Inc. first quarter 2003 earnings release conference call.

This call will be available for replay beginning at 3:00 p.m. eastern today through 11:59 p.m. eastern on Monday, April 21, 2003.

The conference id. number for the replay is 940-9745.

Again, the conference id. number for the replay is 940-9745.The number to dial for the replay is 1-800 642-1687.Or (706)645-9291.

Okay, thank you.

Good-bye.

This concludes today's conference.

You may now disconnect. (ACTUAL END TIME: 12:50 p.m.) of.(Normal termination)--- 0