濱特爾 (PNR) 2004 Q1 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the Pentair, Inc. first-quarter 2004 earnings release conference call.

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

After the speaker's remarks there will be a question and answer period. (OPERATOR INSTRUCTIONS).

Mr. Harrison, you may begin your conference.

Good morning, everyone, and thank you for being with us today.

I'm Dave Harrison, Chief Financial Officer, and with me this morning is Randy Hogan, our Chairman and Chief Executive Officer.

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.

In addition I would like to refer you to the risks outlined in our 10-K as of December 31, 2003, and our news releases.

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

Actual results could differ materially from anticipated results.

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

Hello.

Thanks for joining us.

Our first-quarter results demonstrate that our operating disciplines are working well and that the pursuit of our strategic initiatives continues to pay off.

The fact that these results have been supported by improving economic conditions is icing on the cake.

What a great quarter it was.

Our first-quarter 2004 net sales totaled $767 million, a 20 percent gain over the same period in 2004.

If we remove the effects of an acquisition, favorable currency translation and four more days in this first-quarter versus last year, sales were up approximately 11 percent.

Excluding the Everpure acquisition and currency translation and after adjusting for the extra days, the Water Technologies Group's first-quarter sales improved about 13 percent over the same period last year.

The robust organic sales reflect the group's successful new products, expanded distribution and improved service capabilities.

In the Enclosures Group, organic sales were about 15 percent excluding currency translation and the extra days.

These results were driven by expansions in new markets and expanded distribution network and the success of recently introduced products.

In the Tools Group, organic sales were about 7 percent excluding translation and adjusting for the extra days.

Demand for the group's innovative new products was the key factor behind the group's improved organic growth.

Earnings per share in the first-quarter were 80 cents, a 43 percent gain over that of the same period last year.

This was our eighth quarter of year-over-year EPS improvement.

Operating income for the first-quarter totaled $73 million, 40 percent higher than in the same period last year, and we recorded margins of 9.5 percent in the first quarter this year reflecting 130 basis point improvement over margins of 8.2 percent in the same period a year ago.

We're all excited that the results of our hard work in the last three years are reading out so well in our performance, however, that is by no means where it ends.

We will continue to drive our strategic initiatives and capture new organic growth in the months and years ahead.

We will also make the most of the enormous opportunities associated with the transformation of Pentair into one of the highest performing water technology companies in the world, and will maintain our diverse portfolio businesses supported by a strong and growing Enclosures Group.

The Federal Trade Commission is conducting the expected review of our proposed acquisition of WICOR Industries and that review is ongoing.

Meanwhile the Pentair and WICOR teams have done a great job planning for a smooth integration.

We anticipate that the transaction will be completed sometime in the second or third quarter of this year.

Similarly our review of strategic alternatives for the Tools Group continues on schedule.

We are making good progress and we expect to conclude the process sometime in the third quarter.

Now let's review our operating group's performance in the first-quarter starting with Water.

In Water Technologies, sales for the quarter jumped more than 27 percent compared to last year spurred by growth across all of our businesses.

Excluding the contributions of the Everpure acquisition, we grew in excess of 20 percent.

Factoring out currency translations and adjusting for the extra days in the first-quarter our growth rate was still about 13 percent.

Pool and spa equipment sales grew over 25 percent, the fastest rate in our history in the first-quarter.

The pool season is off to a good start and we expect high demand this season, especially for our popular pool lights, heaters, heat pumps and automated controls.

Sales of water treatment and conditioning products in North America also increased in the quarter benefiting from success and new account development.

Valve shipments set a new record with strength in both residential and commercial markets.

Sales of filtration products grew dramatically as Plymouth Products continues to win more OEM business.

The recently acquired Everpure business made a larger than expected contribution to our first-quarter sales.

European sales, excluding acquisition and currency translation, grew nearly 10 percent driven principally by an increase in pool equipment shipments and sale of water treatment valves.

Sales in the developing markets of Asia and India also continue to grow dramatically.

First quarter pump sales in North America grew at the fastest rate in four years aided by the fact that we signed several new pump distributors in the quarter.

Continued strong sales of residential pumps, an uptick in water system well pumps and record commercial fire and HVAC booster pump sales, more than offset weaker municipal pump shipments.

The group's operating income grew more than 40 percent in the first-quarter versus the same quarter last year.

For the second quarter in a row year-over-year return on sales expanded from the prior year period with all businesses contributing to the 120 basis point margin improvement from 12 percent to 13.2 percent.

Volume growth, along with supply management savings and productivity improvements, drove the enhanced profitability.

Pump margins benefited from increased volume, favorable product mix and productivity improvements as did margins in the pool and spa equipment business.

Water treatment North America margins increased reflecting continued outstanding operating results.

For example, our Brookfield operation, one of our PIMS' benchmarks, recorded its 13th straight quarter over quarter improvement in ROS.

First quarter margins at the Plymouth Products and Everpure filtration businesses were also higher than expectations.

I'm very pleased to note that the Everpure acquisition was accretive to our earnings in the first quarter of ownership.

We're impressed with the accomplishments that the Pentair Everpure team has made in executing the integration plan and look forward to many more good quarters from our filtration businesses.

Europe too saw significant improvements in profitability, benefiting from productivity programs and the impact of the lower dollar on U.S. source products and components.

Overall, the Water Technologies Group has done a tremendous job in the first-quarter.

This performance is especially impressive in light of the fact that many people in each of our water businesses are also working very hard on integration plans for the WICOR acquisition.

In the Enclosures Group, sales for the quarter grew more than 25 percent or nearly 15 percent excluding currency translation and days adjustment.

All the Enclosures' units realized solid demand across key market sectors proving the value of the growth initiatives we set in motion during the last two years.

Hoffman sales, for example, benefited from the recent addition of more than 100 new distributor locations, new products, expanded market share and higher demand from established industrial markets as well as security, networking, food and beverage and commercial markets.

These actions have also benefited from Pentair Electronic Packaging businesses whose customers, approximately 150 of which are new in the last year, began to put into production a number of new programs.

Enclosures' Europe sales grew at the highest rate in more than five years, as recent market shares gains boosted volumes further supported by improved business activity in telecom markets.

Sales at our Asian Enclosures operation also continues to ramp up, benefiting from new wins for projects serving local markets.

The group's operating income increased 96 percent over the same period last year.

Return on sales expanded by 400 basis points over the first quarter of 2003 and some 60 basis points over the fourth quarter of 2003.

This first-quarter ranks as Enclosures' ninth consecutive quarter of sequential margin improvement.

In fact, last time Enclosures had 11 percent ROS was in the first quarter of 2001 and quarterly sales were some $35 million higher at that time.

This is quite a testament to the value our new operating disciplines have brought to Enclosures.

First quarter margins at Hoffman increased due to additional volume which allowed Hoffman to leverage its improved productivity.

PEP's operating income also improved over last year as PIMS and supply management helped drive increased profitability.

Enclosures' Europe profits improved in the quarter as well benefiting from increased volume, lower cost resulting from the closure of the Scottish manufacturing facility and a concentrated effort to focus on customer profitability in core markets.

Our Enclosures Group's results have been robust, as we have focused on growth opportunities in new markets and captured significant share during the economic downturn.

We look forward to even higher performance from our Enclosures Group in the remaining quarters of 2004.

In the Tools Group, first-quarter sales were up 11 percent compared to the same period last year making this the second quarter in a row of year-over-year sales gains.

Excluding currency translation and days adjustment, the group's sales increased about 7 percent.

Sales of combo kits, pneumatic nailers, routers, compressors, joining tools and pressure washers, accounted for much of the sales gain.

In fact, we set a new all-time record for pressure washer shipments in the month of March.

All markets were up including the industrial channel.

Tools Group operating income in the first-quarter gained 17 percent over the same period last year and first-quarter ROS with 7.5 percent reflects a 50 basis point improvement over the same period last year due to higher sales volume, productivity gains and cost savings from PIMS and supply management activities.

Competitive marketplace pricing, unfavorable mix, and material cost inflation partially offset those gains.

New product launches continue to help drive sales performance in 2004.

Router sales for the first quarter were up approximately 25 percent over the same period last year due to sales of our new model 890 series router and continued strength of the model 690, a favorite of professional users.

The new Mag Saw line of circular saws launched in March is in high demand too, due to its quick change keyless blade clamp that allows users to make toolless blade changes in seconds.

Also among the 35 new products launched in the first quarter was a combo kit consisting of a new lightweight high-pressure framing gun and a new high-pressure direct drive oil lube compressor.

Tools also introduced a new line of quarter cable pneumatic random orbit sanders, a new pressure washer that uses proprietary radial pump technology to offer customers pressure ratings up to 2600 PSI, and an upgraded vertical pressure washer line.

Earlier this month, we completed the purchase of the remaining interests in our Asian Tools joint venture.

Pentair had acquired an initial 40 percent ownership stake in the joint venture in 2001 and subsequently increased its ownership to 49 percent in 2003.

We've enjoyed a long and successful relationship with the joint venture partner and our completion of the purchase enhances both our overall cost position and our ability to provide customers with quality, innovative products and improved service.

The relationship also gave us an important edge in quickly ramping up our Enclosures and Water Technologies Manufacturing in China.

First-quarter results demonstrate that the Tools Group continues to be a good business equipped with strong brands, a reputation for innovative products, state-of-the-art manufacturing capabilities and grounded operating disciplines.

Our Tools' leadership team has proven it is capable of managing the challenges inherent in the marketplace.

We remain confident that our skilled management and employees recognize brands, quality products and efficient operating facilities and continue moving the tools business forward.

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

Dave.

Thanks Randy.

As you can tell from Randy's comments we are extremely pleased with our first-quarter financial results.

Since the highlights are few of the many improvements, return on sales of 9.5 percent represents an eighth consecutive quarter over quarter increase in operating margin.

First quarter's EPS of 80 cents was 15 cents above our guidance at the beginning of the quarter and 5 cents over the top of the range given in our prerelease last month, most of which emanated from continued volume improvement.

Our debt to total capital ratio which ended the quarter at 39.1 percent was down from 40.9 percent last year, even with the acquisition of Everpure.

The 39.1 percent ratio was below our target level of 40 percent while supporting dividends, seasonal fluctuations in working capital, a 20 percent increase in sales and seven acquisitions over the last two years.

Continued productivity from working capital which is now 11.5 percent of sales on an annual average is down 30 basis points from last quarter.

Free cash flow for the first quarter was a slight negative of $4 million, a $6 million improvement compared to the first-quarter last year.

Our cash flow traditionally is negative in the first-quarter due to seasonal fluctuations in working capital levels.

Our twelve-month average EBIT ROIC was 14.7 percent at the end of the first-quarter, an 80 basis point improvement over the first quarter of last year.

This is one of our major goals and we continue to focus on improving productivity and both our balance sheet and income statement.

We are now seeing the impact of margin improvement and a return on invested capital and cash flow.

As Randy mentioned, we're continuing to improve the quality of our financial performance.

Operating income margins for the year were up 130 basis points over the first quarter of 2003, and 20 basis points over the last quarter.

Our gross profit margin in the first-quarter increased 190 basis points from the first-quarter of last year and is up 90 basis points from the fourth quarter of last year.

Over the last three years we have communicated to you that we are striving for a 5 percent total cost productivity in all of our businesses.

We are very pleased to report that in the first-quarter all of our businesses were able to obtain incremental material savings and realized cost reduction from productivity improvements.

These improvements resulted from our lean manufacturing activities coupled with volume from our growth initiatives that allowed many of our businesses to surpass our goal and achieve total cost productivity in access of 5 percent for the past quarter.

As you might expect we are seeing material and overhead inflation in a number of our businesses.

We are striving for greater productivity improvements to help mitigate cost increases in base materials such as steel, in ocean freight and fuel, and in health care and insurance.

In addition, over the last few months, we have been able to selectively raise selling prices to help cover the additional cost on many of our products.

Our goal is to keep improving our total company margins.

SG&A costs were up 60 basis points in the first-quarter compared to last year.

This is primarily due to nonrecurring expenses such as downsizing costs as we close our Mississippi tool factory.

Outside support and integration planning for the WICOR acquisition and M&A expenses related to both the WICOR and Tools' activities.

Without these nonrecurring items, SG&A as a percent of sales is even with last year.

Research and development expenditures continue to be about 1.6 percent of sales for total Pentair, as all three of our segments in best, provide competitive new products to the marketplace.

Interest expense for the first quarter of 2004 was higher by $1.2 million compared to last year.

Great cash flow generation in 2003 reduced debt.

Even with the recent acquisition of Everpure, interest expense would have been the same as last year.

The $1.2 million increase is due to fees related to our bridge financing.

The $850 million bridge facility is in place to bridge the period from the closing of the WICOR transaction until we have completed the longer-term financing for this acquisition.

We have also obtained waivers on our existing revolver that will allow us to remain in compliance throughout the period of the bridge loan.

We maintain an approximate 50 percent split on fixed versus variable in order to take advantage of the continued lower cost financing environment.

The first-quarter of 2004 effective income tax rate of 35 percent is one point higher than the 34 percent rate of last year.

The higher rate is due to our increased level of profits, the anticipated mix of our 2004 U.S. and foreign earnings and the fact that many of our tax savings programs are relatively fixed.

Again, the good news is that profits are improving, but in higher tax rate countries as the profitability improves the effective tax rate trends higher.

A point of fact is that our European Water and Enclosure businesses are continuing to improve profitability faster than the overall business.

As usual we are pursuing rate reduction opportunities which could improve our effective tax rate.

We continue to make excellent progress on working capital productivity.

Inventory was at the same level as the first quarter of last year supporting a 20 percent sales growth in the first quarter of 2004.

The productivity of inventories is measured by days improved from 63 down to 61 days on an annual average.

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

Receivable days again saw another improvement in the annual average, moving in the current quarter from 59 to 55 days.

It should be noted that receivables increase in dollars was only 13 percent versus the sales growth of 20 percent.

This difference reflects the added productivity that we have seen in receivables management.

Accounts Payable days are down two from the prior year.

All three groups saw double-digit increases in orders in the first quarter with Water and Enclosures both up over 25 percent.

We continued in the first-quarter to show a positive book-to-bill ratio for the total company and all three groups left the quarter with strong backlogs.

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

Thanks Dave.

I believe our recent performance supports the fact that Pentair is becoming a superior operating company.

The success of our five strategic initiatives is evident in our sales growth and improved income performance, in our inventories and receivables management and in our cash flow.

Pentair is also deepening its emphasis on building a strong talent pool, the foundation of which is our long-standing values and culture.

Equally important, we operate with a focus on not just winning, but winning right and we strive to be respected for the way we do business.

Pentair also knows how to manage growth.

Our approach to acquisitions includes a straightforward financial evaluation model, a well articulated strategic rationale, a clear and concrete integration plan and well-defined leadership requirements.

This approach is implemented consistently and with discipline, as evidence in our acquisition of Plymouth Products and now Everpure, and the improved results that the filtration businesses have delivered to date.

Similarly our approach to organic growth involves an analytical process that helps us target and monitor key growth opportunities.

We then drive strategic actions to accelerate new product development, expand into new channels and markets and establish presence in new geographic areas.

A consistent focus on market share gain and an awareness of opportunities to explore new business platforms further supports organic growth.

Pentair's organic sales growth in the first-quarter revealed the value this process has delivered.

Finally, we actively manage our portfolio businesses against clearly stated objectives.

This posture upholds a long tradition of practical portfolio management that has served to reinvent Pentair at least three times during the company's 38 year history.

In each case those transformations have elevated the company's performance to a new level.

Indeed our current transformation has already begun to raise the bar.

These four strengths, superior operating disciplines, a growing talent pool, the ability to drive our growth, and bold portfolio management constitute Pentair's value proposition.

We believe this proposition is driving improved shareholder value for Pentair and we're confident it will allow us to deliver improved results and even greater value in the future.

Given current economic conditions we anticipate organic sales growth in the mid to high single digits over the remainder of the year.

Further, we now expect second quarter EPS of between $1.00 and $1.05 and full year EPS of between 3.45 and 3.60.

Thanks for your attention.

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

Tracy.

(OPERATOR INSTRUCTIONS).

Deane Dray of Goldman Sachs.

Hi, Randy and Dave.

First question is on the pool and spa business, that 25 percent sales growth.

How much of that is core?

Is it too early to have comments about weather impact yet and what are inventory levels like?

What we said was it is over 25 percent, not 25 percent.

The way we look at it is, I think everyone's anticipating a good pool season.

In fact, when you take a look at the states and cities that attract pool starts, all of them are up solid double-digits, midteens to 20 percent.

That bodes well for new pool construction.

Inventories -- the channel builds inventories in the first-quarter in anticipation of the strong second quarter.

The fact that our sales are higher than I think the channels right now is indicative of a normal pattern, not something abnormal.

However I do think the success we have had with our new Intel-A-Touch (ph) products, the heat pumps we added last year in our new cleaning line, our new pressure side cleaners, I think we have gained some share.

I think inventories are good in the channel but I don't think they're too high.

Clearly the East Coast, the spring, despite the rain you're getting today, the East Coast has had a much better start than it had last year.

Last year was a disaster.

Just to clarify, you said more than 25 percent.

Is that considered all core because you did add some new products a year ago?

I can't break out separately right now what the new products are.

I'd say around 25-ish for the core before you add the new products.

What about the update on the municipal side?

You said that was a little bit soft.

On the municipal -- you know we are in the municipal pump business and shipments there were a little bit soft in the first quarter.

We expect a stronger second half.

Municipal is only about 10 percent of our business or a little bit less, particularly with the growth we have had in residential and commercial.

Frankly the comeback of some commercial business is pretty heartening in the first-quarter, not something that -- and we saw it not only in pump, we also saw it in Enclosures.

We were pleased to see that.

Last question on Enclosures.

You mentioned a couple different points about increased market share.

Are you including your share what might be captive Enclosure business that you might be winning and where else might the share be coming from?

The networking business, which is the food distribution North American networking business, we weren't in that in any consequential way three years ago.

And it's 5 percent of our sales today.

We have talked about it before, we've added Graybar and Annexor (ph) and CSCS as distributors for those products.

So that's an area where we see share gain.

We believe we've gained share in commercial as we have expanded our distribution base in commercial.

The addition of security and defense we've been working on, and medical, we made good progress there.

But one of the nice things that happened in the first quarter was we have talked before about the fact that we won a number of third generation, what are called third generation programs from telecoms.

That was the good news.

The bad news was they weren't ordering any.

They started ordering some in the first-quarter.

In fact we've seen a shift back toward telecom in the first-quarter in our mix which is great, that is sort of gravy.

We think 15 percent growth in that business is higher than the market and therefore we feel pretty good about saying that we've gained some share.

That's been our focus.

We flattened out in our sales in Enclosures I think before the market did, when we were bumping along there at 140 million a quarter.

Just to clarify, is that -- when you said third generation, are you referring to 3G on the cell phone business or is there something else?

No, cell phone, 3G.

Great.

Thank you.

They are wireless base stations, is what we saw coming back.

Thank you.

Jim Lucas of Janney Montgomery Scott.

A couple questions, if I might.

First, Dave give us a little color on the raw material side, but between Tools and Enclosures, still I would guess is an important commodity buy for you.

Can you give us a little flavor of what you're seeing there?

One of your competitors on the nailer side on a conference call about an hour ago, was talking about great pressure there.

Can you give us a little color on your side?

It is true that we've seen increases in both the Tools as well as Enclosures arena for the steel and we have been able to track that, do I think as good as we possibly can in terms of keeping those costs down with the contractual relationships we've had with our suppliers.

And selectively we've been able to find places where we can raise some selling prices to offset some of the costs there.

We’ve been managing through that.

We started early last year knowing and seeing the impact of the steel coming through and we have been managing that pretty carefully as we're going through.

Even though the costs have been higher, we've still been able to improve on our profitability as we have done year to year.

If I could add, because of our supply management focus we've got long-term contracts in a number of commodities that have helped us more in the first-quarter than we thought given the nature of what was happening with commodity pricing.

We have been working in earnest for about five months now on managing steel.

Copper is also up so that has hit motors.

Luckily in a couple of our businesses, we do have price increases so we were taking advantage of that.

As we look out for the rest of the year, we aren't really counting on any kind of moderation.

As some of our longer-term contracts expire we do expect some more pressure which is why we've been active on the pricing side.

On the areas where we can't get price because of long-term contracts or competitive reasons, we are just going to rebuild our efforts in productivity.

I think we've got it -- I think we've got it factored in to our outlook right now.

To that point on pricing, can you give us a little additional flavor on where you're able to get price increases and conversely where you're seeing pricing pressure in the market?

I don't want to go into a lot details, but I will tell you that we have more degrees of freedom in Enclosures and Water than we have in Tools and I will leave it at that.

When you look at your range for the full year of 345 to 360, still kind of a wide range, can you give us a -- can you talk a little bit about what it's going to take to hit the top end of that range and possibly maybe some upside surprise versus coming in at the low end of the range?

If we raise it to 345 and 360, he's asking for an offensive (indiscernible).

Come on, the markets are responding positively here.

We see a good -- in that forecast at the high-end of the range, I would say it's getting to the higher end of the single digit organic growth, as well as a good job of managing the inflationary pressures in commodities, and being able to get supplies to ship everything.

On the material supply -- on the material side, we're not just focused on the cost, we're also focused on the security supply.

We have had, with the kind of growth rate we had in Enclosures, 15 percent for example, we want to make sure we can secure the supplies we need.

We are focused on both of those.

That is with -- with the forecast we see for supply cost and a high single digits kind of organic growth, we will be at the high-end of the range.

I guess if we do an even better job of managing supply costs and a better job of driving organic growth, than maybe it could be higher.

But I think the range is wide primarily because of the supply, but we still -- it's higher, that whole range is higher than our old range.

It's nice to have some positive news.

Dan Whang of Lehman Brothers.

Good morning Randy, good morning Dave.

Regarding the organic growth, you had very strong organic growth in this first-quarter, 11 percent.

I think that was a good amount better than the 6 percent that had been anticipated back in March and that works out to March with particularly the second half being very strong.

Could you provide a little detail on the organic growth by month if possible?

March was the strongest of the three.

When we gave the 6 percent, we expected over 6 percent.

When we looked at that there was a chance we would beat it and we not only hit that chance, we beat that chance.

I would say it was sort of like an all green light quarter on organic growth, is how I looked at it.

We always hedge a little bit on the organic growth side as we look on the outside because we have less degrees of freedom to control that and we've got a lot of good things happening.

We think we have a lot of momentum.

This quarter, being so strong, what are you seeing going into April so far and do you think there were any special circumstances in the first-quarter, where there were some pre-buys that made it particularly strong?

I think, as Dave said, we had strong orders and backlog in Water and Enclosures.

He didn't mention Tools because Tools actually -- you've got to examine the orders.

They had some big lumpy orders.

One year they will fall into one month, one year it will fall into the next.

But we think Tools also has a lot of momentum going into the second quarter.

So all three businesses exited the quarter with positive momentum.

In terms of -- I don't think the Tools channels overfilled.

We talked about the pool business earlier and I think it's properly filled, is how I see it.

Our orders exceeded, as I mentioned, exceeded the orders of distribution but that's as it should be, because the second quarter is the big quarter for the pool business.

The same with pressure washers, we're filling the channel with pressure washers right now which is why March was our biggest month ever.

I think we left the quarter with strong enough orders in backlog to really support the statement that Randy made and the fact that we expect organic sales growth in the mid to high single digits for this quarter.

I feel pretty good where we left the quarter, we should be able to do that.

In terms of Enclosures, do you expect continued sequential improvement in sales and I guess obviously margins?

I think we have a ton of momentum there if telecom continues at the rate it’s at.

I do think actually in Enclosures there was a bit of fill in the industrial channel that may not sustain, it will be good but it probably won't be at the same kind of growth level.

The goal in that business is 15 percent ROS and Mike Schrock and the team there are totally committed to it.

So I think I don't think we'll be seeing a lot more 400 basis point improvements year-over-year.

I think that 15 percent is a couple years away anyway, but I think we are back up to a level that we should expect this business to be able to operate at or better.

Finally regarding Everpure, I think you mentioned that it was accretive to earnings in the first-quarter.

Do you know how much accretion that contributed and also how much revenues?

Yes we do.

We generally don't go down into the individual businesses that far, but it was accretive and it met our expectation in terms of what we had talked about earlier in terms of --

Modest increases, the beating expectations was we weren't really expecting a lot of impact in the first-quarter.

Great, thank you very much.

Ned Armstrong of FBR.

Good morning.

With regard to the Enclosure markets going to some of those growth initiatives that you saw in the medical, security, defense markets, what proportion of total Enclosure sales did those markets account for, and how do you see that percentage moving in the near and intermediate-term?

Let me give you the mix that we -- we bucket -- those networking and security and defense -- security, defense and medical all fit in what we call our electronics segments.

Electronics, a year ago Electronics was about 18 percent of our total sales and now it's about 22 percent.

A lot of that growth -- some of it was just the general and commercial electronics market coming back, but a lot of it is some of our medical and security programs kicking in at a higher sales level.

The other news is a year ago telecom was 10 percent and it's closer to 13 percent of our sales, and industrials was 50 percent and dropped to 44.

We are seeing that mix shift back, not because of industrial shrinking but because the other ones are growing at much faster rates than industrial as they come back.

Do you think that 20 percent, all else remaining the same, that 22 percent can go to say 30 percent as you exploit new niches or is it unrealistic to be that aggressive?

I'd use a quarter, a quarter plus maybe, 25 percent plus.

That's mostly because I think as telecom returns to a more normal level, it's going to -- telecom and datacom together are going to be closer to 25 to 30, and industrial will probably be 40, 45 and commercial will be -- may not add to 100 here, five to ten.

Secondly with regard to organic growth in the water business.

Do you think high single digits is, without acquisitions, a reasonable rate to assume going forward over the next several years?

That is the one we are assuming, yes.

Anything that could cause that to be greater?

If there was a real surge in people wanting -- an additional surge of people wanting filtration for water, home filtration or commercial filtration, that could be an upside.

The international growth markets, we have a lot of traction.

They are still small for us, but they were up 40, 50 percent and if we can make that 100 percent a quarter, that would yield a lot.

I see those as upside.

I think the pool business is -- it's hard to say that there is upside from the current run rate.

I think filtration and international would be the upside.

Thank you.

Harry Shalury (ph) of Langenberg & Co.

Actually, it's Brian Langenberg.

Good quarter.

Just want to dive into -- and I'm going to try and limit my question to something you might be able to answer on a conference call.

When we go into Enclosures specifically, two aspects.

Number one is, can you talk at least in round figures about, say, what percentage of your raw material buy was either hedged or contractual versus spot?

Then the second thing is talking to your major European competitor last week, at least about the European market, apparently they haven't even put through or tried to put through a price increase yet.

Can you comment a little bit about perhaps -- have you even tried to take a price increase yet in Enclosures on the European side or -- two parts to the question?

Have you got the mix, Dave?

I don't have the exact mix.

Round figures is fine.

Enclosures is about, overall, maybe 35 -- 30 percent.

Hedged?

Oh, how much is hedged?

Well, let me repeat that; hedged or contractual.

Contractual as opposed to hedged.

If I said hedge, I misspoke.

But it was long-term contracts.

I would say --.

Less than 10 percent of our longshore (ph) process (indiscernible), so if you look at all of our raw materials that would be hedged, something less than --.

All of our steel was.

For Enclosures specifically?

He is talking about Enclosures.

We basically, all of our steel was bought, I'd say 90 percent was on long-term contract.

Ninety percent on long-term contract.

Right.

Yes, but those long-term contracts will be coming up here in the summer.

Was there some pass-through built in in these contracts already, or they were pretty firm?

There were some surcharges, yes, we've been seeing some surcharges.

Okay, and that's good to know.

Then can we talk a little bit about, I'm not going to say price in Europe, but have you guys tried to put through price yet in Europe on the Enclosures side?

I'd rather not go into specifics about where we've done it.

We have been proactive in Enclosures, overall, on price increases, and leave it at that.

Thank you very much.

Larry Baker of Legg Mason.

Can you, Dave, just tell us what was the cost of buying in your Asian joint venture?

What did you invest, spend on that?

The final cost to take the last 51 percent, was something a little over $20 million.

Another question.

The corporate overhead jumped fairly significantly this quarter, and you mentioned several things that affected SG&A.

Was that the same thing or is that --?

That is part of it.

SG&A covers the entire company but if you look at specifically where we call it other on the sheets that we put out to you, which is the corporate that is not allocated out.

We've seen, with the increased profitability that we're seeing now and we're also forecasting, we've seen increases that will be there in corporate in the bonus and profit-sharing program.

We have business development activities which are up for WICOR and the Tools' activity, and we will have additional costs for that.

And the internal and external audit costs that we're seeing, both from the standpoint of additional hours, as well as higher rates on the cost for the 404 compliance project, all contribute to that being up.

We don't expect that, as we go throughout the -- and also the insurance programs that we've got contributes to that too.

We don't expect to see that kind of a number in each one of the quarters but we think as we go forward the run rate will be somewhere in the range of $6.5 million.

Okay.

Finally, you talked around this, but in the Enclosures is the 15 percent sales growth on an organic basis, is that maintainable for the rest of this year?

No, I'd use high single digits, but don't tell them I said that.

Thank you.

Debra Coy of Schwab Capital Market.

Not to overdo this commodity price issue, but can you give some sense of your exposure relative to the segments?

In other words, of Tools is presumably going away in about the third quarter and we are left with Water and Enclosures, how does that compare relative to the exposure that you're looking at now on the commodity side?

Let me see if I can answer that.

If you look at where we were in the first quarter, the exposure for the Tools side was almost twice the exposure for the other two businesses added together.

Okay, well that actually does answer it.

So then when, Randy you said earlier, when you're talking about the -- to the question earlier in terms of looking at the upside, downside within the earnings outlook range, excluding Tools, certainly your issue of managing supply costs gets less.

That's fair to say, right?

And we have more degrees of freedom to manage our pricing on --

You mentioned Enclosure particularly, that you have freedom on --.

We have really good positions in Enclosures.

And since metal is a pretty important part of our business there, we have a really great team managing it.

Yes, I understand.

And also, you have volume as well.

Coming back then to the water side, can you give any more specific color on the segments?

Obviously we have talked about pool and spa and you mentioned some of the other ones that were up, water treatment conditioning, valve shipments, filtration.

Any more specifics on what kind of trends in organic growth you are seeing in those segments?

Where is the better, where is the -- you mentioned municipal pumps as being relatively weaker.

Can you kind of talk a little bit about the trends that are driving those?

In other words, water treatment and conditioning up how much?

Driven by what?

What's driving valve shipments to a new record?

Any more color on those?

We think the return of the commercial business, particularly in the water filtration area, has been very helpful.

The commercial -- what was hidden in our water numbers was our commercial business declined a lot in the downturn, and it's really beginning to come back.

And we're seeing it first in filtration and in the valves.

We haven't seen as good a commercial valve market as we saw in the first quarter in probably three years.

Then on the filtration side, I think we continue to do a good job of capturing new OEM business as well as it has a really nice growth profile.

There are new applications for the OEMs and we're just beginning to get into Everpure to see how we can boost the organic growth there.

But their organic growth was very good in the first quarter.

Is the appliance type OEM business?

The Everpure is straight commercial, (indiscernible) and the OEM business on the Plymouth side, there is some undersink, there is some appliance, there is some plumbing, faucet type business, filters in the faucet.

There is a pretty broad range.

That helps.

And then in pool, Europe was good but again the same things.

Pool, the pool business, which is -- for us that is more than just marketplace growth.

We have low share in the pool business in Europe, so we are trying to gain share there.

And then again the valve, the water treatment valve business picked up over there.

And then last question, can you -- I haven't had a chance to try and look through results.

I don't know if WICOR or Wisconsin Energy has even reported first-quarter, but can you tell us if WICOR is seeing some of these same trends and --?

I can't.

I won't see the numbers until they release either.

They haven't released yet.

Okay.

That is what I didn't know.

I haven't seen it.

Thanks very much.

John Quealy of Adams Harkness.

Good morning.

A quick question on the distributor relationships.

You mentioned both on the Waterside, you got some new distributor relationships as well as some success over the past year in Enclosures.

Can you comment a little bit about how things are going according to your expectations for signing up new distributors?

And what we can look for or what you folks are looking for the rest of '04?

Sure.

Let me answer the second question first.

When we talk about that mid to high single digit organic growth, that incorporates already our actions to add distribution.

Let me go to question one.

Our philosophy is that even industrial business, you can grow market share if you focus on the market enough.

So we've defined vertical markets.

We started with Enclosures and that were doing it in Water, vertical end markets that we can focus on and then we look at our market share by vertical end market and by geography by municipality, and determine what our sales are in those regions and then use that as a surrogate for deciding where we need to make additions to distribution, if obviously (indiscernible) flow, that's what we need to add.

We've been doing that with Enclosures now for five years and as I mentioned we added over 100 just over the past year that impacted favorably Enclosures in the first-quarter.

We're beginning to do that in Water and that's going to be a process that we do in every single business.

That's our philosophy and how we approach it.

I'm not sure will get 100 a quarter, that's 100 we've added over the last year in Enclosures.

There has been a number in Water as well.

But that philosophy is what's going to drive our share gain in what I call the blocking and tackling category.

Following up on the water orders up 25 percent, without getting into specifics can you characterize where some of the strength is coming from, whether it was pool and spa, filtration, treatment pumps, etc.?

Sure.

Well I meant pool and spa was the highest, over 25 percent growth, and then the water treatment and filtration business was next and the pump business was the lowest.

North America was higher than Europe, but Europe was still double-digit, and Asia was 40, 50 percent, very high.

Finally, a housekeeping question.

With regard to the tax rate, should we assume a 35 percent rate moving forward here in '04?

I think that would be the best assumption, yes.

Thanks, congratulations.

Bing Lin (ph) of SoHo Capital.

I want to focus on the Tools business a little bit.

In the Asian Tool joint venture, could you tell me what type of tool this joint venture is producing right now?

It has produced for years, that joint venture, now a wholly-owned part of our company, has produced the stationery and benchtop tools primarily sold under the Delta brand-name.

They also make actually -- we have an Enclosures operation located in one of the factories and we have some Water production associated with one of the other factories.

That's primarily it.

Great.

Also Black and Decker recently announced they just invented some type of cordless nailer.

I want to understand what is the impact on your pneumatic tool business?

I haven't seen it yet, the cordless nailer.

There are a number of cordless nailers out there and it's a battery operated cordless nailer, finishing nailer, I believe.

It should be interesting.

We are really large in the contractor segment and corded, the cord being a hose in this case in the pneumatic.

This product won't compete heads up with that.

We have a battery operated cordless nailer that is actually a brand nailer, not a finishing nailer.

Not quite an overlap.

What percentage of your Tools sales is strong (indiscernible) market?

What's that?

What percentage of your Tools sales is from DIY market?

If you go back to our 10-K we have broken that out, and about 58 percent of the sales go through three DIY distributors.

Thank you.

Last question would be, any more detail on the strategic or alternative for the (indiscernible)?

We mentioned we weren't going to do a play-by-play on that when we announced it, but it's proceeding according to (indiscernible).

We expect to have it completed by the end of the third quarter.

Thank you.

There are no further questions at this time.

Thank you very much for your attention and, Tracy, if you can give them a callback number if they want to hear the recording, please do.

We're out.

Thanks.

Thank you for participating in today's Pentair, Inc. first-quarter 2004 earnings release conference call.

This call will be available for replay beginning at 3:00 PM Eastern standard time today through 11:59 PM Eastern standard time on Friday April 30, 2004.

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