濱特爾 (PNR) 2004 Q2 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the second quarter 2004 earnings conference.

All lines have been played on mute to prevent any backgrounds noise.

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

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

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

Thank you.

Mr. Harrison, you may begin your conference.

Good morning, everyone, and thank you for joining us for this conference call to discuss our results for the second quarter of 2004.

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

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

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

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 since then.

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

Actual results could differ materially from anticipated results.

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

Hello.

Thanks for joining us for our second quarter 2004 conference call.

The second quarter operating performance turned out every bit as terrific as our stellar first quarter.

The FDC cleared the acquisition of WICOR Industries and we recently announced an agreement to sell our Tools Group.

These last two milestones are particularly significant in that they propel us much closer to our goal of transforming Pentair into a focused yet still diverse operating Company doing business in the Water and Enclosures arenas.

We expect that this transformation will be complete in 2004.

Meanwhile we have some excellent results to share with you today.

Consider these highlights of our second quarter performance: sales were up 13% or 10% without acquisitions and currency translations.

Water sales were up 22% and earnings were up 29%.

In Enclosures sales were up 23% and earnings up 85%.

Operating income of $96.5 million is 26% higher than in the same period last year.

Operating margins of 11.9% are 130 basis point improvement over last year.

Earnings per share in the second quarter totaled 55 cents, a 25% gain.

And this was our 9th consecutive quarter of year-over-year EPS improvement.

And finally, our free cash flow of $100 million for the quarter puts us well on the way to achieving our free cash flow goal of $200 million this year.

That's a lot of good news for a short three months, and the icing on the cake was the FTC's clearance of the WICOR acquisition and inking the Tools deal with Black & Decker.

Now let's look at some of the details starting with water.

In water sales for the quarter grew more than 22% compared to last year with solid growth across all of our businesses.

Excluding the contributions of the Everpure acquisition and the effects of currency translation water sales still grew 15%.

The group's operating income of 353 -- excuse me -- the group's operating income grew nearly 30% in the second quarter, nearly all the water businesses contributed to higher margins, marking the third consecutive quarter where margins have grown buy at least 100 basis points year-over-year.

Increased volume along with supply management savings and productivity improvements drove enhanced profitability across the group.

Pool and spa equipment sales grew substantially in the quarter with pool building in the sun belt and replacement sales nationally driving most of the growth.

Operating profits and margins increased as higher volumes and productivity benefited the bottom line.

Our focus on improved customer service and delivery performance is yield -- yielding results too, with on time delivery exceeding 90% in June.

Sales in our Water Treatment business grew in the high teens with water conditioning control valve shipments breaking the record set in the first quarter.

Both residential and commercial valve sales grew in the double digits.

Tank sales supported by the addition of our new Brine tank line were also strong in both the residential and commercial markets.

Margins at Water Treatment North America reached a new high in the second quarter.

Filtration sales in North America grew in the quarter over last year, even excluding the impact of the Everpure acquisition.

And Everpure sales and margins were strong as well and their profit contribution for the first half of 2004 is ahead of schedule.

In Europe, risk valve sales complemented positive results from our pool equipment growth initiative driving double-digit organic growth.

Our on time delivery performance in Europe hit 97% in the quarter, notable in view of the expansion we are making in support of our European pool growth initiative.

In pumps, our water systems business had a very strong second quarter as did our residential sump and effluent lines.

Margins improved nicely with particularly good performance at the Ashland operations which benefited from increased volume, improved pricing and higher productivity.

Shipments from the Ashland operations also set a new record for the quarter.

We won a significant order from Wal-Mart to supply fire systems for 46 of their stores.

This is our second major fire system win in the commercial construction market following similar success with Target.

Municipal orders in the quarter were strong marking our second highest quarter ever.

In fact, we won two significant orders from municipal waste water projects in northern California and backlog in the municipal business is the highest that it's been in recent years.

Before moving on to the Enclosures Group I would like to note that the FTCs clearance of our acquisition of WICOR Industries marks a major milestone in the transformation of Pentair.

When we complete the transaction effective at the end of July, we'll have created a leading water and waste water systems business, a global pool and spa equipment business and a broad based filtration and purification business.

We will also have stronger global presence.

In the first half the water group is tracking to our goals of 15% sales growth and achieved 15% operating margins.

With WICOR we will reset the starting point on operating margins and drive right back to 15%.

We are very enthusiastic about the opportunities ahead of us in the water business and trust that our investors, both current and perspective, share that enthusiasm.

Pentair's Enclosures Group delivered 23% sales growth in the second quarter 2004.

Excluding the impact of favorable foreign exchange, sales improved about 21%.

Second quarter operating income in the group increased 85% from the same period last year and margins improved 400 basis points to 12.1%, 100 basis point improvement from the first quarter.

The second quarter 2004 was the Group's 10th consecutive quarter of margin improvement.

Hoffman sales increase reflect improving demand and market share gains generated through the success of our growth initiative.

Hoffman's ability to quickly respond to higher demand has also been a key factor in enabling the Company to capture new share and grow faster than the markets it serves.

Equally important our supply management activities have secured steel supplies to position us very well relative to our competition, many of whom are buying steel on the spot market.

Our supplies are reliable and protected and have given us a clear edge up on the competition in a market where the ability to meet demand quickly is a key factor in winning and keeping customers.

Hoffman's operating income continued to set the pace for the Enclosures Group finishing the quarter with margins at an all time record high.

Productivity gains were generated by leveraging PIMS activities on higher volumes which continues to support our margin growth.

At our Pentair electronics packaging business the re-emergence of the telecom market has benefited our sales already and we have a nice pipeline of wins that will fuel further growth between now and year-end.

Dependable performance during the telecom downturn has drawn OEM customers to our offerings as other competitors have either disappeared or significantly scaled back, providing us with new program opportunities on all fronts.

PEP's operating income improved dramatically over last year.

This quarter marks the highest margins at PEP in over three years as efforts to transform the business mix continue to gain traction.

This effort combined with continued cost control and shifting more manufacturing to lower cost labor markets is increasing profitability.

Sales in Europe grew in the quarter as order activity at large OEMs, particularly in the test and measurements, automation and control and telecom segments, belie the fact that base business activity remains somewhat sluggish.

It's also worth noting that about a third of the growth came from new customers.

Europe's profit results were also outstanding in the quarter.

And our Asian Enclosures business continues to develop with sales increasing about 50% in the quarter.

In summary I'd like to point out that the genesis of the Enclosure groups strong organic growth can be found two years ago during the darkest days of the capital spending decline.

Back in late 2001 and 2002 we were working hard to get our costs in line with the market conditions.

But we also began to invest in new vertical markets that held great potential.

It was that investment, made during a time when our competitors were focused on retrenching only, that has led to the groups outstanding organic growth momentum.

In security and defense our focus market efforts have positioned us to win.

For example, U.S.

Postal Service has awarded two key projects to upgrade security on which Hoffman will provide the cabinet.

Additionally, Graybar, one of our largest distributors, has added over 2300 of our products to its GSA schedules at the request of a major defense contractor.

Even outside the U.S.

Enclosures business continues to garner security projects with wins in Europe and Canada.

Another focus growth market, the medical market, continues to generate a strong base of business.

With the group having won its fourth program at GE Medical, supporting CT scanning equipment, as well as a third electronic rack monitored product as a major medical instrumentation producer.

We introduced four new products for the datacom and data storage market and released a major line of server rack accessories, gaining commitment from two of the industry's largest players for their high volume server accessory programs.

We anticipate that our early investments in growth and Enclosures will continue to generate many new wins in the months and years ahead.

In Tools, sales of $283 million equaled those of the same period last year.

The group benefited from stronger sales of portable power tools and stationery bench top tools and industrial channels, new pressure washer sales in a major home center, stronger international sales and sales of new private label power tools.

This improvement was offset by price decline in some lines, the change out of accessories at a major home center in advance of a relaunch we anticipate a little bit later this year, our removal of a couple of pressure washer SKUs in the club channel and the bankruptcy of a major woodworking customer.

Operating income of 23 million was equal to that of the same period last year as the effects of competitive marketplace pricing, higher raw material costs and one time costs combined to offset higher productivity.

Strong sales to industrial channels was driven by a broad range of new products including nailers, compressors, circular saws, saw blades, miter saws and pressure washers.

Although sales soften in June industrial channel sales return to normal levels during the first three weeks in July.

Service center revenues increased as well reflecting continued strong demand for accessories and expendables.

Looking at sales from a product perspective pressure washers were strong in the second quarter as we shipped a large initial order of pressure washers for Canadian tire.

These pressure washers are sold under the Simonize private label brand.

In June we also shipped a new tecumseh powered pressure washer into Sams Cub, to supplement the Honda power SKU currently in the lineup.

A major customer has committed to support the new quarter cable 10-inch compound miter saw featuring the industry's largest cutting capacity and a successful sell through of our new range of nailers continues to do drive the pneumatic business.

The pneumatic saws continues to do very well in the market with sales ramping up in all channels.

Mag saws with a new break feature will begin shipping to industrial channels next week.

Product development continues to be a core focus of the Tools Group with 68 new products launched since the beginning of the year.

I'd like to conclude the discussion of the Tools business with some brief comments about our agreement to sell the group to Black & Decker.

Black & Decker is a recognized global player in quality power tools and accessories, hardware and home improvement products and technology based fastening system markets.

Importantly the Tools Group will now become part of the core of Black & Decker's business as they are deeply committed to the tool industry.

We believe they will invest in and build upon the strong Tools Group organization that we have built over the last 20 years.

Black & Decker has repeatedly demonstrated that they can grow and sustain strong brands.

Their track record and leadership in the power tools industry presents the Tools Group with new and very real opportunities to further deepen customer relationships, to build more quickly upon the impay -- upon the innovation platform and to access the resources necessary to drive even greater growth.

Throughout the process Black & Decker was a front runner.

The fit between their tools businesses and ours is excellent with both complementing the other in terms of products, markets and customers.

They are also several strong parallels between our Tools Group and Black & Decker, including strong reputations for innovative products, premiere brands and broad channels.

These similarities bode well for the future of the Tools Group.

I would like to take the -- this opportunity to publicly acknowledge the tremendous job that the people in our Tools business have done over the last five months.

They fought through difficult circumstances in a demanding marketplace and through it all remained dedicated to the business and professional in their approach.

The Tools Group is a very strong team defined by its personal integrity and a shared desire to succeed.

And the business of it has potential tremendous potential to grow and expand it beyond its current performance.

Thank you, Tools team.

Dave will now address financial topics in his comments.

Dave?

Thank you, Randy.

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

Just to highlight a few of the many improvements, EPS increased in the second quarter versus last year by 25%, 55 cents versus 44 cents.

All of the EPS numbers we are discussing and reporting on today are on a post stock split basis.

The 55 cents reported for the second quarter represents a record EPS for any historical quarter and is 3 cents higher than both the top end of our guidance at the beginning of the quarter and current analyst expectations.

Most of the upside emanated from continued volume improvement and productivity.

Return on sales of 11.9% represents the ninth consecutive comparable quarter-over-quarter increase in operating margin.

Our debt to total capital ratio which ended the quarter at 35.9% was down from 38.3% last year, even with the acquisition of Everpure.

The 35.9% ratio is below our target level of 40% while supporting dividends, seasonal fluctuations and working capital, a 17% year-to-date increase in sales, and 7 acquisitions over the last 2 years totaling $410 million.

Continued productivity from working capital which is now 11.1% of sales on an annual average is down 70 basis points from the beginning of the year.

We are particularly pleased with the free cash flow from the second quarter at $98.8 million, bringing the first half cash flow to $94.7 million, a $36 million improvement compared to the first half of last year.

Higher margins coupled with continued improvement in working capital productivity are having a significant impact on our ability to generate consistent, positive cash flows.

Our 12 month average EBIT ROIC was 15.4% at the end of the second quarter, a 170 basis point improvement over the second quarter of last year.

As we have communicated in previous discussions this is one of our major goals and we continue to focus on improving productivity in both our balance sheet and income statement.

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

We are continuing to improve the quality of our financial performance.

Operating income margins for the year were up 130 basis points over the second quarter last year and 240 basis points higher than the first quarter.

Our gross profit margin in the second quarter increased 200 basis points from the second quarter of last year and is up 190 basis points for the first half.

With the inclusion of WICOR as of August, 2004, our water operating income margins for the rest of the year will be lower by roughly 200 basis points compared to the prior year.

This lower margin is due to the lower initial WICOR margins versus the Pentair higher ongoing water margins and the anticipation of one time costs associated with integration.

We are expecting margins to improve in 2005 as we are able to impact the base business of WICOR and start realizing the benefits from synergies.

As I mentioned in the first quarter call we are still 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 and ocean freight and fuel and in healthcare and in insurance.

We have selected -- we have selec - been selectively raising selling prices to help cover the additional costs of many of our products.

Our goal is to keep improving our total Company margins.

SG&A costs were up 80 basis points in the second quarter and first half compared to last year.

This first half increase is primarily due to non-recurring and new expenses such as the downsizing cost as we close our Mississippi tool factory, outside support for integration planning for the WICOR acquisition, M&A expenses related to both the WICOR and Tools activities, and higher costs of doing business in this environment of increased corporate governance.

These costs include Sarbanes-Oxley compliance, insurance and external audit fees.

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

Research and development expenditures continue to be about 1.5% of sales for total Pentair as all three of our segments continue to invest in new products for the competitive marketplace.

Interest expense for the second quarter of 2004 was higher by $1.4 million compared to last year.

Great cash flow generation over the last year reduced debt such that even with the recent acquisition of Everpure, interest expense would have been the same as last year.

The $1.4 million increase is primarily due to fees related to our bridge financing.

As we mentioned in February, an $850 million bridge facility has been put in place to bridge the period from the closing of WICOR transaction until we have completed the sale of our tool business.

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

The second quarter 2004 effective income tax rate of 35% is one point higher than the 34% rate of last year. he higher rate is due to our increased level of profit, the anticipated mix in the 2004 U.S. and foreign earnings and the fact that many of our tax savings programs are relatively fixed.

Based on our current knowledge of WICOR tax rate we will see a 50 basis point increase in our overall blended tax rate in 2004 to 35.5% and a 100 basis point increase in 2004 to 36%.

As part of our acquisition strategy we are pursuing rate reduction opportunities which could improve our effective tax rate.

We continue to make excellent progress on working capital productivity.

Productivity of inventories is measured on a 13 month rolling average, improved from 65 down to 61 days.

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

Receivable days again saw another improvement in the annual average, moving in the current quarter from 58 to 54 days.

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

Both water and Enclosures saw double-digit increases in orders in the second quarter with Enclosures up over 20%.

We continued in the second quarter to show book-to-bill ratios for both groups at 1, even with the strong sales experienced in the quarter.

All three groups left the quarter with strong backlogs.

Due to the timing of the divestiture announcement for Tools, we will not be accounting for them as a discontinued operational until the third quarter reporting.

The impact on discontinued operations from the sale of Tools is somewhat dependent upon the timing of the transaction.

However, we currently expect to be roughly neutral to the income statement and tax leakage should be minimal.

For your convenience we have provided a preliminary analysis of continuing and discontinued operations for the last 6 quarters of reportable business segment results.

This schedule was attached to our press release issued earlier today.

As you can see without Tools the overall Pentair's sales growth for the second quarter was up 22% and 24% for the first half.

Subtracting acquisitions and foreign exchange impact the pure organic growth for the second quarter was up 17% and 15% for the first half.

Our continuing EPS for the first half of 2004 is up 46%.

On a final note assuming the Tools transaction closes before year end, we expect to leave the year with debt in the range of 30 to $50 million below the 860 -- $806 million we ended in 2003.

Our cash flow certainly supports the additional investment in converting the assets of our largest business, Tools, into a $2 billion water business with higher growth and margin prospects.

This transformation, while supporting growth in Enclosures and raising dividends for the 28th straight year, is designed to continue Pentair's long history of superior shareholder return.

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

Thanks, Dave.

The second quarter was a success in many different ways.

But it all boils down to three things: setting expectations, executing to meet those expectations and then delivering results.

We did that in spades during the second quarter.

We also split the stock and raised the dividend and we are on track with the process of transforming Pentair that we first outlined on February 4, 2004.

The WICOR transaction is set to close at the end of this month and the sale of our Tools Group to a strong and well recognized buyer has been announced.

So for the remainder of this year we will be focused on executing integration plans for the WICOR water business, completing the sales of Tools, and sustaining the strong operating performance momentum that we've built.

The transformation of Pentair is nearing completion.

We are becoming a stronger, more nimble company.

Moreover, we will charge ahead to deliver on our commitments.

We've provided a preliminary financial schedule reflecting the accounting discontinuation of Tools.

Looking to the future on a continuing basis, we expect third quarter EPS of between 29 cents and 34 cents, and full year EPS of between $1.28 and $1.38.

This is in line with our prior guidance.

More importantly, in 2005 we expect continued operations EPS of $1.95 to $2.10, a 50% EPS growth.

By 2005 we expect to have swapped the EBIT of our Tools business in the dynamics of the tools market for the EBIT of WICOR and the prospects of the water business, all for a net cash outlay of roughly $100 million, or about half a year's free cash flow, with no dilution from prior expectations of $1.99.

That's a pretty good trade in my book.

Thanks for your attention.

I would now like to turn it back over to the operator.

And if you'd please give directions on the Q&A?

Take over.

At this time I would like to remind everyone that if you would like to ask a question, please press star then the number 1 on your telephone keypad.

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

Your first question comes from the line of Dan Whang of Lehman Brothers.

Yes, good morning, Randy, good morning, Dave.

Hi, Dan.

Just wanted to start off the questions in the water segment.

Could you provide a little more detail about the growth trends that you saw by the various regions that you serve?

Sure.

The -- you know, our developing markets continue to be our strongest growing markets, India and China, from a small base, where they continue to grow very, very sharply.

The interesting thing is both Europe and the U.S. grew and we grew in all three segments.

The pool business continues to be a very, very strong business, albeit it didn't grow as much as it did in the first quarter which was probably good because, you know, we've been -- we've been ramping up production and improving our customer service at the same time.

Pumps was strong across the board in the U.S.

And then we were particularly pleased to see how well the valve business did in Europe.

So I guess I'd have to say it was pretty broad-based.

I don't know, Dave, whether you'd add anything specifically to that.

No, I would agree.

We had great growth across all the -- the businesses.

Okay.

And I think you talked about also the strength that you saw in the municipal market regarding your pump business.

Yeah, that's on the orders side, the cycle time between orders and shipments on the municipal business is the longest.

And, you know, we had a lull in our orders and that's hitting our sales today.

We haven't enjoyed much benefit from the higher orders rate.

So that goes into the backlog.

And we've got a pretty big project that will be shipping at the end of the year this year and these two wins we just had are actually for next year's shipment.

Okay.

But it's -- it's heartening to see the backlog growing the way it has been.

Right.

And, you know, in terms of the WICOR acquisition, I think, you know, seems like you had been looking at the whole integration planning for some time now.

Could you provide a little bit more detail, maybe just an update as to where you are?

I think you meet frequently with the group over in WICOR, but which functional areas of the Company or operations will you hit first and maybe just a little bit more detail so that we could all get a better feel around that.

Sure, be glad to.

As we've said before we have 14 integration teams and there have been about 100 people on both sides, WICOR and Pentair water, involved in those 14 integration teams and they have been split functionally in terms of supply management all the way to IT, and by business, so we could look at end markets, and by support functions.

So we looked at legal and we looked at finance.

Those teams have completed their work.

The plans are in the can.

And we are ready to execute the plans.

And let me give you -- let me give you some texture on that.

First, the organization is set.

In fact, the top three layers of the organization have been assigned and announced.

Everyone on both WICOR and Pentair water know what the organization is going to be on day one.

And in fact 36% of the top 135 managers are coming from WICOR.

Further we've unified all the titles, all of the pay scales have been -- have been set to be consistent across the business.

So, we will actually have a lot of the administrivia, important administrivia, done at the outset of the business.

W've also prioritized.

We've analyzed every spend category, both direct and indirect, and we have -- we have specific plans to be implemented in the supply management arena which will be the highest priority.

We also see a priority in terms of streamlining our operations.

And we are particularly encouraged by what we see are some growth opportunities, leveraging our combined China assets and in fact we are looking at leveraging our Enclosures Mexico capability to help improve margins.

That looks very promising.

I am not going to get into a lot more detail on that because we like-- we like - we like the business to take the lead on that.

And finally we have 120 -- the top 125 of managers of water here today for the rest of this week to go through those plans in detail.

And we are going to be working with them to make sure that come the beginning of August we have those plans being executed, not being talked about.

Great.

Well thank you for the details.

Now, in terms of the guidance for the rest of the year, I just want to clarify that that does not include any contributions you expect from WICOR?

It basically, you know, it does include WICOR but right now we are going to hit the ground running on the integration.

And so we are seeing more cost.

We are going to see the costs before we see the synergies.

So we actually have costs loaded in without a huge amount of benefits for the remainer of this year and we see synergies kicking in next year and they'll exceed any costs, so.

That's -- that's already included.

So essentially we -- in the -- what's been given in the guidance on the continuing basis is per the accounting direction of how you have to run discontinued.

We have -- we've got WICOR for 5 months, the cost of integration for those 5 months, we've got the financing costs in, and then in discontinued is basically just Tools and what we can charge to Tools, which is not everything that -- everything that we would have charged on a continuing basis.

And I would like to remind everybody that we in our plans we've got about $30 million of net benefits in the first year of synergies from WICOR and we got about $40 million in working capital, or cash flow increment. .

So those are in the numbers we have given.

And I think it's important to note that when you add up all the things that Randy just talk about in terms of what's in there, you put both continuing and discontinued together, we are pretty much right where the guidance was for total year EPS.

All right.

Okay.

And, great, and one last question on Enclosures.

I mean, that business had great margins in the quarter.

I mean, where could that margins ends up as we exit this year?

The goal of the business, and let me clarify this because I'm not saying the end of the year, the goal of the business is to get to 15%.

I don't think we will be at 15% by the end of the year.

But I think we will see a little bit further margin expansion.

So I would think the exit rate will be a little bit above where -- where their performance is in the second quarter.

I don't think -- I don't think we will be getting 400 basis point improvements a quarter year-over-year much longer.

I've asked for them but I don't think they are going to happen.

But with that said, I think we are still going to see continued improvement in terms of margin.

Okay, great.

And the goal is 15%.

I would like just one thing, Dan.

We feel pretty good about being able to take such a big contributing part of Pentair as it shows in, I think last year, it was 46 cents and the discontinued operations as we show Tools on a -- in 2003 about 46 cents.

That's a big piece of the earnings of this Company.

And we -- we -- we feel pretty -- pretty good and confident about our ability to get back and replace that within a year.

We think that's -- we think it -- while it's a little bit ambitious, we are confident we can do it.

Great.

Thank you very much for all the details.

Dave, you wanted to clarify something, I think?

Yeah, I think when I was going over the expected tax number, I believe I misspoke and said that the increase of 100 basis point that we would see from WICOR coming in was for 2004.

And what I meant to say was 2005.

We are going to see approximately a 50 basis point increase over our current tax rate of 35 in 2004, and then 100% next year which would bring it to 36%.

Your next question comes from the line of Deane Dray of Goldman Sachs.

Thank you.

Just if we go back to the third quarter guidance for a moment just to clarify.

I understand that when you do close that you are going to see mostly costs and not, you know, some of the revenue synergies and so forth right up front.

So you are going to get two months of WICOR.

And then you'll have a full fourth quarter.

The benefit based upon your '04 assumptions, is -- should WICOR be neutral or slightly dilutive in that kind of stub year?

I think as we -- as we enter into this third quarter we are looking at it being somewhat neutral.

And then as we go into the fourth quarter, with the benefit of having three months as well as some of the synergies that's going to be coming into it, then I feel quite sure it's going to be accretive in the fourth quarter.

Okay, good.

That's very helpful.

And then when you go -- the way we should think about the discontinued business for Tools, is there any reallocation of corporate expense?

Because, you know, prior to the move you had three segments to allocate headquarter expenses, you guys are running pretty lean, but what goes there?

I'm really impressed with our finance group going from basically Friday night when we inked the deal to today to have figured out how to discontinue the ops and they have spent a lot of time.

The rules are pretty clear on what you can charge to discontinued ops.

And essentially, and Dave, correct me if I'm wrong, basically they get no corporate charges, is that right, or very little?

Very little, only that which can be allocated directly to them, that is their expense and anything that would go away or go with the business as it goes.

That's the only thing.

So in essence our -- in essence I think it's fair to say that you can see our -- all, the whole corporate charges essentially is still in continuing operation.

Okay, good.

That's very helpful.

That's fair.

Then just quickly on Enclosures, when we see that kind of core growth, did they benefit in any way of a channel sale, previous quarters you've added some new distributors, so are we include -- are you including that in your core numbers this quarter?

Well, certainly in the growth.

I think there is some channel fill but I think when you take a look at the source of the growth and you look at some of these new businesses like the datacom networking business for Hoffman and like the security wins and the OEM wins, those aren't channel fill, those are -- those are really the focus on the end market.

So I can't give you the split right now.

I've got a ops review on Friday with Enclosures so I'm sure we will spend a little -- little bit more time delving into it.

I really do believe we are gaining market share and I think our focus on end customer applications is superior and not just doing it.

Great.

And that core growth was 21%?

Right.

Okay.

Thank you.

Your next question comes from the line of Jim Lucas of Janney Montgomery.

Thanks.

Well, Randy, given we are talking about the market here and it's what have you done for me lately, and we've got to think, okay, you got WICOR taken care of, Tools potentially sold, you've got the integration period.

At what point do you revisit the acquisition program?

I hope Rick Cathcart's not listening.

You know, I think, we will never take our eye off of what opportunities are out there.

We want to be a consolidator in water.

We are actually beginning with the performance we have in Enclosures.

In our strategy process right now, we are looking at what -- what expansions might make sense.

I think we've talked about before, we don't need capacity.

We don't need Enclosures capability.

But there may be some capabilities we don't have that would augment our program, so we are looking there.

But our focus right now is on the integration and there's no doubt within this Company that the integration of WICOR is job one, two and three.

So, while we'll look out there I don't anticipate anything big for some time to come.

So, does that mean a year goes by?

Or?

You are not going to commit to a time?

I am not going to commit to a time line because I think -- I think it's -- it's going to be dependent on how quickly things come through on the integration of WICOR.

I am really -- I'm really optimistic because of the strong planning and the strong team we have in water that it's going to go very well.

But I also know stuff happens.

So, I think, a note of caution is good.

Okay.

And taking a step back, you've done some smaller deals over the last couple years, building the filtration, it's good to hear that with WICOR you are also acquiring some good management.

With the Everpure in Plymouth, can you give us an update on how those integrations are going and any -- any significant changes there, positive or negative?

The Everpure, let me start with Everpure, it's the newest one.

You know, we've rolled in our standard operating reporting system.

We have integrated, started with PIMS in supply management and as we mentioned we are actually ahead of schedule on income and the growth is very good.

And we are working on some ideas to drive that growth further that are very exciting.

Plymouth got off to a great start, as you know.

It is facing probably more pressures right now on the material cost side.

So we are working hard on lowering the cost base there.

And fighting off the material gains and getting what price we can.

But we feel good about the growth and we feel good about the position.

I think we were going to focus a lot on -- on -- on the vertical market approach we've used in Enclosures and other parts of water to find ways to improve our application products to end markets.

We do a lot of OEM business in Plymouth so the price pressures in OEMs are a little bit higher, which is a cut more base(ph) in Plymouth.

But I feel really good about the implementation of PIMS there in supply management and as I think we mentioned before we've actually moved the molded carbon block business over to China and that's ramping up well right now.

And we've got a nice integration of filter -- filter supply to the pool business that is ramping up right now, too.

So there's a lot of good things going in both of those.

All right.

Well, it's too bad the eldest tour is going good bye.

Thanks.

Thanks, Jim

Your next question comes from the line of Ned Armstrong of FBR

Yes, good morning.

Hi, Ned.

I had a few detail questions regarding the acquisition and divestiture.

With regard to the earnings guidance that you laid out, is it implicit in those numbers that the Tool sale is completed at year end and funds are received at year end?

Or do you assume an earlier receipt of those funds?

That -- that -- that's essentially what we did for planning purposes, you know.

We're -- Black & Decker and us both would like to see it happen sooner and we will work to try to make it happen sooner.

But, for planning purposes what we said was -- was exactly that, that we will just assume it closes 12-31.

Okay.

And do you have available any estimated pro forma numbers for asset line items such as the working capital items, goodwill or other intangible assets?

Not at this time, Ned.

Okay.

Do you think you will be filing them in an 8(K) at some point or is it just we will need to wait until the reporting period?

I think we're going to proba -- you know, we will be going through the discontinuation, we'll be bringing in the WICOR in this quarter.

So you will see those kinds of numbers as we report the quarter.

And then when we take out the Tools you will see how that all comes out when we report the fourth quarter.

Okay.

Okay.

And then just with regard do the businesses, can you elaborate a little bit more on how Hoffman got some of their share gains away from new products?

Was it -- was it really more getting new customers or -- or was it price oriented, or how -- how exactly did they achieve it?

There's been a couple phases and this is going to be a simplification, but phase 1 was we had -- Hoffman had 78% brand awareness yet had very limited, almost exclusive distribution which didn't necessarily serve.

It was very well positioned to serve industrial but it did not serve commercial, food and beverage and some of these other segments very, very well.

So Phase I was to expand the distribution.

So we've added over 2000 distribution locations.

That started in 1999.

The second was we defined vertical markets.

So we said food and beverage, we said automotive, and we said datacom and networking, and we developed targeted products.

For instance we talked before about the food and beverage business which uses all the stainless steel products and we have a product line which we call water shed which has been a real award winner.

So we -- we developed products for specific applications.

And we identified that again our distribution didn't really serve well but what the datacom -- the datacom and networking through distribution market.

For example, in a typical office building most people have servers and computers and things in a computer room with cabinets.

Those are largely sold through local -- to low voltage contractors through distribution and we had no access there.

So we said, okay, we have products.

We have some gaps.

We will fill in the gaps and then we will go after those distributors that focus on that.

So in fact Anixter is now a distributor of Hoffman, Graybar, which was already a big distributor for us on the industrial side, had a separate electronics focus distribution and we secured Graybar as a distributor.

And CSC, who are the top three distributors there.

So that was the distribution play.

So we have new products, new distribution channels.

And now we are focused on OEM outsourcing.

There's a lot of people in the electrical and industrial world who are adopting the same approach that telecom did which is we don't have to make everything.

And so we've gain -- we've gained a number of OEM programs.

And albeit OEM programs are not as profitable as the through distribution but they are also fewer SKUs to deal with and easy to load the plans.

With our PIMS approach they work really, really well.

And then finally, I think we just have a great team and they are executing all that well.

That may be more than you wanted.

No, that was-- that was very helpful.

Just one quick little follow on.

In the process of adding that distribution, did you find that you eliminated a lot of your current distribution?

You know, that was the risk.

You know, you do.

And -- I mean, order magni -- we lost a few but order of magnitude is, out of 3,000 location, we lost 3.

It was immaterial in terms of the numbers we lost.

There's always changing out and in of distributors based on specific circumstances.

But, I think there's only three I can think of that we actually lost because of other action we took.

Okay, thank you.

Your next question comes from the line of Debra Coy of Schwab Capital Markets.

Yes, good afternoon.

Hi, Debra.

Can you -- going back to the original, I am just trying to get a sense on the segments and I'm sure you did this on purpose, Randy, but I am going to come back to it.

You said pool and spa was up substantially.

Are you willing to be any more specific?

Sure.

Substantially more than 10%.

Okay.

So, you said -- because you did say Water Treatment, high teens, pool and spa, low teens, is that fair?

No, no.

In rank order in terms of the growth, it was pool and spa was the highest, then the water treatment, followed by water treatment North America, followed by

Filtration.

Europe.

Okay.

And filtration and then pump.

Okay.

Actually that's very helpful.

That works.

And everything was up.

Yes, you did say everything was up.

I was just trying to get it gauged a little more specifically.

And then -- and then shifting over to the backlog growth side, you also said pretty much that everything was up.

But are you still seeing, if you look -- if you sort of roughly put things into the consumer versus industrial, you mentioned some of the municipal orders.

Are you still seeing relative leading strength on the consumer side cutting across pool and spa and filtration?

You got that backlog data there.

What are you seeing?

We are seeing very strong growth coming from our largest piece of water business and strong backlogs at the end of the quarter from our pump business.

You know, on the Water Treatment, we've got, and depending upon which Company, we've got strong backlogs, depending which division we are looking at.

I would say that , obviously, pools is coming -- is going through their season now.

Sure.

And that's the backlogs are coming down a little bit from what they were.

Sure.

And then we are still seeing very strong backlogs in our international business.

And that cuts across Europe and everywhere?

Europe and Asia, right.

Again, residential looks good.

Commercial, the commercial segment is, particularly if you look at pump, is better than it's been in some time and no surprise because the commercial construction market was so bad.

So, I would say residential is good, commercial is better, municipal is the best backlog we've seen in a number of years.

That does make sense, obviously given the timing of the municipal spending cycle that we would expect to see that come back and commercial as well.

I guess the ongoing concern is sort of what's your crystal ball on the residential market over the next several quarters?

Um-hum.

Is that rhetorical?

Not really.

Yeah, I don't really have a crystal ball.

I think -- you know, I was heartened to see that the-- that higher interest rates didn't really knock -- knock residential construction.

And people are still spending to upgrade their water systems in their houses, a lot of that business is replacement.

So, you know, we're -- .

You're still hanging in.

Fair to say it's still hanging in both on the -- both on the new construction side and obviously more so as would you expect on the replacement side?

Right.

Okay, fair enough.

That helps.

Last question is can you talk at all about the, I know it's early, but obviously you've been spending a lot of time with these guys, can you talk at all about the business trends in the WICOR businesses?

Rick and I were just talking about that this morning.

And I'm pleased to see that they are also strong, I don't think their numbers, I haven't seen them in detail, I don't think that their growth is quite as strong as ours.

And I'm -- I'm talking ex acquisition, the 15% organic.

Right.

I don't think it's quite as strong but it's also positive growth, which I find very good.

I like bringing it on board with positive growth.

We are going to focus on keeping that growth going and then work on the margins.

So.

And I think it parallels very much.

I think they had strength in pool and I think they had strength in the water systems business as well.

So you feel like they are coming in with sort of some momentum?

The momentum on the top line, yes.

And then you take the costs out?

Um-hum.

Okay.

That helps.

Thanks.

Okay.

Your next question comes from the line of David Smith of Smith Barney.

Good morning, guys.

Morning.

First on the tax rate, are you saying 34.5% for the full year or just for the second half?

We are looking at 35.5, which is go -- which basically will be for the full year.

We are going to have roughly half a year of the WICOR business in which pushes the average up by 100 basis points.

So we are looking at our rate right now at 35%, bringing WICOR in for the last half will bring the year -- the full year up to 35.5, and then next year we will be looking at 36.

Okay, great.

That clarifies it.

Can you give us more -- more clarity on the backlog by segment on a year-over-year basis?

Yeah.

When we were answering Debra's request there we talked about the fact that pumps are still strong.

Are you specifically looking at just the water business and enclosures?

Water Enclosures just in total.

Water is still very strong and Enclosures is even stronger in terms of the backlog that we left the quarter with.

To give you a sense of size, water is up double-digit and Enclosures is up double-digit and 50% higher than the water.

So, in terms of backlog.

At year-over-year, right?

Year over year backlog.

Okay.

What's pushing that Enclosures number?

Which market specific are really driving it?

You know what's interesting, it's all three.

Our major -- the four segments is Hoffman, there's Pentair charge packaging which we call PEP, and then Enclosures Europe, which is dominantly Schroff, and then Enclosures Asia and by an anomaly, actually, Asia is showing a slightly lower backlog but that's -- that is an anomaly because they had 50% growth and they have good program growth.

But, all three of them are up double-digit and, you know, the -- the growth -- the exit order rate were strong in all three.

Hoffman and PEP and Europe.

Europe, in the third quarter in August, third quarter is always a little slow in Europe but they still carried a pretty good backlog end.

So, that's heartening.

I would say they are all very close to the mean, those three.

Okay.

Can you -- I know you talked about it briefly about debt reduction but any sense of where after the bridge loan debt to capital might be at year end?

Yeah.

As I mentioned we are looking at something maybe in the range of 30 to $50 million lower in terms of debt at year end after everything is completed.

So that's going to put us probably somewhere.

Year over year.

Year over year.

Yeah.

Somewhere close to, I believe it will be around 35% debt to total capital.

After paying the bridge off.

That's going to be plus or minus one.

I haven't done the exact calculation but it's pretty close.

Okay.

That sounds good.

How about pricing.

You talked briefly about that, nothing specific, are you seeing anything like in terms of water equipment pricing or enclosures pricing you can talk to us about?

Sure.

You know, one of the nice things -- I mentioned in our tools business prices were down, they were down about 2% but in our other business we actually have higher prices.

And in Enclosures it's -- you know, we've been able to, because of our market strength we've been able to capture some of the increases in steel costs, so prices there are probably up, you know, maybe a couple percent and then in, I didn't bring my calculator, and in water, it's about 1% up, blended.

And then on a net basis obviously is it kind of flattish or is it kind of a beneficial situation for you guys?

Net of -- on a continuing basis it's beneficial net on a -- on the reported basis second quarter it's down because the tools price decline offset the, more than offset the price increases in water and Enclosures.

So on a going forward basis though I would expect water and Enclosures to show positive prices.

Okay, all right.

Sounds great.

Thanks a lot.

Your next question comes from the line of Larry Baker of Legg Mason.

Good afternoon.

Hey, Larry.

Can you just review briefly the growth of size of the businesses in the new combined water technology segment, Yeah.

The major markets, the way you're going to be talking about it.

Roughly speaking, you know, on a prospective basis, used about $2 billion and the pump business which is water, waste water systems, about 900, maybe a little less than 900 million.

The pool and spa equipment business is about 600 million, and the filtration and purification business, a little bit over -- over 500 million.

Okay.

Thanks.

And in terms of the profitability, the profitability goes, filtration, pool and pump, from highest.

Okay.

And then in your guidance for '05, can you sort of talk about the size of WICOR in that guidance, revenues and operating margins?

Well, they are going to be blended.

You are going to see Tools -- I mean, you're -- you're going to see, yeh, Tools out and then water in.

And, you know, we see water at about, hold on a second, total water, just bear with me, these are new charts for us.

New names.

It's about -- it's about 2 billion.

You know, it's over $2 billion we expect to see.

So you can imagine, you know, they will have to be -- they'll have to be contributing over 800 million.

So, say mid 800s.

Okay.

And they are going to bring down the average ROS, as Dave mentioned, a couple hundred basis points from last year in the third and fourth quarter and we expect to claw back, not all of that but some of that next year.

Okay.

As the guidance we said takes a blended WICOR rate and the Pentair rate, which at the time when we talked about it was about a half versus 13.5, half for us, it's 30 million just by getting them from their 8 or so, 8.5% up to our 13.5 and then, of course, to get both up to 15.

And we did achieve that 15 in our own water business this year.

Okay.

It helps that we had the best quarter.

You know, second quarter is always the best quarter.

One other thing that I would like to mention and we'll provide clarity on this as we can, but it's too soon to do that.

Our calendarization -- our seasonalities going quarter to quarter is going to look quite different without Tools and with WICOR.

Typically in our water business, and I assume this is true for WICOR, the (inaudible-participant interference) is the weakest quarter, the second quarter is the strongest quarter.

So we will -- our calendar is going to look a little bit different.

As we get WICOR aboard and once tools is gone when we get that we will provide some more clarity on that as we get it.

And then just one balance sheet question if I could, David, inventories seem to be -- jumped up a little bit in the quarter, is there a particular reason for that?

Yes.

As we move through the quarter, the tool business started to fall off a little bit in terms of orders and shipments and through June.

So, obviously, with our supply chain that we have in terms of (inaudible-participant interference) product or the product that's coming from China, as well as we normally would have for the estimate, these goods went up fairly significantly in the tool business.

Okay.

Great.

Thank you.

With that said, Larry, though, we still had-- we still had really good days and saw the days come down for the total.

But the biggest piece of it(inaudible-participant interference).

Okay.

Great.

Thank you.

Your next question comes from the line of John Quealy of Adams Harkness.

Hi, good afternoon.

A couple questions.

Randy or Dave, if you wouldn't mind just repeating what seasonality is going to do post WICOR?

I couldn't hear that clearly.

Oh, okay.

Right now tools-- tools has a double hump seasonality, the second quarter and fourth quarter are both strong, are strongest quarters for tools.

Our water business typically the second quarter is very strong because that's the big quarter for the pool business.

And the fourth quarter is the weakest.

And I'm assuming that, and we have the data, that WICOR has a similar kind of seasonality.

So we are not going to have the bump in the fourth quarter that we typically would get from the stronger tools business, Christmas season.

So for some reason people don't by sump pumps for Christmas, they just don't.

Anyhow, so I just wanted to get people thinking about the fact that the seasonality of our quarters is going to change.

The guidance we gave, though, in terms of the $1.95 to $2.10, that's the annual guidance.

So I'm just talking about how that calendar will layout .

We'll have to work to give you some guidance after we get WICOR on board and we get the detailed plans for 2005 set.

Okay.

Great.

My second question, you've had the announcement of WICOR out there for a few months.

Can you talk a little bit about your interactions with customers in your conversations with them and how the reaction and receptiveness has been for that moving forward?

I think generally it's very positive.

Some of them had actually -- had actually gone public and talked to the FTC during the anti trust process.

I would say there's a few customers who are concerned about the relative power we have.

But there is competition out there and they have, they do have options and everything.

So, the -- I would say by and large positive.

Okay.

Great.

And my last question, if you could layout for us for the newly combined water segment, what proportion of business is going to be direct sales versus the indirect channel, if you could?

I can't give you, I don't know that off the top of my head.

We would have to go do some work on that.

I don't look at it that way.

We haven't rolled it up that way so we would have to specifically try to break that out.

Okay.

Fair enough.

Thanks very much.

Okay.

Your next question comes from the line of Dana Walker of Holmer(ph) Investments..

Good afternoon.

Hi, Dana.

Several questions but brief and their focus, what sort of a revenue contribution do you expect from WICOR over the last five months of the year?

We are -- it's rolled up into our water business so it isn't separated out.

We are looking at something, you know, generally, we, Dana, this is relatively sensitive information for a couple of reasons.

One is that we haven't actually closed on the business yet.

And we don't normally break things down to that degree.

But, you know, if you look at 2003, we are looking at the reported sales which were pretty close to $750 million.

And if you took -- if you took five twelfths of that and added a little bit to it for the growth that we are seeing this year, and they are -- we are seeing some growth, you will come to something pretty near it.

Very well.

Question number two, I was left somewhat in doubt on how the continuing ops numbers are affected by the expected infusion of proceeds from the Black & Decker transaction.

Yeah, well, once we get the payment from Black & Decker we will pay down the debt which will reduce our debt service.

So this year's.

It's essentially, what it's going to do is reduce our -- reduce our interest expense.

I don't think it's because we are keeping, we already have and continuing most of the other, virtually all of the other expenses.

You were talking about the P&L, weren't you?

I am, so this year's continuing ops EPS number, which is between 1.28 and 1.38 is fully burdened by the WICOR debts as well as the absence of proceeds from Black & Decker?

Correct.

That's correct, yes.

So part of the swing on a continuing ops basis moving from '04 to '05 is the receipt of those proceeds?

That's correct.

and a reduction in interest expense.

And as Randy said, going forward once the transaction take place then there will be approximately $100 million, maybe just a little bit more, that basically will be associated with the transaction that will go forward that we will be paying down out of cash flow.

Question number three.

Can you in a rough sense talk about the base unit growth assumptions that you're making in your '05 plan?

Or is that premature.

It's premature.

Nevertheless you've approached it in some fashion based on putting out a range for EPS?

Right.

We kind of do a top down and valuate touch it with the businesses and then we will -- from that we felt it was important to give the guidance with these changes and it's usually a little earlier than we would do it.

Our planning process, generally, we go through the detailed planning between now and October.

And then review it with the board and move from there.

But the kind of goals that we've set long-term are, we want to grow the business organically 5 to 8% and double that with acquisitions.

We've already made the acquisitions, so just focusing on organic growth, you now, 5 to 8% is what we've targeted.

We're doing a little better than that right now.

But you haven't attempted to extrapolate the strength of this year into next year?

Not at this rate.

That's right.

Final question is this, both of you have talked about the return on sales goal of 15% in your water equipment business.

Are you suggesting that ex WICOR you are darn close to being there as of the end of this year?

Well, our goal in Enclosures is 15 but we are not at 15.

Pardon me, on water treatment.

Oh, Water Treatment.

You know, ex WICOR -- yeah, in the first half, if you look at the first half we were -- it's 15.1% ROF.

So we were, I don't know how that, I don't have that number in front of me but I would be surprised if we weren't pretty darn close to exiting the year ex WICOR at 15%.

I offer that up as why I have confidence we can get there.

Is it your judgment that that's the appropriate equilibrium on a go forward ex WICOR or is that new goals?

The new goal is to get the combined business back to 15%

That's all I have, thank you.

Okay.

Your next question comes from the line of Michael Hamilton of RBC.

Good morning, everyone.

Good morning.

Just a quick one.

In your operating guidance for '04, what is included in one time charge range there?

For the total for '04?

Right.

Looking at your new '04 guidance from continuing operations, what have you got in there in terms of a range for one time expenses?

You are talking by WICOR?

And that would just be coming from our integration of the WICOR and the integration costs is what you're talking about?

Right.

Because most of the one time we've had in so far during the course of the year that are truly one time are really Tools taken out.

Right.

So, we generally don't give it out.

The net number we've published is $30 million in the first year.

For net.

For net.

That's net of costs.

So, you know, and we've talked about, you know, needing, you know, at least one-third of that in the first half.

Put another way just so I understand.

You do have one time integration charges in that number and in the guidance you've provided us.

That's correct, we do, that's correct.

Okay, thanks.

At this time there are no further questions.

Thank you all for your attention.

Thanks for your questions.

I am supposed to be on Cut along Kramer tomorrow afternoon, I should tell you that in case you're interested.

And operator, if you could give the replay numbers I will turn it back over to you.

Thanks for listening.

Thank you for participating in today's second quarter 2004 earnings conference call.

This call will be available for replay beginning at 1 pm eastern standard time today through 11:59 pm eastern standard time on July 25, 2004.

The conference ID number for the replay is 2924366.

Again, the conference ID number for the replay is 2924366.

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

This concludes todays conference.

You may now disconnect.