濱特爾 (PNR) 2003 Q4 法說會逐字稿

Good morning.

My name is Taylor, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the fourth 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 1 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, everyone.

Thank you for joining us this morning to discuss Pentair's plans to acquire WICOR Industries and the results for the fourth quarter, 2003.

I have Dave Harrison, your Chief Financial Officer and I will be your host on this call.

With me this morning is Randall 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 risk.

Also, I would like to refer you to the risks outlined in our 10K as of December 31, 2002, and our news releases.

Forward-looking statements included herein are made as of today, and the company undertakes no obligation to update publicly any 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.

Good morning.

Thanks for joining us today.

We are very excited about this morning's news.

The pending acquisition of WICOR marks a transformation that is anchored in the strategy of building our water business to add shareholder value.

Nine years ago Pentair identified water as attractive market and embarked on a remarkable growth journey that continues today.

With highly innovative, quality products designed to meet the broad needs of customers in filtration and purification, pool and spa and water and wastewater systems, our water technologies business will continue to be a growth engine and driver of shareholder value going forward.

Additionally, our enclosures business has been and will continue to be a key element of our portfolio.

As the internal pace setter on four of our five corporate initiatives, including cash flow, supply chain management, lean enterprise and talent management, the enclosures group is well positioned to continue growing sales profitably.

For many years, and particularly in the 1990s, the tool business was Pentair's key driver of business and profit growth.

It was and still is a good business equipped with strong brands, reputation for innovative products, state-of-the-art manufacturing capabilities and grounded operating disciplines.

In recent years, however, our water technologies has increasingly taken the lead in sales and profit position among our businesses.

Now with the pending WICOR transaction, we have an ideal opportunity to examine the future of our tools businesses.

Accordingly, we have engaged Goldman Sachs to assist us as we explore strategic alternatives for our tools group.

This action is entirely consistent with our desire to expand our presence and core strengths in the water industry.

Indeed, we are confident that our skilled management and employees, strong brands, quality products and efficient operating facilities will continue moving the tools business forward.

We believe that it is in the best interest of our shareholders, as well as the employees and customers of our tools business, to pursue strategic alternatives for the business.

Pentair will support, invest and operate the tools business throughout the decision making process, just as we have for the last 22 years.

In the meantime, our employees will continue their focus on improving performance and meeting the needs of the customers.

We anticipate that a final decision regarding strategic alternatives for the tools business will be made sometime before the fourth quarter of 2004.

Now, let's talk about some of the details of the WICOR acquisition.

When we complete the acquisition of WICOR, we will have a $2 billion water technologies business comprised of a $900 million water and wastewater pump systems business, a global pool and spa equipments business with revenue of roughly $600 million and a filtration and purification business of approximately $500 million.

Equally significant, we will become more global in scope with anticipated international water-related sales of more than $400 million.

Through this transaction, Pentair expects to bring together the best of both businesses.

For example, the WICOR organization has a very strong customer service capability which I foresee using as a model for improving our customer service functions across the group.

Similarly, Pentair's has a proven set of operating disciplines which we would anticipate would be adopted in the WICOR businesses after the completion of the transaction.

Even our post-acquisition product range reflects an excellent fit between the businesses.

For example, Pentair's core pump lines include wastewater pumps, fire pumps, commercial, HVAC pumps and municipal pumps.

WICOR's strengths are in the food service pumps, agricultural pumps, RV and marine pumps and foam fire control pumps.

There is very little overlap in the end market and the diversity of the lines means that the new Pentair water technologies will have a presence in most major product categories.

This is true even when it comes to geography.

For example, our pool and spa business is particularly strong in the sun belt while WICOR's business is strong in the Northeast and Midwest.

These and other complementary positions and strengths make it easy to understand why we think that we can build the highest water performing technologies company in the world.

Throughout the integration process, we will keep the following fundamentals firmly in our minds.

First, we will maintain our focus on values by treating the people with respect, maintaining absolute integrity and communicating openly and often.

Second, this is an acquisition in which we will maintain a long term focus on growing the business and act quickly in the short term to capture some $30 million in synergies, primarily for operations, including sourcing, supply chain and manufacturing.

We will retain the best of both businesses by developing a shared vision and common culture, identifying and retaining key talent and capabilities at all levels and strengthening brands, products and channel relationships of both businesses.

We will take advantage of what we consider to be a transformational opportunity by putting speed before perfection, by maintaining momentum and securing ongoing business and by continuing to think big.

Our integration planning process, which is based on our own proven approaches, industry best practices and dedicated resources is well under way.

In this process the similarity between Pentair and WICOR are both an advantage and opportunity.

The WICOR businesses are similar to our own and we will be able to to hit the ground running once the transaction is complete.

More importantly, both company's emphasis on values and integrity gives us confidence that we will be successful in this integration.

As with past integrations, our first priority will be to satisfy every one of our current customers and deliver on our current business commitments.

To date, we formed a steering committee comprised of five executives from both companies, two from Pentair and three from WICOR to oversee integration planning.

We have established an integration management office with three full-time executives.

We formed and assigned targets to 14 integration planning teams, comprised of more than 90 integration team members.

Those teams include business teams for water systems, pool, filtration, Europe and the rest of the world, as well as functional teams for human resources, IT, supply chain, operations, finance, China sourcing, technology, growth and legal.

The integration management office is supported by communications and clean teams, the latter of which are charged with analyzing sensitive information free of competitive impact before close.

We will have the new organization structured prepared and ready to implement at that close.

As you saw in our announcement, we have the financing commitments for this transaction which we expect to complete in the second or third quarter of this year.

Dave will elaborate on the financing this transaction in a few moments but first, let me also turn to what we announced about the fourth quarter results this year.

Our fourth quarter results reflect two trends.

First, we continue to gain traction in each of our five key operating initiatives, within all of our operating groups, which is translating into higher cash flow, stronger management teams, new organic growth, greater productivity and higher margins and second, we are benefiting from a positive economic trend that together with our organic growth initiative is clearly having a impact on our top line.

Both of these trends were clearly evident in the fourth quarter performance of our water technologies group.

This group delivered strong sales of $252 million in the fourth quarter, a 9% improvement over those of the same period last year.

Excluding the impact of currency translation, sales increased 7%.

For the full year, 2003, water technologies group sales were up nearly 14%.

The fourth quarter sales performance was driven largely by strength in our pump, pool and filtration businesses, as well as in Europe.

Pump sales growth was in the high single-digits with sales of our sump and wastewater pumps and engineered systems particularly strong.

Pool sales were equally strong against a very strong fourth quarter in 2002.

European sales were robust with most of the growth coming in water conditioning and pool products.

This demonstrates that our initiative aimed at establishing a strong presence in the European pool market continues to gain ground.

Sales in the developing markets of India and Asia were very strong, albeit on a smaller base.

Filtration sales were up more than 10% for the quarter, driven by the success in our OEM markets as we added new customers and new products.

Water treatment sales in North America benefited from higher shipments of tanks and residential valves, offsetting softer reverse osmosis housing sales.

Filtration results do not include our recent Everpure acquisition, as that agreement was closed at the very end of the year.

The group's operating income for the quarter totaled $32.3 million, nearly 40% over the same quarter last year.

Return on sales expanded by 280 basis points in the quarter, compared to the fourth quarter of 2002.

For the full year, 2003, the group finished with 13.6% return on sales, matching 2002 and stemming the decline caused by Asian investments and unfavorable retail mix seen in 2001 and 2002.

Margin improvement in the fourth quarter is directly attributed to the continued success of our PIMS and supply chain initiatives, particularly in the pump business.

Favorable product mix, improved retail logistics and added volume also contributed to the margin gains in pumps.

Filtration margins grew in the fourth quarter reflecting the success of our Plymouth products integration and specifically our PIMS and supply management activities of that business.

Profits in the European water business were stellar in the quarter and margins benefited from favorable foreign exchange on U.S. source materials and continued productivity improvements.

Pentair also completed the acquisition of Everpure in the fourth quarter.

As you may recall, Everpure is a leading global provider of water filtration products and services primarily for the commercial food service sector.

Everpure products include a wide array of filtration systems and cartridges for various applications.

Together with its sister company, Plymouth Products, Everpure gives Pentair a solid position in the global water filtration market.

With a large install base of filtration equipment, more than 70% of Everpure's revenue comes from sales of replacement cartridges.

Everpure's strong brand name, industry leading process technology, rapid product development capabilities and broad footprint in North America, Europe and Asia will leverage the strength of the water technologies group and accelerate the long-term growth and profitability of our business.

Our water technologies businesses are performing well with continued growth and margin improvement.

These strong fundamentals give our water technologies business good momentum that we can carry into the WICOR integration.

Last quarter, we hinted that our enclosures group would likely reach double-digit margins before year end, regardless of market conditions.

We are very pleased and proud to report that the group turned in margins of 10.5%.

Fourth quarter 2003, sales in the enclosures group totaled $152.5 million, up 11% over the same period in 2002, or 6%, excluding the impact of currency translation.

The improved volume was driven by increased demand broadly spread across all of our electrical and electronic markets.

Hoffman sales were up in the quarter as continued expansion to the networking market produced year over year sales increases of nearly 40% on a small base, while commercial sales were up slightly in a depressed market.

The large industrial sector was showing signs of sustained improvement as project capital spending begins to grow.

Sales of Pentair electronics packaging increased as well due to significant new program wins in the security and medical sectors, combined with the return of a number of telecom customers that had not been ordering in the recent past.

Enclosures Europe sales recorded its first significant quarter over quarter sales growth in local currency since 2000.

Sales were broad-based led by increased sub rack sales in key sectors including transportation.

Fourth quarter operating income was $16 million for the enclosures group, reflected a gain of almost 70% of that over the previous year's fourth quarter.

Return on sales expanded by 360 basis points over the fourth quarter of of 2002 and 120 basis points over the third quarter of 2003, as enclosures generated 8 consecutive quarters of margin improvement.

The group's profit performance was driven by volume- related efficiencies, improved product mix and continued productivity improvements.

Hoffman margins continue to set the pace.

The effect of mid single-digit sales gain along with supply management savings in the applications of PIMS practices throughout the organization were the primary drivers of the margin improvement.

PEP Operating income dramatically increases efforts to transform the business mix as paying off.

This effort, combined with continued cost control and a shift from more production to lower cost labor markets is once again leading Pentair Electronic Packaging to improving margins.

In Europe, we realized a nice step up in profits and enclosures, aided by a lower cost structure after the second quarter shut down of a Scottish facility.

Overall, enclosures group has done a tremendous job of fighting through a difficult market down turn during the last 2.5 years.

This turnaround was achieved by the near flawless execution of the Pentair integrated management system, supply management, cash flow and talent management, together with the closure of seven operating facilities.

Today, the business is well positioned to grow profitably and demand in its key markets appear to be building momentum.

We are confident that we will continue to see great things happen in our enclosures group.

In tools, sales of $278.2 million in the quarter were up 3% compared to the fourth quarter of last year.

The pricing and competitive environment remains difficult but the fourth quarter was the first quarter in 2003 in which organic sales showed improvement with a 3% gain compared to prior year.

The group's newly-launched pneumatic framing nailers and roofing nailer proved to be successes in the marketplace with sell through up 20% over the previous year's gains, previous year's sales.

The two-gun pneumatic nailer kit was a major success at Home Depot during the Christmas season.

Sell through was up significantly for the category versus prior year.

The 890 router line has made quite a splash in the trades.

It was featured in several editorial reviews, front covers and dealer catalogs.

After a strong launch in the industrial channels during the fourth quarter, both Home Depot and Lowes will be offering this product late in the first quarter of 2004.

Industrial channel sales continue to recover and were well ahead of fourth quarter 2002 comparisons.

This performance was aided by new product launches, specifically nailers, routers and reciprocating saws and strong promotional activity.

The two Husky brands of air compressors that we placed in Home Depot were very successfully promoted in the fourth quarter.

Sears promotional activity was strong for the compressor line and delivered a dramatic increase in revenue for the quarter as well.

The introduction of our new Delta mitre saws has taken hold in the marketplace with tremendous reviews from users, distributers and the woodworking press.

Our 14-inch band saw was selected for an innovative award by "Workbench Magazine" for the blade quick tensioning device.

Operating income for the group totaled $19.5 million, 21% below that of the same period last year.

The 210 basis point in decline in group margins was due to competitive marketplace pricing, inflationary cost increases, expenses related to capacity reductions and other one-time costs which were not offset by the group's material savings and productivity improvements.

In 2004, the tools group continues to see a very competitive marketplace, and is working hard to capture cost reductions and productivity improvements while continuing to develop innovative new products to deliver improved ROS in 2004.

We feel confident that the tools group will continue to compete, improve its performance and strengthen its brand, produce quality products, maintain good relationships with customers and vendors and generate good profits.

In fact, tools has made significant progress in its performance over the last three-years.

Pentair's decision to review strategic alternatives for the tools business is driven by our growth strategy that emphasizes investment in the water industry.

Now, let me turn a conference call back over to Dave for some additional financial details.

Thank you, Randy.

We are pleased with our fourth quarter financial results.

Included among the highlights are return on sales of 9.3%, which represents the 7th consecutive quarter over quarter operating margin improvement.

The fourth quarter EPS from continuing operations is 69 cents, was at the high end of the range that we gave you earlier in the quarter.

Our debt to total capital ratio, which was 39.9% at the beginning of 2003, ended the fourth quarter at 39.1%, and that includes $215 million purchase of Everpure.

The Everpure acquisition was recorded on the last day of the year.

The 39.1% debt to total capital ratio was below our target level of 40% while supporting dividends, seasonal fluctuations in working capital and seven acquisitions over the last two-years.

Free cash flow for the quarter was $71 million, bringing our total year free cash flow to $219 million, or 155% conversion of net income.

This marks our fourth year in a row where we have achieved record cash flows in excess of 100% conversion of our net income.

Our 12-month average return on vested capital was 14.1% at the end of the fourth quarter, a 30 basis point improvement over the end of last year.

As you know, this is one of our major goals, and we continue to be focused on improvements, stemming from productivity in both our balance sheet and income statement.

As Randy mentioned, we are continuing to improve our overall financial performance.

Operating income margins for the year were up 40 basis points over 2002.

Our gross profit margin in the fourth quarter increased 140 basis points from the fourth quarter of last year and is up 100 basis points year over year.

All of our businesses were able to obtain incremental material savings and realize cost reductions from productivity improvements, related to our lean manufacturing activities.

We are seeing the results of redoubling our on going efforts in the tools cost reduction in an effort to offset competitive pressures in the marketplace.

In addition, we are striving for greater productivity improvements to help mitigate increases in the areas of rising ocean freight, pensions, health care and insurance, while improving our total company margins.

SG&A costs were up 50 basis points in the fourth quarter and the total year compared to the last year.

This is due to increased promotional costs in the tools business, expenses for down sizing relating to capacity reductions and product transfers as well as strategic investments for growth and innovation.

One time costs that were in SG&A, include the down sizing and relocation of factories in Ohio, Mississippi and Scotland.

Also, the settlement of a class action suit launched against the compressor industry for alleged mislabeling.

We have reserved $4 million for our portion of this tort action.

You should note that even though the SG&A dollars are up 9.6% compared to last year, excluding acquisitions and downsizing costs, our spending is essentially flat.

Research and development expenditures were up for the year for 20 basis points, reflecting the additional efforts by all three of our segments to provide competitive new products to the marketplace.

Interest expense for 2003 was lower by $2.6 million compared to last year, this was due to more favorable interest rates offset somewhat by interest expense related to our recent acquisitions and, a $1.6 million interest charge on a settlement of a claim dating back to before the SF acquisition.

The actual claim was reserved at the time of the acquisition.

We maintained a 50% split on fixed versus variable rates in order to take advantage of the continued lower rates that we see in the market.

The 2003 effective income tax rate of 34% is 1.5 points higher than the 32.5% rate of last year.

The higher rate is due to the mix of our 2003 U.S. and foreign earnings and the fact that many of our tax savings programs are relatively fixed.

Again, the good news is that margins are improving and higher tax rate countries and as our profitability improves, the effective tax rate trends higher.

A point of fact is that this year, our European water businesses are returning to the highest operating margins in our portfolio.

As usual, we are continuing to pursue rate reduction opportunities, which could improve our effective tax rate.

You may recall that we divested our Pentair equipment segment late in 2001.

There was no income or loss from discontinued operations in 2002.

In the fourth quarter of 2003, we reported a loss from discontinued operations of 6 cents per share, due to a reduction in estimated proceeds related to exiting two remaining facilities.

It is anticipated that our current reserves will take care of the final dispositions of these few remaining items.

We continue to make progress on working capital productivity.

Inventory levels have come down $23 million since the end of the third quarter but still remain higher than we would like.

All of our businesses are making great progress in inventory management through their PIMS activities, and we expect continued reduction in inventories throughout 2004.

Receivable days are down two, inventory days are down three and accounts payable days are down two from the prior year on a quarterly average run rate, as compared to the fourth quarter of last year.

And again, the 12-month average return on invested capital, which reflects the combination of productivity from asset management and operation results, has improved from 13.8% at the end of the fourth quarter, 2002, to 14.1% today.

All three groups saw positive trends to the quarter in orders.

Tools were up roughly 10%, water was up over 15%, and enclosures was up nearly 15%.

All three groups likewise left the quarter with strong backlogs, and we continue in the fourth quarter to show a positive book to bill ratio for the total company.

I would like to comment on the fact that we have been aided in the pending purchase of WICOR with attractive bridge financing.

Both Bank America and U.S.

Bank have agreed to supply the necessary loans bridging the period from the closing of the transaction until we have completed the long-term financing for the WICOR acquisition.

We have appreciated their assistance and their confidence in us.

Also, both Standard & Poor's and Moody's have reviewed our plans for the purchase of WICOR and are expected to maintain our current corporate credit rating under credit watch with a negative outlook, pending pay down of the debt.

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

Thanks, Dave.

Our efforts to build organic growth are combining with the resurging economy to drive higher sales in each of our businesses.

The water technologies and enclosures groups are performing very well as we continue post successes from our operating initiatives.

Looking forward, with continued gains in our water technologies and enclosures businesses, we expect about a 15% increase in first quarter 2004 EPS from the year earlier period.

For the full year, we expect EPS to be in the range of $3.15 to $3.30 per share, excluding the acquisition of WICOR Industries.

Thank you for your attention.

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

Taylor?

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone key pad.

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

Your first question comes from Dean Dray with Goldman Sachs.

Yes, good morning and congratulations.

Thank you, Dean.

The first question would be under the water business, the 280 basis improvement over last year.

Could you walk us through the components of what drove that margin improvement?

You have identified some of the individual businesses, but what, how much of it came from, let's say, the top line growth, how much came from PIMS, was there any pricing in there, did you take any share and what about the seasonal impact and how should we think about that?

Hold on for a second.

My writing is small.

I have to get on my glasses.

We had a good volume drop through, but we had -- one of the biggest drivers, selling price was a modest benefit.

We had great progress in material savings, great progress in subsidiary cost reductions, particularly at our pump business and we actually -- let's see, what else is on the flag here.

Any share gains?

I would say, you know, our volume.

I think our volume increases are in line with the other peers I have seen on a nonFX basis.

I think we are doing well in pool.

I think we did very well in filtration with over a 10% gain.

By the way, I should mention too, the material savings and the PIMS productivity we got in Plymouth filtration was very, very good.

We also had a nice benefit from the fact that we are now beginning to get the readout benefits of moving our reverse osmosis housing product out of Ohio and into India.

So that was the other big driver.

Dean, I think the execution across the board and all the businesses was just phenomenal.

You know, we talked about the European margins improving.

It was just really a very, very good improvement.

And then ex WICOR, what would be the target upside operating margin in water?

I see in '01, you got up to 14.5%.

What is your sense of, how far would you take this?

Well, our goal, the goal right now that the business has is 15%, and I think that's a realistic goal.

All right.

And then just to make sure I got the numbers for the organic growth rates, you said water, organically, was at 7%.

There was no acquisition impact there, is that correct?

Minimal.

There were a few small ones but less than half a percent impact.

Enclosures, is that the same thing, is that 6% in organic?

There was nothing--

There were no acquisitions.

We haven't had anything in enclosures in a long time.

Tools is 3, so, what was total company?

Total company growth?

Organically.

The total company was right at 7%.

Great.

And then how did the quarter progress?

We have heard a lot of things, comments about December being strong.

How was December for you and what sort of conditions are you seeing thus far in January?

Dave mentioned, Dave mentioned that the strong backlog we carried out of the year, that was a reflection of the strong orders in December.

November was stronger too.

You know, we came in at the high end of the range that we set, and that was really because all three businesses performed pretty well against what we thought they would doing at the beginning of October.

So, second half of the quarter was stronger than the first half, and I, you know, that backlog that we carried into the year bodes well, I think and that's why we are giving the guidance of 15% up in earnings in the first quarter.

Great.

Thank you very much.

Your next question comes from Dan Whang with Lehman Brothers.

Hey, Dan.

Good morning, Dave.

Good morning, Randy.

Good morning, Dan.

Lots of good things going on.

Actually, you know, I have a question that relates to WICOR, and, in terms of the regulatory approval issue doesn't seem like it should be anything to be concerned about but could you comment on that?

Would there be some with the similarity in some of businesses?

Well, we have very comparable positions and, you know, we are preparing the filings right now, and we will do everything we can to support that review.

Okay.

How about in terms of the price, you know, we know in sales but how about in terms of an EBITDA multiple?

If you look at the EBIT multiple that we paid for, it is just a little bit above 9.

But I think one of the things that you have to really take in consideration when you look at that is the fact that their margins, and they haven't reported yet for the total year, but their margins are going to be around 9%, as opposed to ours at something in the range of 13.8.

You know, that's an opportunity that we have got going forward to really see quite a significant improvement in the possibility.

Their, WICOR has just really started the focus on lean, so they are a few years behind us, and we are very encouraged with their receptivity to it, and we believe we can accelerate that.

That is clearly one of the sources of synergies, as well as supply management.

We see some, we see some opportunities there.

Okay, great.

And I have just a quick question on tools and one on enclosures.

In terms of tools, you talk about strategic alternatives.

We take that as just a, straight sale, or is it other potential type of arrangement possible?

We are looking at all possible arrangements.

But, we think it is time to do that.

Great and in terms of enclosures, I think you talked about strength in the various end markets.

Can you tell us what the current end market mix is right now?

Yes, wait one second.

The telecom is about 11%, which is actually up 1% from the third quarter.

Datacom is now up to 10%, and, you know, that's been growing from less than 5%.

Electronics is about 20.

Networking is about, about, it's over 5% now.

Commercial is about 7, industrials is about, just under 50.

Okay.

Great, actually, I will sneak in another one.

I don't think you mentioned free cash flow expectation for '04.

Just a quick comment on that, please?

Yes.

We, again, expect free cash flow for '04 to be in excess of $200 million, just like we talked about for '03.

Okay.

Great.

Well, I guess I will let someone else have a chance.

Thank you.

Thanks, Dan.

Your next question is from Cliff Ranson from Ranson Incorporated.

I have lost my voice, can you hear me?

Yes.

It's a blessing to to all of you.

Hope you get better soon, Cliff.

Through a quirk of history, I think I understand that some of your private competitors in the WICOR area, I suspect this will bedevil them, I guess two questions, what are your preferences or what are your options on the long-term financing and, two, how will you, what will you need to do to rationalize the distribution of the WICOR products with your existing products?

Well, our preference in terms of financing the WICOR acquisition, longer term, would be to convert assets that we we currently have, into cash, that we can pay down our bridging loan.

So that's the preference.

We would going forward today?

Right, and we feel pretty strongly we would be able to do that.

The second question, in terms of channels, obviously, we still have the regulatory approvals to go through, so we have not compared a lot of detailed information between WICOR and Pentair for those reasons.

We will have a clean team that will look at the channel, and we think these are quite manageable, since the issues are quite manageable.

Okay, fair enough.

Thank you.

Your next question comes from Jim Lucas with Janney Montgomery Scott.

Well, that is an interesting name change for me.

I guess I own a coffee distribution company now.

Couple of questions.

Dave, just a house keeping.

We have EBIT for tools.

Could you give us the D&A for 2003 for the tools piece?

You mean depreciation and amortization?

Depreciation, amortization.

Yes.

You know, Jim, I am going to have to plead ignorant on that.

We done have that broken out.

I can get back to you on that.

I apologize.

All right.

No big deal.

Regarding the WICOR acquisition, can you talk about how this deal has come about.

Were you proactive in approaching them, did this go to an auction, was it private, could you just give us a little more detail about how the deal came about?

Sure.

It was a negotiated deal.

We approached them.

As we looked at the various options to keep driving our growth in water.

Frankly, WICOR was the number one, was the number one idea we had strategically, because it complemented us but it is so close to the businesses we run today, we have incredibly high confidence about getting the synergies and, at the same time, we have, we don't have that many overlaps in the end market.

So, and we are taking a growth orientation to it, so we intend to keep all the brands and the product lines, you know, driving what efficiencies we can, products.

But we approached them, and, through a series of discussions, they got comfortable with us, we got comfortable with them, and we have been working together, already, we already know their top 20 managers, they know us.

We have done a cultural survey of them and our water business to understand the differences between the businesses at a very fundamental level, so we can incorporate those into our thinking, and we know enough to have defined those 14 integration teams very, very clearly.

And it's a great, if I can speak for them, it's an incredibly -- it fits very well with their strategy, and, as I said, is the number 1strategic idea that we had identified some time ago.

Okay.

Okay, Jim?

Yes.

Okay.

On the depreciation and amortization for the quarter, it was $5 million for tools and for the total year, it was $21 million.

Okay.

Thanks on that one.

And, final question, as you look to the new Pentair, the strategy continues to unfold.

You have got the culture, which would continue to gain momentum as evidenced by the work that Mike and his guys have done over in enclosures and is spreading throughout the company.

When you look at the working capital and cap ex needs going forward for the new Pentair, if we were to assume that the tools business is, has moved on, and WICOR is in, can you talk about what your working capital and cap ex needs are?

Well, you know, I think that's a good question.

As we look at the WICOR business, we see some pretty good opportunity, from the standpoint of reducing their working capital and we are not yet at the goals that we want to be.

We are getting darn close on receivables, but on the inventory side, our enclosure business is pretty close to being there.

We still have opportunities in the water business for reducing inventories, and we have, I think, a lot of opportunity with WICOR, as well as our current water business, or both our receivables and inventory.

So, we are going to be, I think, getting down with the total businesses, getting down to, you know, we are currently at around 12% in terms of working capital now, sales.

We think we can drive that down a little bit further.

And from the standpoint of capital expenditures, you know, we are going to have opportunities there also in water, as we merge the two businesses, and we are certainly going to try to keep that below 2% of sales.

The, if I could just add to what what Dave said, you know, our goal in inventory is 45 days, as we get closer to it, I would like to ratchet that down, because that is only 8, 8 turns, and I think we have to have a higher objective than that.

But our goal now is 8 turns, and we are getting there, enclosures is the closest, water was the next closest so if tools wasn't in it we would be that much closer but we have opportunities there.

We are as as Dave said, 55 days closer to our targets.

I don't know if we will lower that goal or not.

A lot of that has to do with the commercial, the commercial goals.

But WICOR's days are higher on both of those, so, on both receivables and on inventories.

So we think that there's probably, you know, another $50 million that we can go after there overtime.

Yes.

I think over the next couple of years, we usually see between 40 and $50 million.

And final house keeping question, cap ex and D&A for 2004?

We are looking at capital expenditures being roughly $50 million, and the depreciation, roughly 67 with amortization on top of that, of 8 million.

Okay, great.

Thanks a lot, guys.

Thanks, Jim.

Your next question comes from Ned Armstrong with SBR.

Hey, Ned.

Yes, good morning.

Some of my questions have been answered.

Good.

But I did have one remaining question, and that with regard to tools segment.

How much in assets, book value, do you have invested in your tool business?

I don't think I want to --

Yes.

We generally don't talk about that.

But let me say this: We certainly -- we know that the assets that we have in our tool business are really very, very good.

Brand names, the businesses themselves, it is one of the best.

So we are not concerned at all about the sales of the business, if that's what it turns out to be, or the price.

Okay.

And, second, and this is, this is a bit more speculative, but with regard to the tool businesses, would there be any expectation of or openness to selling some of the brands but retaining others or is that not a viable alternative from your perspective?

I think it is premature to speculate on that, so I won't.

Okay, great, thank you.

Your next question comes from Brian Langenberg with Langenberg and Company.

Thanks, gentlemen.

Congratulations guys you went from paper to tools and water.

Congratulations.

Better than rocks.

I missed it, sorry, not enough sleep.

Going back to process, turning on a specific thing.

You guys approached WICOR first.

My question to you is this, was it that you went to WICOR to talk, Wisconsin Energy to talk first, and as things came to fruition you said, okay, we need to to sell tools or were these could incident, and the second half of this is if you guys don't get the price you want, you guys historically have been very disciplined about what you buy and what you sell.

Are you willing to accept higher leverage and hold on to your tool business for another two or three-years if you need to do that to get the right price?

Let me answer that first, and then go to your first question second.

Sure.

We are pretty confident in the value of our tool business and we are disciplined with them and we are not without options in terms of long-term financing.

So I would not -- I would not rule anything out at this point.

Okay.

But I actually, I think, our tools business, you know, we have really bottomed out.

You know, we had a 210 basis point decline in the fourth quarter.

Some of it was one timers.

Right.

And the other half was being upside down on the cost versus things we talked about before.

Those things will be behind us, you know, looking forward, we think we have bottomed out and margins will be improving.

Good.

It is a good business, we are still investing in new products and and I am really confident in the team we have got down there.

Sure.

So I am not worried about that but we will remain disciplined as we look at the options on tools.

Now, on the first one, on WICOR, I don't want to get into all the nitty gritty details of the discussion but, clearly, you know, as we did our strategic planning, we saw WICOR as the number 1 opportunity, if we could interest them.

We had common strategic interest.

We worked hard to get where we are on both sides and it was at that point, when we looked at it, when we looked at what it meant, the it was really a transforming event for the board and management when we sat down and said, okay, what should we do, and we took a look at the whole portfolio and we felt good about enclosures and we felt that it was a good time to take a look at the strategic alternatives for tools.

Got it.

That's how it it went down.

Okay, just a small follow up.

We can come back on this.

I just want to get a little idea on what the free cash flow, minus cap Ex segment and could you just delve into the fact a bit you have a steering committee of five people to do the integration.

I am going to assume that Rick Cathcart is number 1 of five and there are two others from each company.

Could you take me briefly through who those people are, what their roles will be kind of sketch what the management team will look like?

Sure.

First of all, Brian, we don't break down the cash flow by segment, but I will go so far to say that all three had very nice cash flow for the year.

Right.

And finished the year with very nice cash flow in the quarter.

But we don't break that down.

Okay, okay.

Fair enough.

But all three were nice contributors.

Okay.

North of 100% cash conversion?

Yes.

They were all three north.

Okay.

And then on, in terms of the management structure, since this water piece is going to be going forward.

You are right, Rick is leading that five person.

You are right, there are two people from WICOR and two people from Pentair.

The head of the integration team full time is one of our people, and there are a couple of people from there in terms of the office, there's a full-time office staff.

Okay.

Without naming names, because --

Okay.

All of those people are going to play a long-term role though within the water business is the easiest thing to say, and we see good roles for the WICOR management for going forward.

Thank you very much.

Congratulations.

Okay.

Thanks.

Your next question comes from Steve McNeil with State Street Research

Good morning, congratulations on the WICOR deal.

Thanks for not asking me what I was doing in in New York when I bumped into you.

I will leave that one be.

I walked into him on the street.

Can you just walk us through the synergies, this $30 million number, and I guess maybe we can reference the 9% operating margin at WICOR versus your 13.6?

I mean, are there structural differences between the businesses that would kind of throw a ceiling in terms of where you could get the the margins, if you could just help us understand what of your thinking is there?

Sure.

We parsed out goals to all fourteen of our integration teams, without going through, without going through the details of each of those.

The $30 million really is representative of the difference in the performance of our business versus theirs.

We think overall, long term the whole group, including WICOR can get to 15%.

That $30 million really is approximately what it would take for them to get from where we are.

Just 4% on the 750 million of revenue, basically?

Right.

We find them very receptive to the supply management and the PIMS initiative that we have.

Towards that point, you know, we have made a lot of progress in strengthening our talent management.

We have a number of people we moved from enclosures just recently in fact, the head of our operations from Hoffman who has has done just a great job of implementing PIMS is now in charge of operations and water.

He has been the key guy going around doing the assessment of lien readiness at the WICOR plant and he found receptivity and rapidity to be quite robust.

It is really our initiatives that will give us the $30 million, it is PIMS, supply management, and they will help us continue to advance our capability broadly within the Pentair group too.

Okay.

Now, if we just dream a little bit.

If you somehow achieve proceeds, I mean, if we make the assumption that the tools business will be sold in one transaction, that would be the underlying assumption here and if the proceeds, net proceeds were greater than the amount you are paying for WICOR, and maybe we are getting a little too ahead of ourselves here.

But would that excess capital or the overage relative to the money, this bridge financing, I mean, should we think of that as additional acquisition fire power or deleveraging money?

Steve.

One of the things that Dave and I have tried to do since, when, after we set on our positions is to keep things clear and simple.

WICOR started as a dream, but we never talked about it.

So I am not going to talk about dreams today.

I think we have a lot to do just executing these, and we have 150% focus on executing it.

We clearly want to grow water.

It's the ambition of the company, and it's the ambition of the board.

So we are going to get WICOR approved and closed, execute the integration and we are going to finish the strategic review of of tools and do the right thing for our shareholders and the folks in tools and their customers and then we will have the conversation then.

How is that?

Fantastic.

Okay.

You gentlemen have a good day.

Thank you.

Your next question comes from Dana Walker with Colmore Investments

Good morning.

Good morning.

Could you lead us through some of the structure in terms of spread over LIBOR, or whatever you may want to choose the bridge financing and how definite the term might be given the uncertainties on tools outcome?

Yes.

I mentioned that we are seeing some pretty attractive numbers.

I don't know that we actually should be giving out the exact number, but we are looking at a relatively small spread over the current financing that we have in terms of our revolver.

If I think, you know, I can tell you that our overall rate that we are currently paying, including our public fixed rate, which is as high as, which basically is 785, overall rate is a little less than 5%.

So, I think that, you know, once we get it all put together and we do our S.E.C. filing, then all of that will be disclosed.

So you were talking about, without being definitive, something in excess of 5 but not meaningfully in excess of 5?

No, actually, the bridging will be over and above our current variable rate.

Okay.

Which is -- okay.

Lower than the 5?

Yes.

Our, in fact, can I talk about revolver in terms of what the rate is?

Sure.

Our revolver floating rate in the fourth quarter was 2.2%.

And we do borrow smaller amounts, even for less than that, on a quasi commercial paper basis overnight borrowing.

Randy, Dave or Randy, question number 2, could you with Everpure now in the fold, describe in rough terms what your year 1 and year 2 expectations might be from that business, given that it was a wonderful property but also expensive?

Well we expect it to be very modestly accretive in the first year and much more accretive in the second year.

The year 2 effect would be a function of growth or a function of PIMS?

Both, both.

We think the growth profile looks good but PIMS and supply management, we have a number of ideas on the cost side that are in the process of being implemented.

We are off to a pretty fun start on the integration, just as we had Plymouth integration.

It is the same team that did the Plymouth integration that is working on the Everpure integration.

So, we -- I would say it is about 50/50.

If I recall, there was a tax nuance that was going to lower your consideration paid ultimately, when does that come into play?

I am not sure that I can describe that accurately.

Well, it basically comes into play, it is the 338 H 10, basically that we are able to take advantage of in terms of appreciation.

So it comes into play immediately as we start recording any income from the business, through the first quarter.

Two last quickies.

Gentlemen, you enumerated several items which I believe you were describing as going to be expense head winds in '04, including freight, pension, insurance and health care.

Could you be more specific about the trends you are seeing there?

And, finally, you have talked about your price experience in tools, which was negative in '03, a rough sense for which you think '04 and '05 might hold?

Let me deal with the price issues now in new tools, we did not have, as I said in the third quarter, we were down again a little over 3% in price in the fourth quarter.

A lot of that was driven by the first year of a three-year program that won't repeat, and so I think , you know, going forward, we do see a continued price compression, but more in the 1 to 2% range, that is what we have said, on a sustained basis, not the 3% range, which was peculiar to our compressor basis last year.

That is the pricing side and then on the cost side, Dave?

The cost side, the ocean freight that we talked about last time as well as this time.

I think everybody understands that there is a tremendous movement of product out of China, which is really driving the ocean freight, and we have built into, you know, our current estimates, number that is we reflect is going to take place there.

Also, the same with pensions, and insurance.

We are, we worked very hard on the insurance side in terms of negotiating the best rates we possibly can but that is going up, I think, not only for our company but for every company.

And when you look at, you know, I think the pension cost is basically one that, you know, we try to make sure that we are doing the best we can in terms of the costs on that, but, you know, I think we have got built in adequately in terms of our estimates that we have talked about, all of those costs.

But there's no question about it, they are up.

Very well, thank you.

Yes.

I think the offset to that, which is important to mention, is that, you know, we as a total company in every one of our businesses, work very, very hard to try to get 5% total cost productivity and we measure that on a consistent quarterly basis, trying to offset the costs that we see in those categories we just talked about and we are doing pretty well at getting closer and closer to that 5% we set as a target.

Dave and Randy, thank you.

Okay.

Your next question comes from Anan Moore with Brooks Capital.

Hi, guys, I am from Brooks.

Can can you hear me?

Yes, we can.

Randy congratulations, just a couple of of questions, quick clarifying questions here.

The water margin that you referenced, I think, in response to Dean's question getting up to 15% is that a 2004 goal for you or can you spell out the time frame?

That is the first thing and the second thing is, you guys have talked about getting the WICOR business up to your margins, but 15% was the goal, for the base business, the billion bucks of base that you have, pre WICOR.

Given the fact that you guys have increased the business by 70%, I think you guys have a slightly higher goal than that.

Do you want to clarify that?

Yeah, thanks for the opportunity to clarify.

When we talk about the $30 million synergy target.

That is thinking about WICOR today and that 9% range getting into the 13.6 we are at now.

The 15% I was referencing was just the goal that Rick Cathcart and our existing team as, I mean, our existing business has held, has set.

That goal isn't for 2005 -- I mean, 2004, but it is a couple-year goal.

Not a five-year goal.

It is maybe two-years out to get to the 15%.

Our first focus on the integration team is looking for specifics.

We haven't really translated that into the combined ROS goals.

But, if we can get the combined WICOR and Pentair to 15%, that is really a lot of value creation.

So, I am not -- I haven't set about to set a new goal beyond the 15% just yet.

Oh, I got you.

But, logically, you think that with the enhanced scale that you have 70% more, you know, just in things like material and lean and some of the cost side issues, you know, that 15 could possibly nudge a couple of points higher, not next year and not in '05, but in the out years, you.

I know, Randy, you said you don't want to dream.

That doesn't sound like a dream, it sounds like it should happen if you guys are executing right.

When we get the 15, let's talk about it again.

Good enough.

We will do that.

One question on the management.

You talked about Rick being there and a couple of guys on the integration side.

Are you pulling some of your lean guys.

I know you moved a bunch of your lean guys into tools, actually some of your higher performers into tools.

But are you pulling them out and putting them on this integration team?

In fact, I will tell you that the two, our two leading businesses in the application of Pentair management systems has been Hoffman.

I mentioned earlier, Don Westman, Vice President of manufacturing in Hoffman, he was Vice President, we have now moved him over the water group so he can focus fully on lean and the leader of Fleck water business and the leader of that business is the fellow leading the charge at Plymouth and now supporting Everpure as well.

We already had within water, one of our best practitioner and we moved one of our lean gurus on there to focus on WICOR.

A number of people that are available, we have done some best practice sharing, for instance, between waters and enclosures already to great effect.

So, yes, we have moved some resources and we also have some good resources in water to start with.

All right.

Great, thanks, guys, congrats again.

Thanks.

Your next question comes from John Queely with Adams Harkness.

Hi, good morning, congratulations.

Hi, John, welcome to the call.

Thanks very much.

Quick question.

Post WICOR, with 2 billion in water business, can you give us a sense of the mix by end market meaning the amount of business going to commercial, industrial, residential, municipal, for instance, anything that you can offer there?

Yes, our municipal will actually go down as a percentage because WICOR doesn't have any municipal.

We will still be dominantly residential and commercial but they have interesting nitch businesses that I would classify as industrial and kind of industrial like, for instance, they are a leader in agricultural pumps so I guess we would put that into industrial.

In the mix that we have done.So they have, I would say, a little more industrial business than we do.

Yes, which, I don't know, whether we will need more segments or, they are not traditional residential commercial that we have looked at before.

So I would say a little bit higher industrial, but still, still dominantly, I haven't run the numbers yet, you know, because we haven't shared specific end customer data yet, so we won't be able to give you accurate numbers until post closed but I would say residential commercial would still be over 50%.

I think I can safely say that and a bigger portion of industrial.

But it is still all water, you know, still all focused on water, which is why WICOR is such a neat fit for us.

Okay.

In terms of the M&A environment, you folks have been really setting a pace the last couple of years.

With the risk of getting ahead of ourselves, can we talk about your appetite for future M&A in '04 whether it be small tuck ins, there are a lot of properties out there in the market.

Can you comment on your desire out there?

Well, you know, overtime, we want to be one of the key consolidators.

We want to be the highest-performing business in the water technologies world.

But our focus right now is on executing these two strategic initiatives, one, buying WICO are and, two, examining what to do with tools, and we will keep our finger on the pulse of the M&A environment too.

Great, and one last house keeping question.

When you talk about the EPS impact from exchange rates in '03 for the full year, and what your expectations are with your '04 guidance for that?

Yes, well, Dave is looking up.

The exchange impacted our top line really more than our bottom line.

Okay.

It is -- so it didn't, in fourth quarter, I don't think it had any impact on our bottom line.

We do have some transaction effect, as I mentioned, in our water Europe business.

They actually sourced some U.S. product, which we call transaction benefit, not translation benefit.

But, Dave, what would you add to that?

Well, we actually had about 5 cents for whole year.

Whole year.

So we are looking at a little over a penny a quarter.

Okay, great.

Thanks very much.

Okay.

Your next question comes from Mike Morseville with Bear Stearns.

Good morning.

Good morning.

Regarding the tools business, I was curious in the fourth quarter if you felt any material ramifications of the introduction of a tool line at Home Depot, and, more importantly, looking out, the competitive landscape seems to be changed there, does that have any bearing on your decision or was this strictly a refocus of the company?

It is really a refocus of the company.

Didn't have any bearing on our decision.

In fact, we mentioned before in the last conference call, that as that Rigid line was introduced at Home Depot we only faced up with about $3 million, $4 million of product.

Didn't have any impact on there.

In fact we actually built some private label product for Home Depot.

The Husky air compressor products were two of our highlights in the fourth quarter.

We have a good relationship with Home Depot and LOWES.

And we had our best comps in the fourth quarter.

Okay.

Could you just describe what your reasoning, I guess, was in going public with this rather than perhaps pursuing alternatives in a private manner?

Yes.

I will be glad to.

As I mentioned earlier, we want to do things clear and simple.

It is the right way to do it for people involved in the business as for the shareholders.

It is not something that I think we need to hide under a hat.

Do you have a ballpark on the time frame?

Well, by the end of the third quarter, we expect to have concluded the process .

Thanks.

Any other questions?

You have a follow up question from Cliff Ranson.

Yes.

Hey, Cliff.

Hi, guys, hang on.

Dave, I'm sorry, can you repeat, when you were giving us the tax rate for '03, I didn't really understand what you were telling us about the assumption for '04?

Yes.

The assumption for '04 will still continue to be 34%.

Okay.

Same as we had in '03.

Okay.

And then the last question is, how do you manage around the issue when you have a major segment for sale in terms of the retailers and distribution channels that sell power tools?

Might be hesitant to stock, this is a traditional issue.

I am just trying to figure out how you are going to manage around it when they don't know who the the next owner is going to be?

Well, you know, the beauty of our business is they are fairly stand alone.

We will redouble our efforts in terms of focusing on the customers, making sure they are informed.

I think that is one of the benefits of staying in public.

You know, I think that they can count on us to continue to invest in the tools.

We are not changing our investment profile.

We are still launching our new product.

We are still focused very much on delivering the service to them.

The brands are strong, the brands will remain, doesn't matter who the owners are, Porter Cable and Delta are some of the strongest brands in the industry.

We will be talking to them.

The customers.

Okay.

You don't view it as a big issue?

I view it as something we need to focus and manage.

Got it.

Thank you, sir.

Yes.

There are no further questions.

Okay.

Thank you, very much.

I appreciate your interest.

If I could characterize the questions, I would say you are excited about it too, and we think we are on, to quote one of you, to building a new Pentair.

So, thanks a lot for your attention, and, Taylor, if you could give the directions on the play back, please.

Thank you for participating in today's fourth quarter, 2003 earnings release conference call.

This call will be available for replay beginning at 1 P.M.

Eastern Standard Time today through 11:59 P.M.

Eastern Standard Time on February 8, 2004.

The conference ID number for the replay is 2924364.

Again, the conference ID number for the replay is 2924364.

The number to dial for the replay is 1-800-642-1687 or 706-645-9291.

Thank you very much.

Goodbye .