濱特爾 (PNR) 2006 Q1 法說會逐字稿

At this time I would like to welcome everyone to the first-quarter earnings conference call. (OPERATOR INSTRUCTIONS).

Mr. Harrison, you may begin your conference.

Thank you for joining us today to discuss Pentair's results for the first quarter of 2006.

I'm Dave Harrison, Chief Financial Officer, and with me today 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 the risks outlined in our 10-K as of December 31, 2005, 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 will turn the program over to Randy Hogan.

Thanks, Dave.

Welcome to our conference call.

While meeting overall expectations, our first-quarter results were mixed in terms of the highlights and opportunities.

As for the highlights, our Technical Products group achieved a record level of profitability at $37.7 million and 14.8% operating income margins.

Excluding acquisitions, margins were 15.1%, which speaks to the strong performance by the Technical Products group's core businesses.

As a whole, Pentair's European and Asian sales were up approximately 13% in local currencies.

However, in Europe these improvements were partially offset by unfavorable currency exchange.

Nonetheless, after several years of economic malaise, it appears that the European economy is slowly gaining strength.

Inflationary pressures continued during the first quarter, with raw material input costs rising, putting pressure on margins.

However, we also continued to increase prices in the first quarter.

As a result, overall price increases of about 2.5% combined with improved productivity to more than offset the inflationary pressures.

Our supply management initiatives delivered incremental gross savings before inflation of nearly $17 million in the first quarter compared to last year.

Supply management continues to be a key contributor to our operating excellence for us, and is countering cost increases.

The initial set of plant closings and consolidations that were put into action following the acquisition of WICOR are now complete, and the moves that had been delayed in the second half of 2005 were wrapped up in the first quarter.

Of course, product moves and transfers to our Mexican, Chinese and Polish operations will continue as part of our low-cost country manufacturing strategy.

Our recent Thermal Management acquisition is performing well and related integration activities are going smoothly.

As for opportunities, there remain a few in the Water Group.

First, we did not realize the mid single-digit organic growth anticipated in our Water Group.

We captured about 10% growth in the fourth quarter, as you will remember.

Compared to that, organic sales growth in Water was lower in the first quarter, due to lower growth rates in both pump and pool.

When you look at pool sales from a seasonal perspective, however, the sales from the fourth quarter 2005 and first quarter 2006 combined still reflect a double-digit growth rate.

We did realize good growth in select areas of our Water business, notably in water systems and wastewater pumps, Everpure foodservice, and international markets.

I'll go into detail on the market dynamics in a moment, but for now I want to emphasize that we remain committed to driving higher growth in Water.

As we have said, we have now begun to invest more resources to grow the Water Group.

Historically, our organic growth rate in Water has been about 5%.

And with the opportunities we see internationally and in key vertical markets, we are committed to driving that historical rate to the higher-end of our 5 to 8% growth goal.

To capture this higher growth, we're making significant investments in marketing, sales, product development, infrastructure and leadership.

As expected, these investments affected our margins, as did inefficiencies resulting from plant and product line moves.

Unfavorable product mix and unfavorable foreign exchange resulting from the decline of the Euro were also factors in our profit performance.

We're still confident that the Water business offers tremendous opportunities for growth and profitability for Pentair.

We're committed to delivering in the short-term while investing for the long-term so we can capture a higher sustained organic growth rate, have a much more vital international business, and achieve our 15% ROS target.

Now let's turn to the operating details.

In the Water Group, first-quarter sales of $517 million were up 1% over the same period last year.

Excluding unfavorable currency exchange, sales were up about 2%.

As I mentioned earlier, we captured growth in a number of our water markets.

For example, water systems pro channel pump sales for the quarter were up in the high single digits, as sales in the professional segment were driven by new products, new customers and price.

Wastewater pumps sales also performed well, as shipments increased in the mid-teens compared to the same period last year.

These gains were somewhat offset by sales declines in retail pumps.

And although orders from municipal markets were strong, the timing of those orders left quite a hole in the first quarter from a shipments perspective.

As expected, we experienced a slower rate of growth in pool markets in the first quarter, following strong growth from successful early buy programs in the fourth quarter of 2005.

Sales to our pool tile distribution business grew very strongly because of new product extensions and continued growth in the pool finishes business.

In filtration, Everpure continues to grow nicely serving the foodservice industry.

However, filtration sales reflected a decline in retail sales, and our OEM filtration sales were also a bit disappointing with the cancellation of a couple of programs.

So, we're redeploying our resources to strengthen sales in the pro channel, and we plan to hit this hit opportunity harder than ever before.

Also in the first quarter we had a very strong presence at the WQA Aquatech show last month in Chicago, where we introduced some new ultrafiltration products, which I'll address in a moment.

At the show, the general manager of our filtration operation in Sheboygan, Neil Desmond, was elected to a one-year term as president of the Water Quality Association.

We're very pleased to have Neil lead this important organization.

The WQA is an international trade association representing some 2400 companies in the household, commercial and industrial water treatment industry.

Pentair involvement in WQA is strong.

In fact, two other Pentair Water employees lead committees and task forces for the organization.

Our European Water business grew in the mid single digits in local currencies because of new products in water treatment, filtration and pumps, which [complement a recovery] in the European economy.

We increased our market share in the residential pump market.

In filtration, we won new tank customers in Poland and Ireland, strengthened our distribution networks in the UK, Croatia, Portugal, Turkey and Poland, and received our first order from a major global beverage company for business in Hungary.

Pump and filtration sales in Russia were also good in the first quarter.

Sales in the Asia-Pacific region for Water increased, due partly to strong worldwide sales of CodeLine pressure vessels.

We've established ourselves as a leader in pressure vessels by consolidating our position and building the technical leadership in industrial and municipal reverse osmosis housings.

We had a good growth rate in orders and strong shipments for this global product line in the first quarter.

In fact, backlog for pressure vessels set another record in the first quarter.

We noted last quarter that our investments for growth in new products, among other things, have been a focus for the Water Group.

And that was certainly evident in the first-quarter product introductions.

New products included a high-end sump pump for retail and catalog markets, our peripheral [vein] pump, new reverse osmosis turbine pumps, electronic pump controls, and new variable-speed pumps.

In filtration, the new [Viraguard] cartridge line was launched at the WQA show in the first quarter.

This hollow fiber membrane ultrafiltration product is designed for point-of-use applications, and will soon be supplemented with additional [ultra] purification products for point-of-entry applications.

These deliver microbiologically pure water and can be configured for both virus and bacteria removal.

Filtration also launched a new point-of-use [mini softener] system targeted to applications where space is at a premium.

The system was a collaborative product development effort, serving the European, Asian and American water treatment market.

Potential applications include hotels and multiunit housing, espresso and coffee machines, [square] washers, steam rooms, saunas, boilers and RV and marine applications.

Pentair Pool Products continued its run of innovative products, introducing the EasyTouch Control System with integrated IntelliChlor automatic chlorine generator, the Prowler line of robotic cleaners, and the Quad DE swimming pool filter, a breakthrough in diatomaceous earth technology.

We expect our ongoing investments in R&D to accelerate further the delivery of new and innovative product introductions in the quarter ahead.

Operating income for the Water segment totaled $55.6 million, down 8% over the same period last year.

Return on sales was 10.8%, down 100 basis points compared to the same period last year.

Expected inefficiencies resulting from plant and product line moves were a factor in our profit performance, as were unfavorable product mix caused by higher sales of large filtration projects and pool finishes, versus the more profitable sales of residential water treatment and pool equipment products.

Another factor was unfavorable foreign exchange due to the U.S. dollar sourcing arrangements for raw materials in European Water businesses.

There are still some inefficiencies in pool and filtration that will carry forward, but as we've said before, we expect these to dissipate during the second quarter.

Also as expected, accelerated investments to drive growth and establish low-cost country operations affected profit in the first quarter to the tune of about 7 to $8 million.

These activities included developing new customer relationships, reinforcing our international management, sales, engineering, sourcing and manufacturing challenge talent, implementing a unified business system infrastructure in Europe, and advancing our Faradyne Motors joint venture.

Let me now turn to Technical Products.

Technical Products set new records in sales, operating income and return on sales.

Total sales of 254 million for the quarter reflect a 29% increased of $57 million over the same quarter last year.

Excluding the impact of the Thermal Management acquisition and foreign currency exchange, organic growth was a very nice 13%.

Excluding acquisitions, sales in North American markets grew in the high single digits, driven by strong petrochem, commercial construction, data, medical and food and beverage sales.

Rebuild projects related to last year's hurricane continue to be a driver of sales in petrochemical markets, while our telecom sales were flat in the U.S., as new business was offset by transfers to Asia.

Technical Products has continued to focus on vertical markets by introducing new products targeted to specific customer requirements.

In the Hoffman business, these new products include a new stainless steel intersafe cabinet for the automotive market, which features a data port for easy access to data connectors.

Hoffman also introduced the ProTek series of double-hinged water-resistant enclosures for datacom applications, protecting 19 inch network equipment from dirt, splashing water, dust and other contaminants you see in more industrial environments.

Also, the pharma pro line of enclosures was introduced to the pharmaceutical industry.

The products were developed to minimize exposed surfaces where dust, bacteria and other undesirable contaminants might accumulate.

And finally, the [Weather Flow] rain-tight enclosure is geared towards thermally-sensitive applications and offers venting and filters to help dissipate heat.

The European business recorded its highest sales quarter in the past five years, with growth in local currencies of about 20%.

The increases were driven by success in new products like the Advanced Telecommunications Computing Architecture, or ATCA, and our Varistar cabinets, which were launched last year, as well as general recovery in major European markets, and Germany in particular.

We also benefited from high shipments resulting from a large project for outdoor enclosures with Deutsche Telekom.

Sales in Asian markets increased over 50% in the quarter, helped by planned OEM program transitions from North American and European operations, continued market penetration in China, and general market recovery in Japan.

Sales in the Thermal Management business exceeded expectations in the first quarter.

Continued growth in the telecom markets and strong sales in medical and at Hoffman's core industrial channel helped drive Thermal Management volumes.

Technical Products operating income increased 50% to $38 million.

This is another new record, exceeding the previous $30 million record set in the fourth quarter of 2005.

Return on sales for the quarter hit 14.8%, up 80 basis points on a sequential basis, and this marks Technical Products' 17th consecutive quarter of sequential margin improvement.

In North America, profits benefited from material cost savings, productivity improvements and price.

In Europe, improved results were driven principally by increased volumes and supply management savings.

And in Asia, volume increases in China and Japan gave us great operating leverage on the investments we made there, strengthening margins.

On the supply management side, Technical Products continues to more than offset raw material cost inflations through pricing and productivity.

We no longer anticipate a softening of steel prices, as there has been again a tightening of supplies driven by strong global demand and low inventories.

Stainless steel is even more constrained then carbon steel, as [most] push out orders and try to keep up with the strong global demand.

Specialty metals -- zinc, copper and aluminum -- have continued their dramatic run-up in prices over last year.

This first quarter 2006 and the full year 2005 results continue to demonstrate that our Technical Products group, and Hoffman in particular, is our proof of concept for the value of our operating disciplines and the Pentair innovative management system.

In fact, it's also being validated with the integration of the Thermal Management acquisition, where all three operations acquired -- McLean Thermal, Aspen Motion and Electronic Solutions -- have aggressively implemented our lean program and supply management practices, and our now in the process of executing our Ignite Growth program to drive performance even higher.

Now I will ask Dave Harrison to address the financials in his comments.

Thank you, Randy.

First I'd like to remind you that Pentair adopted FAS 123R for stock option expensing in the fourth quarter of 2005 on a modified retrospective basis.

Therefore, our first quarter 2006 numbers are directly comparable to our first quarter 2005 results.

Overall, Pentair's first-quarter results were solid, with stellar performance from Technical Products enabling us to make investments in our Water Group at the same time.

This demonstrates the power of diversification within Pentair.

Sales for total Pentair came in at $771 million, up approximately 9%.

Excluding the impact of the recent Technical Products acquisition, in foreign exchange we achieved sales growth of approximately 5%.

First quarter EPS from continuing operations was $0.42, up 8% from the $0.39 in the first quarter of last year.

In the first quarter we resolved the final purchase price adjustment for the sale of our former Tools Group.

This resolution was the primary reason for the after-tax expense of approximately $1.5 million in the quarter and the resulting loss from discontinued operations of approximately $0.01 per share.

Pentair's operating margin for the first quarter was 10.2%, the same as the prior year.

Technical Products' operating margin was up 210 basis points.

This increase was offset by a 100 basis point decrease in Water and the Water segment margin.

Water segment margins were affected by investments for growth, inefficiencies as new plants ramped up, and higher freight and distribution costs.

Pentair's gross margins were also the same year over year, with Technical Products up 170 basis points and Water down 70 basis points.

As a percentage of sales, SG&A expense was down 30 basis points for the quarter, reflecting the leverage from higher sales, somewhat offset by the investments we made for growth.

From a reportable business segment basis, the line item other, which includes (indiscernible), was $14.7 million in the first quarter, up $1.1 million from last year.

This increase was the result of investment in resources, focused on growth and low-cost supply initiatives throughout the world.

R&D costs were up 30 basis points in the quarter, due to increased investments in new products and proportionately higher R&D spending in the newly-acquired thermal businesses, where we are already seeing great results.

Interest expense was up $2 million in the first quarter.

This was attributable to eight interest rate increases by the Federal Reserve over the last 12 months, which have increased our average rate by about 80 basis points.

There was not an increase in our quarterly average debt, as 2005 cash flow funded the thermal acquisitions of $140 million, dividends of $53 million, and stock buybacks of $25 million.

The effective tax rate was up 10 basis points in the first quarter.

The first quarter of 2005 tax rate of 33.9% includes the impact of a favorable settlement of a routine IRS exam for prior years 1998 through 2001.

The first quarter 2006 tax rate was 35.5% before the favorable benefit of foreign tax credits, which reduced the overall tax rate to 34%.

We expect the tax rate for the remainder of 2006 to be approximately 35.5%.

However, we continue to actively pursue initiatives to reduce our effective tax rate.

Keep in mind that the tax rate in any quarter can be affected positively or negatively by adjustments that are required to be reported in the specific quarter of a resolution.

Cash outflow of $101 million in the first quarter of 2006 was equivalent to the prior year and reflects the seasonality of Pentair's business.

With the current level of receivables and inventory on the balance sheet, we feel there is ample opportunity to generate positive free cash flow in the balance of the year.

We remain committed to our free cash flow goal of 100% conversion of net income.

On a 13-month moving average basis, working capital finished the first quarter at 40 days, up two days from the end of 2005 and five days from the first quarter of last year.

Through the first quarter, we have had continuing requirements to maintain higher levels of inventory to support the product moves and plant rationalizations, to meet seasonal requirements of our Water businesses, and to hedge against competitive actions.

In addition, we had higher inventories at the end of the quarter due to the lower-than-expected sales.

The higher inventory levels represented an embedded opportunity remaining for cash flow from the WICOR acquisition, and this opportunity should [read out] as we finalize the product moves and lean enterprise takes root throughout Water.

Our debt to total capital ratio was 35.9% at the end of the first quarter.

This compares to 32.6% at the end of the year and has increased due to our first-quarter cash outflow.

Our first quarter 2005 debt to total capital ratio was 37%.

We achieved this year-over-year improvement even after the 2005 Thermal acquisition, dividend payments and stock buyback.

And by the way, we recently announced our 30th consecutive annual dividend increase.

Our debt to total capital ratio continues to do well -- to be well below our target level of 40%, giving us the adequate financial resources to expand further our Water and Technical Products businesses.

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

Thanks, Dave.

Pentair has a strong grasp of the fundamentals necessary to advance the Company's performance and deliver greater value to its shareholders.

We believe this fact is evident in the performance of our Technical Products group, which continues to outperform in every dimension.

As we replicate the proven disciplines and shared best practices from Technical Products, and get a return on our new investments in our Water businesses, we expect to make a quantum leap in the growth and performance of our Water Group, too.

It's important to remember that the world's water needs provide a compelling argument for investments in this industry, one we've been focused on for 10 years.

With forecasts for investment needs in U.S. water infrastructure alone ranging from 200 billion up to $1 trillion, it appears the water situation is marching ever more closely to the brink of crisis.

This presents a major long-term opportunity for companies in this industry, and although many are focused on the infrastructure requirements, it is also apparent that the investment needed can not be met through traditional approaches.

Therefore, we believe residential, commercial and industrial users will continue to take greater control of securing their own safe, clean water.

Today approximately 50% of new home construction is not connected to municipal water or wastewater networks in the U.S.

These homes must build on-site waterworks to access freshwater, purify and treat it, and dispose of the wastewater.

In addition, homeowners are buying bottled water, home purification systems and whole-house filtration systems in growing numbers.

In developing countries, availability of water is a constraint on development, so developers and industrialists frequently take control of securing their own water.

For example, in India, where over 60% of water comes from wells

(technical difficulty)

I apologize, but there will be a slight delay in today's conference.

Please hold and the conference will resume momentarily.

Thank you for your patience.

Sir, you may resume your conference.

Sorry about the technical difficulties; we're not sure what it was.

I'll just wrap up where I think we lost you.

I was talking about the water business and talking about developing countries, and using the example of India, where over 50% of the water comes from wells.

Commercial building owners are harvesting rainwater during monsoons and recharging the wells as the water table continues to drop at alarming rates.

Continuing with water, on the commercial side, users take control of their water needs, too.

The foodservice industry has on-site water equipment to purify drinking water, soften dishwater and filter ingredient water.

Coffee houses like Starbucks rely on good water; after all, 97% of their product is water.

They recognize that water greatly affects the taste of their product, and water quality is different in every city, from Seattle to Beijing to Amsterdam.

Therefore, they must ensure consistent water quality to guarantee consistent product quality.

There are many other examples of users taking control of their own water requirements.

While we make components and products for large-scale infrastructure projects like pump, reverse osmosis housings and filtration components, and we like those businesses, our primary markets are those where customers are taking control of their own water destiny.

Just as the U.S. energy crisis of the '70s created a market for more efficient lighting, windows, insulation and thermostats, the growing water crisis will motivate users to secure, conserve and reuse water.

This is the opportunity ahead of us, and we are investing today ahead of tomorrow's opportunities.

As a result, we know we have a tremendous business with a very bright future.

In summary, we're reaffirming our previous EPS guidance for the full year 2006 of between $2.08 and $2.18 on mid single-digit organic growth.

In addition, assuming some rebound in water growth rates while continuing our investments, we are initiating second quarter EPS guidance in a range of between $0.61 and $0.63.

That's it in terms of our prepared remarks.

Thanks for your attention.

I'd now ask [Phyllis] to come back on the line and provide our audience with instructions for the Q&A portion of the call.

(OPERATOR INSTRUCTIONS).

Curt Woodworth, JP Morgan.

A question on the margin performance, the Technical Products segment -- obviously, very, very strong, especially considering seasonally this is usually the weakest quarter.

Can you talk about the sustainability of that margin rate going forward?

Is there anything that may have impacted the mix this quarter?

How (indiscernible) think about modeling that for the rest of the year?

One of the -- I mentioned that the core businesses did 15.1%.

And as you know, we've been on a goal to have both of our segments run at 15%.

So, the fact that the core businesses got to 15% was a little bit above expectations, but not surprising to us.

The key drivers for us getting there were -- was the fact that Europe had such a strong quarter.

And growth is a wonderful thing when it comes to margins.

We had that 20% growth in Europe in Technical Products in the first quarter.

And I think that's a higher rate than we see going forward.

The Deutsche Telekom order had heavy shipments, and that's a project that's going to tail off.

So, I don't think we will see 20% growth.

We're still driving for growth.

We're very positive about the things that are teams have done there.

But I think everything went right in the first quarter in tech products, and I think, therefore, I wouldn't expect that margin (technical difficulty) the margin in the second quarter or in the second half.

We also had lots of good things going in thermal, in the thermal business.

It seems like the commercial businesses on the pump and the filtration are performing well, and the main area of weakness is on retail pumps and filtration that you mentioned softened this quarter.

You talk about a rebound in the growth rates you're looking at for 2Q in terms of your guidance of mid single digit.

Can you give us a sense of what is driving the rebound going into 2Q?

Is a lot of the investments you're making this quarter -- I think you said it was an $8 million investment hit -- is a lot of that going towards the retail pump and filtration lines?

Were you really trying to drive organic growth in light of a consumer that is, obviously, maybe faltering a little bit on high oil prices and interest rates?

The investments don't really track with the areas where we had the weak growth in the first quarter; the investments really track with our international growth.

Our new products, the IT infrastructure in Europe, and the Faradyne joint venture are the big pieces there.

We've invested in sales and marketing outside -- a fair bit outside North America.

The weakness in the first quarter on the retail side is a function of, I think, some inventory adjustments, and also weather.

The weather wasn't all that cooperative.

In the pump business in retail, we typically see nice growth with a wet spring, and there hasn't been a wet spring.

In contrast, in California there was a wet spring, and that's our biggest pool market in the first quarter.

And that hurt our pool sales in the first quarter.

So, as we look at the second quarter, we're thinking retail is more normal.

Municipal was actually down; it was up in the fourth quarter.

Municipal shipments were down in the fourth quarter.

We think municipal shipments will be up in the second quarter.

We think retail will be more normal.

And we believe, as you know, that our water business is really very seasonal.

And the big drivers of seasonal are pump and, most importantly, pool.

And the second quarter is the biggest quarter for pool, so we need to see a rebound from that low single-digit rate -- excuse me -- mid single-digit rate in pool to something -- to something in the higher single digits or 10%, which would be what we would expect on a more normal rate.

When we look at the market, we think, as I mentioned -- you combine the fourth quarter and the first quarter, which is the first half of the pool year, and our pool business is up with the market a little bit over 10%.

So, we think the pool business is there, and it's a wild ride in the second quarter always for the pool business.

So, those are the differences, and why we think that we can return to sort of a mid single digit -- that's the assumption -- in our numbers in the second quarter.

Deane Dray, Goldman Sachs.

For the early buy that you talked about last quarter, could you just -- you had ranged it as a potential 1 to 2 percentage points on the pool business, [corresponding] to the early buy.

Is that really how it worked out?

So, really (indiscernible) we ought to be looking at the core growth (indiscernible) fourth quarter and first quarter?

That's the way we looked at it; that's why I mentioned that we averaged the first four (inaudible) -- I think the fourth quarter, we were very pleased with how good pool did in the fourth quarter, but we were also cautious because it was so good.

And it was up close to 20%.

And it was up mid single digits in the first quarter.

So, we really think you've got to look at those and average them out to see what the real business is.

And if we compare that, we [have a good] window on sellthrough.

And we think that's about where the market is.

We feel like we're where the market is across those two quarters, but we clearly -- clearly, the early buy was too heavy, particularly since the weather on the West Coast started great in the first quarter, and then it got bad.

And that slowed down the pool business, both in construction and in rehabs.

Just some clarity on your discretionary investment this quarter in water.

And could you size for us the total what you would call growth investments you made in the quarter?

And were these all characterized, as we would look at them, as discretionary?

I lumped them all in the 7 to $8 million I talked about in the script.

That's everything together.

And I would say it's about half and half, growth and infrastructure.

And I'm lumping infrastructure together with plant related investments.

It's about half and half.

Your point on talking about the greater opportunities for Pentair in consumerism and water, both on the water and wastewater side -- do you see an increased R&D burden on the Company, or is this going to be at the same sort of R&D pace that you're looking at in order to bring these products to market?

I think the R&D pace we have is right.

We've raised it.

I mentioned the ultrafiltration investments we're making in our filtration business, which I think is a product that is spot-on for residential use, but also, I think, for commercial use.

Our low-pressure -- our low-pressure sewer in the wastewater side is -- it's a product line that is developed, and we think it's -- well, we know it's growing.

We had in the teens kind of growth in wastewater.

And the Delta Environmental, which is -- I will call it a super septic, although my people will chide me for that.

That system is already developed, too.

I think our biggest opportunity and challenge is to develop the markets more fully for that; develop the channels and really get to all the markets.

We have a lot of white space in water, and that's why we are investing to grow internationally.

I think we have a lot of opportunity, even in North America, to do a better job of filling in those white spaces, and better address -- I mentioned in filtration, for instance, that the pro channel is a market that I don't think we've done enough with -- our channel we've done enough with.

I think R&D is right;

I think we need to drive the channel and the market and sales development harder.

Just to conclude, I'd like to offer my congratulations to Dave Harrison on his announcement that he will be retiring at year end.

And Randy, if you could just talk about the expected transition.

I congratulate Dave, too, although I don't want him to go.

I understand retirement;

I'm a long way from retirement.

We're going through a process now;

I'm not going to do it in public, but I feel really good about the process we've set up.

Dave has committed to stay through the transition and through the end target through the end of the year, or through the transition, if it happens sooner.

I feel good about our process, and I've get a clear [spec] of what I'm looking for.

I think we've got a lot of different options.

Let me leave it at that. (indiscernible) to say anything.

No, I think that covers it.

Thank you, Deane.

David Smith, Citigroup.

Just following up on this retail impact.

Is it -- just to help understand, on the pumps and the filtration side, is it kind of lost business, or is it due to timing, or is due to de-stocking at the retail level?

Can you just dive a little more into that?

We believe that there's a broad array of products and they have different answers.

Forgive me if I get a little too complex.

In a couple of circumstances, we believe that there was an over-inventory situation in the channel that was set up after the hurricanes, and a lot of product went into the field.

It didn't all get sold; therefore, there was some over-inventory situations, and some expect -- as you would expect, some inventory adjustments in that regard.

And then, particularly on the East Coast, we would have expected a wetter spring, and therefore a lot more pumps.

Pump business, particularly retail pump business, is driven in the early part of the year by weather.

Flooded basements, pools (indiscernible) emptying outdoor areas of water, etcetera.

And frankly it was pretty -- it was pretty dry.

So therefore, they didn't need -- that inventory didn't get pulled fast enough in those ranges of pumps.

In the case of filtration, we do a fair bit of private-label that goes into retail.

And there's been a change in strategy of some of our customers of de-emphasizing that channel, which affected us.

And then there was some just lack of sell-through that we would have expected that really affected filtration.

So, there's really different answers to pump versus filtration on the retail side.

But we think we're still in good stead in those channels, so that's why we expect the second quarter to be more normal.

It doesn't sound like you've lost business or lost share there.

We haven't lost placement.

There's still -- in one channel there's still some -- there's still some holdover of some business that we lost in a couple of their stores, [regarding] the second line.

But that's not a huge thing in the first quarter.

Is there visibility heading into the second quarter?

Are orders starting to bounce back, or is it something that looks like it's going to continue?

We factored into our guidance what we expect based on what we saw in April.

And it was March and April that were the weaker -- March and (indiscernible) into April a little bit.

So we have factored that into our guidance.

On the motor side, with Franklin, maybe an update on where you are with Faradyne.

And then -- I just would have thought that there may have been an easier comp year-over-year on the motor side.

Was that the case?

We are not -- we don't have -- we still had a little bit of loss of motor-only sell-through in the first quarter, but it was -- I would call it de minimus, based on the size of our pump business.

It wasn't important enough for me to even mention.

But it's pretty much -- it's pretty much over from the motor sell-through, which is the only way it hits sales.

The investment, obviously, is going into Faradyne, and I think that Faradyne Motors is not the only part of our strategy.

I think our strategy is moving [at a] pace kind of as I would expect it to have.

And that's kind of like third quarter, second, third quarter?

Yes.

That's when shipments really have to (indiscernible) up.

It's really more third and fourth, but (inaudible)

Lastly, on the nonrecurring items in the water business, it sounds like half of it was facilities related.

Is there any expected continue through into the second quarter?

I think you talked about WICOR being finished now.

And then APW; if you can just tell us if there were nonrecurring costs related to that in the second -- first, and into the second as well.

We said at the (indiscernible) when we set the guidance for the year that we actually had continuing inefficiencies, particularly hitting our filtration business and our pool business from some (indiscernible) that were going to hit the first and second quarter.

Those came in as we thought they would in the first quarter.

They're going to come in as we thought they were in the second quarter.

So we're still -- and that's why the second half is stronger than the first half; it's really those inefficiencies that are going away.

There were some trailing in pump, and they did go away in the first quarter, as we expected them to.

So, those are -- those are as we thought they would be.

In terms of -- there's still some additional -- we're still moving product and there's always costs associated with that.

But when I talked about half being infrastructure related, part of that is planned.

But a big part of that was the IT system that's going into Europe.

And we'll have those expenses in the second quarter and in the second half.

So, again, it's about half on growth, it's about half on infrastructure, which includes the IT, and about half of that half is IT.

That makes sense, right?

(indiscernible) was the last piece.

Was there any impact this quarter?

I guess (indiscernible) the margins in the enclosures business; it just looked wildly stronger than I thought.

And --

I think the Thermal Management businesses -- we had the initial inventory costs; they're totally behind us now, which are the onetime costs that you get with an acquisition.

Those are totally behind us.

But they actually did a nice job of handling that, and then volume was higher than we thought it was going to be.

I don't think we're counting on that volume to stay as high as it was in the Thermal Management.

I think it will still be up.

But it was up double digits, and that was stronger than we thought.

And we got huge leverage on that.

(multiple speakers) target for the year;

I'm assuming that's not still in place, is it?

You talked earlier about that, and you said that it would have been tough to hit that.

We didn't expect to have sequential gains.

We had said that before, in the first quarter.

But that target of 15% by the end of this year; you seemed to be backing away from that last quarter.

But this quarter's numbers seem to be indicating you're on track for that.

Again, I don't think -- we're not planning on Europe continuing at a 20% growth rate, although I would love them to do that.

And I don't think we're counting on the thermal business to continue in the high-teens (multiple speakers) do that, too.

So, for the year, we're really -- we're probably at least 50 to 100 basis points higher than I would have normalized it.

So, I don't want to take the [heat off my head].

So it's not like 11, 12%, but it's certainly higher than that we would have expected?

It's higher than 12.

Mike Hamilton, RBC Dain Rauscher.

Thanks for all the detail.

First, just an update, if you could, on outlook on CapEx for the coming quarter and year.

We're still looking at 80 to $85 million for the year.

Realize the first quarter was a little low, but that's generally the case.

But 80 to 85 is where we've got it pegged.

Thanks.

If you wouldn't mind giving the revenue range that you're targeting off of for your second quarter guidance.

As I said, it's mid single (technical difficulty)

Fair enough.

Thanks again for the help.

Mike Schneider, Robert W. Baird.

Maybe we can start just on retail again; sorry to keep beating up on this.

The filtration product line specifically -- Randy used a comment that you saw some OEM cancellations during the quarter.

What were you referring to there?

There's two things actually.

The OEM that got canceled I'm not going to talk about, because we don't talk about names of OEMs.

But the OEM I was referring to, in terms of -- that's de-emphasizing retail is -- we still supply them; we're just not supplying them as much because they're de-emphasizing that channel.

And we typically, unless they tell us we can talk about their names, we don't.

But as you know, we've invested a lot to build OEM business.

We have got a lot of very exciting programs.

We expect that the programs we're still working on are going to have nice results going forward.

But there were a couple of the programs where -- that stopped in the quarter, because (indiscernible) the change in strategy on the part of the OEMs.

So, that's one thing.

The OEM we're supplying that's de-emphasizing retail is -- we're still a supplier to them; it's just that we're not getting the volume because they're pulling out of retail.

What does that do to your plans to move a lot of that production over to the China operations?

Have you ceased that or do you go elsewhere with that product?

The product is -- it's our typical filtration cartridges, the full range of those.

So, it isn't that those products or the capacity is (indiscernible) going to be utilized.

They were specifically being targeted to some applications that we're already in, but (indiscernible) would have under a different brand-name.

So, it really doesn't affect our manufacturing strategy.

We're not ramping up the volume as fast as we'd like in China on those products.

But we have other options, and I still think that -- the OEM is still an important part of our filtration strategy.

But I think there's really a lot of promise in the pro channel, which we have said before.

And the Water Group and Asia specifically, what type of growth did you see there in the first quarter? (multiple speakers) hope to achieve this year?

We saw good growth, not -- somewhere between 25 and 50. (indiscernible)

Now as I understand it, we've talked with others about how you're buying distributors and buying some systems integrators in China to try and speed the growth over there.

Has that caused any disruption among your existing distributors, and is that just a natural byproduct of this strategy?

I'm sorry; we're on a cellphone -- it was our phone system, I think, that went down.

Could you repeat the question?

I was just talking about your strategy in China.

Now, for the Water Group, as I understand it from others, that you've been looking to and/or actually buying your distribution partners in China.

And I'm just wondering, as you do that, is some of the weakness this quarter explained by some of the disruptions in that distribution channel in Asia?

We haven't bought any of our distributors.

We are trying to improve our distributor relationships there and make more sense of them, and make sure that we have greater insights into how much product they have on hand.

And we did have a little weakness in the first month of the quarter, but I think we're really on track in terms of what I expect from our distribution relationships there.

So, I'm really not sure what (multiple speakers)

Domestically, just in submersible Sable as well, the Faradyne motor -- I guess we've heard mixed commentary about the timeframe out of the major distributors we talk to.

Are you still targeting a third quarter launch for the motor and, I guess, is that on schedule?

Yes, I think we are and I think it is.

There's lots of elements to the strategy, and we are committed to -- our partner and us are committed to make that motor a winner.

The pre-buying of motors from your supplier that I think you even mentioned in your prepared commentary, what's the strategy there?

Are you kind of covering both scenarios in case Faradyne doesn't work, that you've got sufficient motor supplies to continue to operate?

I'm pretty confident Faradyne will work;

I think we're just being prudent in terms of making sure that we have -- we can serve our customers.

So, we've laid in inventories, not just of Franklin motors; we've laid in supplies of other motors as well.

And that's one of the reasons our inventory is up.

There are other suppliers (indiscernible)

The final question on margins and water.

Should we expect again for the second quarter that some of these investments and expenses you went through in detail continue in the second quarter, and margins again will be down year-over-year in the second quarter, just in water?

Yes.

The same type of magnitude -- you were down call it 100 basis points this.

Is that what we should expect in the second quarter?

I don't know if I would say the same, or -- what would you say Dave?

I would say it's going to be roughly the same (inaudible) a little less, but roughly.

Dave, congratulations on the retirement, and take care.

Don't retire him too soon.

He's still working.

I'm here.

I'm here.

(OPERATOR INSTRUCTIONS).

Dan Whang, Lehman Brothers.

Congratulations, Dave.

Just going back to the level of spending and investments, the 7 to $8 million -- how does that compare to the fourth quarter of last year, and how should we look at that level of spend in the second quarter and in the second half?

The investments are probably about twice what they were in the first -- in the fourth quarter.

The second quarter is probably about the same level, and then it drops off in the third and fourth quarter.

Okay.

So, in the third and fourth quarter, I guess the infrastructure investment essentially is slowing down, but the growth spending is continuing? (multiple speakers)

Yes, but we expect to get some results from the growth spending.

So, instead of it being a (indiscernible) drag, we're actually expecting some return on the investment in the second half, and -- but the plant-related investments, we think, will trail off, and the IT related investments will -- they will continue, but at a little different level.

And In terms of the expectation of plant inefficiencies decreasing as you're going to the second half, how much of that inefficiency trailing off volume dependence that you have greater throughput?

Volume really helps.

One of the things that hurt us in the first quarter was, in terms of the absorption in some of these factories, the volume was short.

And we really -- we really need to get that volume to pull through those inefficiencies and get them out of inventory.

So, that was going a little slower than I would like, but it went -- we're not creating the efficiencies at this; we're tracking how as you create them, not just as they hit the P&L.

And those are going per plan -- the ramp down, if you will, creating the inefficiencies which -- in other words, the under absorption (indiscernible) inventory and that gets pulled out on the [side] (indiscernible)

The second question is regarding pricing.

I think you talked about 2.5% of contribution to the Company overall.

How did that split by Water and Technical Products?

Water grew higher and Technical [Products] a little lower than that -- than that average -- plus or minus 40, 50 basis points.

And finally, if you could just talk about the current commodity price environment.

I think in the last conference call you talked about looking at potentially sourcing alternative materials to replace resin.

If you can talk about that initiative and just the overall environment.

Those initiatives continue at pace.

There's two elements on the raw materials side.

As you know, I think, one of the advantages we've had in Technical Products is we have a crack group that focuses on metals.

And we not only make sure that we secure the best price, but we also make sure we secure the supply so we can meet the demand.

And that's actually been helpful to us in terms of gaining share.

So, that group remains right on top of metals.

In terms of plastics, the first thing we did was qualify alternate suppliers.

We did not have alternate suppliers qualified in some of our key applications.

And that (indiscernible) been able to move some of our business to those, sometimes all of it to those alternative suppliers.

So, the fact that we now have multiple-supplier sell side is a big deal.

It's going to help us manage that.

The fact that most of the [placards] we use are petrochem-based, and oil prices are high means that pressures are going to continue there.

And what we need to do is make sure that we're -- we stay aggressive on recovering that on price, as well as stay as aggressive as we can and look for substitution in materials.

That hasn't had a big impact to us yet, but if you can (indiscernible) polypropylene from an ADS or something like that in some application.

That takes design and it takes a little while.

So, those programs are also a key part of our managing the material costs.

And going forward, you continue to expect that pricing and productivity would offset that?

That's how we measure our operations, and I think the (indiscernible) -- it's masked by the investments and the inefficiencies in water, (indiscernible) the water did a nice job on price and productivity in the first quarter, and actually a little bit better than Technical Products.

So both groups, Technical Products and Water, have these disciplines set and are driving them hard.

So, yes; the short answer is yes, they're going to continue

I think we have time for one more question.

We're a little bit over noon, but we also were blanked for 10 minutes.

(OPERATOR INSTRUCTIONS).

If they're all done, that's fine, too.

If there's no other questions, why don't we wrap up here.

Thanks for your interest, and we'll be talking to you.

Host, could you give them directions on the replay?

Yes, sir.

Thank you for participating in today's 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 Monday, May 1, 2006.

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This concludes today's conference.

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