濱特爾 (PNR) 2007 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Pentair third quarter 2007 earnings conference call.

[Operator Instructions] Thank you.

You may begin your conference.

Good morning.

Thank you for joining us today to discuss Pentair's results for the first quarter and to update on you the Pentair outlook for the remainder of the year.

I am John Storm stock CFO and with me today is Randy Hogan, our Chairman and Chief Executive Officer.

Before our discussion begins I would like to remind each of you any statements made about the company's future financial results are forward-looking statements subject to future risks and uncertainties such as it is risks outlined in Pentair's 10-K as of December 31, 2006.

Pentair News Releases.

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

Actual results could differ materially from anticipated results.

I would also like to note that Pentair has adopted the provisions of Fenn 48 accounting for uncertainty in income taxes.

As a result of this adoption, we recorded an adjustment to retained earnings of 2.9 million.

You can see a footnote on our balance sheet in our earnings news release distributed earlier today.

Also I would like to remind everyone today that this webcast is accompanied by a presentation.

We will be referencing these slides throughout our comments.

They describe in greater detail Pentair's first quarter performance and 2007 outlook.

Going forward, we will use this format when reporting earnings to help ensure that investors have the clarity and detail necessary to make appropriate investment decisions.

Today's slides will be available on Pentair's website immediately following this call.

In the meantime, I recommend that you connect to www.Pentair.com and go to the financial information page to access today's presentation.

As usual, we will reserve time for questions and answers after our prepared remarks.

You can ask questions by phone at the end of the presentation.

I will now hand the call over to Randy who will take you through hand the call over to Randy who will take you through Pentiar Pentair's first quarter results and highlights, provide perspective on the markets in which we and describe the detailed productivity actions we're taking to help ensure we deliver expected results this year.

Then, I will conclude our formal comments with an explanation of our second quarter, second half, and full year forecast.

Randy?

Thanks, John.

Well, let's begin.

As we look at our first quarter performance, we're please to do have delivered $0.42 per share of earnings from continuing operations on revenue growth of 5%.

This compares with the First Call EPS consensus estimate of $0.40 per share and is flat with last year.

Overall Pentair sales were $808 million versus $771 million in the first quarter of 2006.

3% of this growth is organic, and 2 points of growth came from acquisitions.

These sales results realized despite significant headwinds in some of our markets.

In the North American residential market new housing starts are estimated to be down some 25% to 35% at approximately 1.3 to 1.4 million housing starts versus last year's annual housing starts of about 1.8 million.

Despite this impact our Water segment grew revenue 7% or 5% excluding the impact of acquisition.

Also in Technical Products we face very difficult year-over-year comparisons in both this first quarter and the upcoming second quarter.

Especially for the portion of our electronics business that serves the global data come and telecom markets.

As we discussed last quarter, the telecom market has been impacted by several large mergers which we believe continue to temper buying activity as the newly merged organizations seek to determine which platforms they will use going forward.

We can meet the demands of these markets regardless of which standard is ultimately defined but are nonetheless impacted by the buying delays right now.

Overall, Technical Products growth was down 1% as the growth driven by Hoffman in Asia in Q1 did not offset the telecom declines in both North America and Europe.

No surprise that some of our markets are not in our favor right now.

In fact, we began dealing with these issues in the third quarter of last year and expected these conditions as we entered 2007.

This year we're focused on return to go our historic operating discipline to deliver significant margin expansion and to deliver on our commitment to say our shareholders.

Overall return on sales declined 30 basis points, a 280-basis point improvement from productivity, positive volume, foreign exchange and price which was not enough to over am co the impact of key commodity inflation and the impact of the inventory step up of our young pump acquisition.

Overall free cash flow in the quarter improve to do usage of $75 million versus a usage of $101 million in 2006.

An improvement of $26 million driven primarily by lower use little for working capital.

We ended the first quarter with overall debt to total capital ratio of 39%.

We turn to the water business.

Overall water sales grew $38 million to $555 million or up 7% versus last year's sales of $517 million.

Organic sales were up 5% and young pump added 2 points of growth.

North American pump sales were down 1% as strong commercial industrial and municipal sales partially offset North American residential softness.

Pump sales were also impacted by the well known disruption of a motor supplier who has become a new competitor in the submersible well market at the same time that that well market has declined.

This is never a good thing.

However, we continue to make great progress in this area as we have now converted more than 70% of existing Pentair pump customers to PENTEK motors our brand for the FARADYNE motors supplied by our JV.

We received orders for approximately 40,000 pumps with PENTEK motors, already shipped 30,000 of them, and of these have around 11 to 13,000 pumps in the ground.

Our total returns thus far are less than 1% which is far better than we experienced with our previous motor supplier.

The competitive dynamics we face in this market have permanently changed.

While there will be no declared Victor at any point in 2007 or 2008, we're very pleased with our progress.

I assure you we are continuing to do everything we can to defend our position in the well water segment of our pump business which roughly is estimated to represent about $100 million of our annual North American pump revenue or less than 5% of total water sales.

Our North American pool and spa sales were up 11% driven by new products and a carry over early by orders in Q1 from Q4 2006.

Last pool season move these early by orders were shipped in Q4 2005.

Thus we have a healthy first quarter year-over-year comparison.

We will detail our full expectations for the year later in this presentation.

North American filtration sales were flat year-over-year as increases in our commercial and industrial markets and continued momentum in Food Service did not offset declines in residential tanks and some OEM volume.

Overall Filtration fundamentals continue to improve.

Lean is being deployed effectively, and margins continue the improvement begun in the second half last year.

We're excited about adding media to the Pentair filtration business and believe it will bring us valuable technology and ultra filtration while extending our industrial growth strategy.

Our sales in the European, Middle East and Asia Pacific markets continue to be strong.

Sales in Asia Pacific grew 27%.

In water Europe sales grew 36% or 14% excluding the young pump acquisition and approximately 6% also excluding foreign exchange.

Overall, water margins expanded 20 basis points with volume, price, and foreign exchange contributing 280 basis points of improvement, productivity net of key strategic investments, primarily driven by investments in SAP and a new Swiss company structure added another 40 basis points.

These improvements offset inflation of around 280 basis points and the impact of acquisitions at about 20 basis points.

We will detail our specific cost actions to achieve water margins of 12.5% for 2007 later in the presentation.

Let me turn now to Technical Products performance.

Overall Technical Products sales were down 0.6%.

The decline was all organic as 5% growth in Hoffman's electrical markets was offset by electronic sales declines.

These declines also masked a significant progress of our Technical Products Asia business which recorded a 32% year-over-year growth in the quarter.

In North America Pentair electronics packaging sales were down about 25% on the contraction in the telecom market, and Technical Products Europe was down 9% excluding currency exchange.

If you recall in the first quarter of 2006 our electronics business was still shipping some end of life data come programs and also produced the Deutsche Telecom order that added $7 million to our Q1 2006 results.

These events are negatively impacting 2007 sales comparisons in the first quarter.

Technical Products expanded margins by 90 basis points through core operational improvements and by 100 points through net volume, price, and foreign exchange.

That's 100 basis points.

However, these gains were offset by significant inflation of 350 basis points link to do stainless steel pricing and an exit cost of 70 basis points that related to a French facility closure taken several years ago.

Overall technical products margins declined 230 basis points.

Excluding the exit cost not expected in the first quarter, the 160-basis point year-over-year or 100-basis point sequential decline was at the lower end of our forecasted range.

We anticipate one more quarter of difficult comparisons as the telecom market decline will continue to be a head wind in the second quarter.

We're confident this our Hoffman business will continue to perform, and we're also confident that our cost actions in our North American electronics business will yield a marked improvement in the third quarter and beyond.

Let me return to the financial results in detail for the whole company.

We drove overall sales growth of 5% and expanded gross margins 60 basis points to 29.4%.

Our EBITDA margin was 12.4% for the quarter, and net interest expense was up 1.$8 million as we added $188 million as we added of debt from last year primarily related to the young pump acquisition.

For the quarter our effective tax rate was 35.2%, a lorn to our normal run rate versus last year which is helped by 120 basis points of favorable foreign tax credits in Q1 2006.

Overall, diluted shares declined 2% to 100.3 million which is down from 102.5 million last year reflecting the impact of our share buybacks.

In the first quarter we repurchased $9 million worth of Pentair shares and have approximately $31 million remaining on our current buyback authorization.

We're focused on operations and believe that despite the challenges we face in some of our markets we can deliver on our commitments through strong operating in all of our great franchises.

We renewed energy focused on margin improvements and lean initiatives in water combined with getting the synergies from our acquisitions, some over due.

This is the story of Pentair in 2007.

As we focus on operating improvements, we're keeping the metrics you see on this slide front and center.

Some of these metrics are we haven't discussed with investors in the past, but we're doing so now and we'll continue to do so going forward to help you better understand how we're running your company.

While we believe our 2007 goals are nowhere near our longer-term potential, we believe that focusing on margin improvements and clear commitment to accelerate after-tax return on invested capital will drive the behaviors we want this year and will yield our intended results.

A few highlights reading out already include margin improvements in water and total cash flow performance which improved $26 million year-over-year as inventory cash usage declined $19 million versus last year.

If we take a look at the components return on invested captain capital to the upper right-hand side of the slide, you will see our fourth quarter trailing net operating profit after tax or NOPAT was $221 million.

Our average invested capital was 2.46 billion dollars which gives us a year-over-year ROIC decline of 50 basis points.

This has to be corrected.

The path to a higher ROIC is simple.

More NOPAT driven from a focused effort on ration and return to our demonstrated lean journey which will help us better serve our customers, drift profitability and lower our investments.

Despite our overall reductions in head count, we redeployed or added approximately 30 people in the last six months who are now focused entirely on lean discipline.

We're beginning to turn the tied on the cultural barriers we believe have stood in the way of achieving lean results faster.

Every $25 million of net operating profit after tax equals 1 point of return on invested capital.

Conversely it will take $250 million of reduction in the investment base to yield the same return.

We clearly need to improve net operating profit after tax while managing the balance sheet effectively.

Our ending working capital was $506 and the 13 average is $430 million, about 13.5% of trailing sales.

Return on equity was 10%, and our total debt was just over $1 billion for a debt to total capital ratio of 39%.

By the way the non-GAAP to GAAP reconciliation of these calculations and numbers are included in the appendix of this presentation which will be available on our website immediately following this call.

As I mentioned earlier we believe our 2007 goals are realistic and achievable.

We also believe our longer term potential is much greater.

We're excited about the alignment and focused effort to accelerate our goals going forward.

Now I would like to direct your focus on our pool and spa business, one that has been getting a lot of attention from current and potential investors.

To shed more light on the market dynamics of dynamics of this business.

Our pool business had 2006 sales of approximately $630 million, the breakdown of those sales is as follows: approximately $55 million of sales were in the spa and bath market and approximately $75 million of sales were in international geographies and the commercial market.

This leaves approximately 500 million of 2006 sales in the U.S., residential pool equipment market.

Around 55% of these sales or roughly $275 million is derived from new pool construction.

In addition we believe that roughly 20 to 25% of new pools are built with new homes and that the remaining 75 to 80% of new pool permit sincerely for existing homes.

Recent reports show that U.S.

residential new housing starts are down about 25 to 30% this year which will affect about $55 million of the $275 million of our sales directly.

The other $220 million of new pool related sales is driven by homeowners and their willingness and ability to invest further in their homes.

The March new pool permit data we track shows permits in key markets down as much as 30%.

For example, California is down 25% but appears to have flattened out.

Arizona is down 35%, and we believe Florida is continuing to decline and is now down nearly 45%.

In contrast, Texas is showing a modest increase.

While pool permit data is not available for all markets, we believe we have a good handle on these critical markets and have been watching trends closely.

We're also managing inventory and costs appropriately given those insights.

Of our total pool equipment sales, then, remaining 45% go into after-market applications on already in-stalled pools.

Unlike many other markets, it is hard to distinguish between an after-market and an original equipment sale at the same pool dealer.

So pricing decisions usually impact entire product lines.

Usually yield attractive results in this business.

This market is driven by product replacement life cycles and upgrades, and we believe it will continue to grow with the install base and through price increases and product upgrades.

We estimate that the current install base of in--ground pools is around 4.85 million.

In 2006 we estimate that around 170,000 pools were added and expect that another 130,000 new pools will be added this year.

This is down from a peak of about 180,000 new pools which we believe were added in 2005.

In addition, there are approximately 3.7 million above ground pools in the United States.

The pool equipment is designed to serve all of these pools.

Our outlook for 2007 pool equipment sales is based on this model and is included in the bottom half of this slide.

For our forecasting we're using the more severe U.S.

housing decline rate as well as the more conservative now pool outlook for exist willing homes as this approach serve to say better focus our cost actions.

Based on this, decline of approximately 30% and 20% respectively, we're anticipating a revenue loss from the prior year of around $60 million related to market dynamics.

There are partial offset to say this decline, however.

Approximately $50 million from early buy orders carried over from four '06 and shipped in this first quarter of 2007.

Aftermarket growth in price increases of roughly $25 million will increase the market or increase our sales, and around $20 million will come from new products like our Intelli Flo and Intelli Pro variable speed pumps and our new master temp heated line all of which are being very well received.

Thus despite the radically upset housing market, we're expecting our year-over-year growth to be down only about 2 to 3%.

Our quarterly rates range from the positive 11% we saw in Q1 to an expected 6 to 8% decline in Q2 due to difficult year-over-year comparisons and to roughly 4 to 6% declines in both Q3 and Q4 as the market continues to weaken slightly.

I hope this discussion helps you better understand the dynamics of the pool market and our pool business.

I am sure we'll get more questions as the year progresses and we'll continue to update you on the market and its impact on our business using the model just described.

Notwithstanding the current turmoil in the market we continue to view the pool business as an attractive business albeit a more volatile one than we believed a blue years few years ago.

Now I would like to turn your attention to the actions worry taking in our Water Group in total to better position our businesses and deliver on our commitments.

Over the past year I have mentioned that I have been disappointed in our progress in building our operating disciplines in our Water Group.

While I believe there are multiple reasons for a logic of progress, I also believe lean enterprise remains our single biggest opportunity to drive higher ROIC at Pentair which means that improvements are well within our control.

We must accelerate our progress.

Thus, last year I made several changes to reinvigorate lean disciplines.

First I delayered the organization to reestablish direct visibility to the operations and presses.

I a Mike Schrock as operating officer and advised him to take some of the best process in lean -- accelerate the sharing of people and best practices where they're most needed.

Third, I made it very clear to the President anything short of rapid ake acceleration and total compliment to lean and operating excellence is just not acceptable.

Fourth, I have challenged the water organization and built operating plan to say achieve 12.5% operating margins for 2007 and we set clear direction to the 15% plus operating margins needed to drive higher return on invested capital.

In our Q4 2006 earnings call we shared some of these plans with you.

Finally, I have leverage the appointment of John Stauch our new CFO to revisit our plans and commit as well as to help ensure any deterioration in end markets is not used as an execution for missing commitments.

This slide lays out the 2007 goals for the Water Group clearly, and we will report back on these throughout the year.

The score card for this one is easy.

12.5% ROS in water for reported 2007 results.

The key actions that we'll read out are first in the spa bath turn around.

The goal here in 2007 is to turn it from a loss of approximately $8 million to break even for 2007, which is the first step for us to determine the long-term attractiveness of this business.

So far our results show some progress of spa bath recorded a much lower loss for Q1 on a more than 10% further sales decline.

The second key action that will read out includes cost reductions and greater lean discipline to say drive operational improvements in pool, specifically in our Sanford operation.

These improvements including a significant write offs we took in 2006 achieving the cost basis of last year's facility consolidations and head count reductions and hire productivity.

We have a good President in place who clearly owns the plan and I am confident we'll exceed our goals.

In pump margin momentum has been established already.

Now we're focused on driving lean more deeply to achieve additional improvements.

We also believe the strength of the commercial and municipal markets combined with our strong product offering will contribute significantly to attain these 2007 goals.

In Filtration improvements are based on the stronger culture of accountability we've built.

Over the past nine months strong operating disciplines and effective execution have begun to yield results.

Thus far I am happy with the progress in this business as Filtration margins expanded 180 basis points in the first quarter.

Still not where they need to be, but certainly better.

In water, Europe we're focused on putting operating miss steps behind us and deploying lean to achieve the margins from the growth we're driving.

While we're maintaining our investments in SAP, we reconstituted and stabilized the leadership team, redirected operating initiative to lean and lowered our head count.

Here to first quarter results show Europe is on the right track.

Finally, there are benefit from delayering of the segment level and some reductions in corporate over head from the streamlining done last year that will and are reading out at the corporate cost line.

Overall we're on track after the first quarter, and I expect we will see steady expansion and progress throughout the year.

Now I want to turn it back to John to close out with our view on Q2 and the full year.

John.

Thank you, Randy.

First of all, I want to say that I am proud and happy to be part of the Pentair team.

I enjoy working with Randy and Mike to drive the required operating changes and would not be more pleased with my decision joining Pentair air.

As Randy mentioned, we have reviewed the full year outlook for the businesses based on the current market conditions.

While the North American residential new home market and the electronics markets are soft, our 2007 operating plan is one of focused cost reduction efforts and margin expansion.

Therefore, we believe we are in an excellent position to achieve our commitment of exceeding $2 per share.

Pentair first quarter performance was $0.42 per share from continuing operations.

Exceeding the consensus estimate for the first quarter by $0.02 per share.

Favorable tax adjustments in 2006 negatively affected year-over-year comparisons by about a penny.

Market headwinds in Telecom, pool, and pump adversely affected performance by approximately $0.09 per share in the fair market value inventory step up at young pump along with the associated increases in net interest negatively impacted results by about a penny.

All other operating improvements yielded $0.11 per share with about $0.02 coming from pool upside revenue and another $0.09 coming from the rest of the operations.

The $0.09 of operational improvement reflects an increase of about 22% versus last year's adjusted EPS of $0.41 per share and was primarily driven by the performance in water.

All of the $0.02 of EPS over drive versus the $0.40 consensus estimate can be explained by the pool growth of 11% for the first quarter which was greater than expected.

Thus far in the pool year, which begins in Q4, we are down 4% when you compare Q4 2006 and Q1 2007 versus the same period a year earlier.

As we demonstrated in the model that Randy walked you through, we believe the market is softer than the growth that we have delivered.

Therefore, it is only wise to assume that the shipments may have come as stocking orders, so we're expecting the $0.02 over drive from Q1 to swing the other way in Q2.

We expect the second quarter to be the most difficult comparison of the year as earnings are estimated to be down approximately 13% comparatively or in the $0.57 to $0.59 range.

The adverse factors driving this are a very difficult market in pool which should affect year-over-year performance by roughly $0.04, continued head winds in the telecom markets of approximately $0.04 per share, and the last difficult comparison as it relates to the supplier competitor issue within the foreign submersible pump motor market which will impact results by about a penny per share.

Overall, we expect the markets to adversely impact year-over-year results by approximately $0.09 per share in Q2.

This is consistent with the Q1 year-over-year impact.

In Q2, we'll also see a $0.03 negative impact related to the fair market value inventory step-up in the Porous Media acquisition as well as increased interest expense related to the added debt and another $0.08 of unfavorable comparison related to 2006 Q2 favorable tax adjustments.

All in all, this is over $0.20 of challenges plus the $0.02 swing in pool revenue from the Q1 over drive that even an expected $0.13 or 22% year-over-year improvement in operating performance versus adjusted Q2 2006 results can not overcome.

As we look at the second half of 2007, we anticipate stronger year-over-year results as the impact from markets becomes a net favorable on a year-over-year basis and as operating improvements in water accelerate.

Therefore, the approximate 13% decline in earnings in Q2 should be followed by 40% increase in the second half and a full year improvement in EPS of 11 plus percent on a reported basis and about 17 plus percent higher than the adjusted 2006 EPS of $1.72 per share N 2006 Q3 and Q4 included approximately $0.11 of favorable tax adjustments that were offset by approximately $0.11 of Q3 one-time write offs related to severance and inventory adjustments in the Water Group.

This year the acceleration we expect in second half operating performance versus the first half of the year will be driven by the operating turn around in water Europe and accelerating cool pump and Filtration lean initiatives as the year-over-year operating performance improves from 22% in the first half to around 28% in the second half.

This forecast assumes a tax rate of 35% to 35.5% for the year and each of the remaining quarters, and you have any commitment that tax benefits and one-time recoveries will not be used to make these numbers.

Also, interest expense is assumed at roughly 20 million for Q2, 19 million for Q3, and 18 million for Q4 reflecting the increased debt due to acquisitions.

We are focused and committed to exceed $2 per share, and as I mentioned earlier, we reworked the plans based on softer market conditions and rebalanced spending priorities to ensure cost actions readout.

For second quarter we expect overall revenue to be around 880 million to 900 million or up about 2% to 4% year-over-year, about 1% will be organic, and 2$ to 3% is related to our recently announced acquisition.

In water we expect revenue to be up around 6% to 7% and about 1% to 2% organic.

In Technical Products we expect revenue to be down 3% to 4% due to the year-over-year impact of the Telecom markets.

We expect operating income to be about flat with last year and operating margin be to be around 11.9% to 12.2% with water margins at be to be around 11.9% to 12.2% with water margins at around 13.7% to 14.1% and Technical Products margins around 13% to 13.4%.

EPS will be down approximately 13% on a reported basis with all of the contraction coming from the impact of the Porous Media acquisition due to the fair market value inventory step-up and the higher debt and a year-over-year impact for the tax rate from 28% recorded last year to the 35% to 35.5% expected this year.

We expect cash flow in Q2 to be around $110 to $130 million giving us a first half total of 35 to 55 million and a debt to total capital ratio at the end of Q2 of around 41%.

For the full year we expect overall revenue to be around $3.34 to $3.38 billion or up about 5% to 7% year-over-year, about 2 to 4% will be organic and 3% is related to our recent acquisitions.

In water, we expect revenue to be up around 8 to 9% and about 3 to 4% organic.

In Technical Products we expect revenue to be up 1 to 2% for the year as the second half year-over-year comparisons offset the first half declines.

We expect operating income will be up around 25% to 27% to $385 million plus and operating margins will expand about 180 basis points to approximately 11.5%.

Water margining would then be approximately 12.5% and Technical Products margins are estimated to be approximately 14%.

The favorable tax rates from 2006 will not be repeated in 2007 and therefore impact EPS by about $0.20 per share and year-over-year interest expense will increase roughly $20 million causing an EPS impact of $0.13 per share giving us a reported EPS outlook of 11% plus growth on a reported basis.

We expect cash flow for the full year to be about 205 to 225 million which will exceed 100% of net income and we expect debt to be about 1.1 billion and a debt to total capital ratio of approximately 37% for year end.

We appreciate all of your attention today.

We know you have been given a lot to consume, but hope you found the insight into the details to be helpful.

Randy and I would now be happy to take any questions you may have.

I would like to now remind participants that you can access the presentation at www.Pentair.com on the financial information page and we'll also take at the end of this conference call, in the mean time we will be happy to take questions.

Your first question is from Deane Dray.

Thank you.

Good morning.

Before we go into some of the business questions, it strikes me as interesting that you all are providing much more detail on your quarterly guidance as a number of companies actually move away from quarterly guidance.

The good news here is that you're is hing up more precision on your financials, but what is the thought process of providing this level of detail?

Well, you know, we haven't done a very good job of providing guidance, and part of getting -- I think we're in a show-me state, and part of getting that to ground, John and I have been deep in the plans, and we've been deep in understanding how we're going to achieve our plans, and we figured we should share that.

We should share that detail, and not everyone had all the information right, so the best way to do it is to lay it out there.

We intend to be more open with more detail at in the business as we've started to here.

Good.

Just on the other pointed on the guidance, not to pars your words, but it is interesting how you focused on the low end of the range for '07.

Should we interpret that there are challenges to just to hit the low end of the range or are you trying to set the bar low here?

Well what I say again our forecasting hasn't been very good, the consensus is 2.01, and we're comfortable with $2.01, and we're not changing our guidance, but we're comfortable with $2.01.

Going into the businesses, the level of detail you provided outed pool business and the housing sensitivity is it is consistent with what you've said before, and interesting you didn't touch on the housing sensitivity on the pump side, so what are you expecting in terms of the residential impact on pumps at this stage of the cycle?

We're seeing it now.

I mean, it is clearly having an impact.

That market is down 30 to 35% any way you look at it, and we're facing into the pump market in the foreign submersible the increased issues associated with having extra supply with a supplier becoming a competitor in that market, so we're assuming the same challenges in that end of the market.

We started to experience them last year in Q3 and Q4, and it is just continuing.

So how would we separate what's the residential market impact on the pump side of the business versus the Franklin issue?

The Franklin issue is only in well pumps.

It is $100 million in total as John said.

That's a 30% hit.

The three factors, one is that there is a lot of motor inventory out there.

There was a lot of aggression in getting placement in stock, so right now the market is affected by the fact that the channel was over stocked last year by the introduction of the FARADYNE motor pumps, by the fact that Franklin was aggressively trying to get their pumps in place, and then the market went down, so I really can't tell you right now how much of that decline we're seeing is the fact that the channels over stocked versus end market but it is only $100 million in our total sales, so it is not nearly as critical to us, we think, as sharing the understanding on pool, which is one of those areas where eight, nine months ago we didn't have as clear a handle on the market.

We've done a lot of work to that model.

We decided we would share it with everybody.

I know this is a second quarter event, but the Northeast just went through an extraordinary amount of rain this past weekend, and that matters a lot for the sump pump side of your business.

Can you share with us any terms of demand flow at the home centers and were you able to meet that demand?

Well, we can meet the demand.

We recently received an allotted -- plotted I guess I should say from one of our retail suppliers because of our ability to react to short-term weather events, so no one can supply better than we can.

Our success in the retail channel continues, and so retail was soft as you can recall in the fourth quarter and the early part of the first quarter, so I don't know whether to view this weather as just getting us back to norm or getting -- or having any upside.

At this point I wouldn't -- I mean --

You wouldn't want to say that the weather is going to continue.

Got it.

Last question on the enclosure you're side, interesting that Hoffman has shown the amount of strength that it has.

Just take us through what the drivers there, how much of that is nonresidential construction, is it -- what are the key drivers?

The key -- industrials remain remarkably strong, but the really strong pieces for Hoffman is continue to do segmentation, they continue to add distribution, and in particular as you pointed out commercial is very strong, and also networking.

That's the standard product sold to also into commercial settings that end up going into people's telecom closets and computing centers.

That's been a nice growth for us, but Industrial also was positive.

The networking side is, that is more enterprise customers as opposed to the big telecoms which are being impacted by the merger science.

Correct, correct, exactly right.

We distinguish between the telecom and the OEM business which is having a difficulty versus this is the buildout if you will of office space.

We also say that standard product sold through distribution is much more.

(MULTIPLE SPEAKERS ) and on the telecom side you get custom build to print.

Great.

Thank you.

Your next question comes from Curt Woodworth.

Hi.

Good morning.

Good morning, Kurt.

Thanks for the detail.

I was wondering if you can provide a little more granularity on the margin expectations for water to get to 12.5% this year, is it safe to say that most of the margin improvement is coming from the pool and spa division and can you talk about your ability to cost down on the residential side this year for the pump business?

Yeah.

I mean, first of all I will handle the margin side, and then I will hand it over to Randy for the second piece of that.

If you think about it, the largest margin increase, Curt, is coming from EMEA water which really had a couple decent quarters last year and started to slide throughout the year.

That's why we feel good about the second half this year on the water margin side.

Think about that as about 4 to 500 basis points of expansion in European water year-over-year.

We then see pretty even expansion across pump which is a couple hundred basis points, pool and spa, which is in the 2 to 250 basis points, and Filtration around 200, so then we get the Asia Pacific Growth which isn't so much about cost takeout on the Asia Pacific water, it is about leveraging the growth we're getting.

That's up another 150.

I would say it is pretty even across the board other than the European water which had the cost issues last year that we hope to mitigate.

Randy, do you want to handle the second part?

That's why when we look at the first quarter and say Europe is on track, Filtration was up 180 basis points, you know, we feel like we're making good progress.

What was the second question?

I didn't catch -- I missed one word.

Were you talking about cost of goods sold?

Just looking at the residential pump business in terms of cost reduction opportunities, ability to at least maybe pre serve margins there given the operating leverage head wind on the volume side?

Well, particularly in the well pumps, the housing side, there is really a couple sections of residential pumps.

There is the pumps we sell through retail which end up in residential applications.

There is the waste water side which has nothing to do with what Franklin is doing, and on the well pump side on our focus has been on driving the quality.

Network is outstanding and sharing supply, and the focus right now is on productivity.

We have a plant in the New York and a plant in China, and the more we ramp up that plant in chine the more we drive our costs, so that's clearly one part of the strategy.

In the part of our retail business, that's just an ongoing low cost country strategy to drive margins there, and frankly the retail business when we're the leader in providing pumps into the retail channel, had a very good first quarter in terms of customer relations, shipping, looked good, and the wastewater side is another area where we are seeing some residential decline.

That's really just a market.

There is no pricing issue there.

That is just a market issue, and our focus there is on moving more into the water re use arena with our delta environmental business.

Great.

Does that answer the question?

Yep.

One last question.

You laid out increase in targets for the [ indiscernible ] acquisitions.

Can you comment on your expectations for 2008, in terms of how creative you think the acquisitions will be?

What's your target.

Collective I I would say $0.05 to $0.06.

Great.

Thank you very much.

Your next question comes from Mike Snyder.

Good morning, guys.

Good morning.

Maybe first we can start with just a couple of the second half swing factors.

John, you laid out that FARADYNE should add $0.03 in the second half and the telecom segment should add $0.04.

Can you give us just some substance as to why those numbers reverse the first half trend?

I don't want to say they're adding.

They're actually comparably, so the year-over-year basis were better because we experienced some significant cost issues on the FARADYNE JV trying to ramp out the SKUs up, get all the parts in, last year, and we start to head forward with about 95% SKU coverage and entering into quarter, and we feel we're up and running fully at FARADYNE throughout the rest of the year and can work on what we need to work on there which is actual cost improvement, and we're getting some volume leverage that's kind of why we see that market head wind on the cost side going away.

As you clearly indicated before, I don't think the market gets better.

It is still around 30% down year-over-year, and we'll continue to experience that in Q3 and Q4 as well.

It is just that we're a lot better shape given the actions that we take in the second half of last year and we're taking here in Q1.

On the Technical Products, if you recall, we really started seeing the problems in data come and telecom in the third quarter last year.

Again, it is a year-over-year -- it doesn't imply that the Pentair electronics packaging is back to our target margins.

It just implies that it is better than it was last year, and it wasn't very good in the third and particularly the fourth quarter.

That's where you saw the first Hoffman couldn't carry the day, and Hoffman did well but not well enough to cover the decline in margins that you saw in the fourth quarter.

Okay.

Just back on FARADYNE for a second, I believe you shipped about 30,000 units.

That's a lot of channel fill obviously.

Do you have a sensor a forecast of what you believe your annual shipments will be out of that division once the channel fill is over and we return to some brume level of sales?

I don't have that number right here, Mike, so I would rather not pull it out of my hat.

Well, let me rephrase that.

30,000 includes what we shipped last year.

I don't have that number.

Okay.

Have you been pleased with the level of FARADYNE acceptance and --

Yeah, that's what I was referencing.

Some 75% of our customers have accepted the PENTEK motor and the feedback we're getting is quite good, and I would say 75% is at the high-end of our expected range at this this point.

We have 90% of the SKUs that is are available right now.

The other ones are close to availability, and so we feel pretty good about where we are right now.

We had 11,000 to 13,000 in the ground performing, and the feedback is very good, so we've had a detailed plan, and it is being well executed by Bill Walt and his team.

One more pumps question, Fairbanks Morse division had the $22 million order from New Orleans.

Did that ship this quarter for or targeted 2Q.

That's targeted to ship in the second quarter,May , some may go into

Final question and this is detailed.

I apologize.

In the pool annual build up where you gave us each of the component to say get to the growth rated for the year, you had $25 million in price and aftermarket assumed.

If you take that on the base of 500 million in pool sales and 45% of which is aftermarket, it assumes, then, you're getting about 11% price on the aftermarket.

Keep many mind some of that is aftermarket growth and the other piece would be the pricing impact.

Okay.

And can you give us I guess that's where I am headed.

Can you give us some sense as to what type of price you're expecting and why you would get any price in this type of soft market?

Let's say somewhere north of 5%, and it is not because it is soft market.

We do get price on a regular basis.

It is a construct channel, and the aftermarket if you will, the growth on install base is driven by a couple things.

One, install base is up, and we haven't -- we see about a 3 to 4% you unit volume growth there and with our new motors typically there is upgrades, very fairly do you not put in a better pump, and right now for instance our Intelli Flo pump, the price of the Intelli Flo pump is three times what the Whisper Flow pump is.

It pays back in less than a year in a lot of markets, so it is an economically a slam dunk.

So there is also content that's gone up.

The content for pool has doubled in the last ten, twelve years, so you get the ramp-up in and the install base, you get the ramp-up because the content is growing, and then you get prices.

Okay.

Thank you.

You're welcome.

Your next question is from James Lucas.

Thanks.

Good afternoon.

Hey, James.

A question for each of you.

John, I guess first off if you could perhaps share with us now that you've got not quite two months under your belt some of your initial observations after you've had an opportunity to go around and kick the tires within the organization, and meet with the people and, Randy, you made a comment with regards to some of the issues you've had with regards to lean and the water business, and you talk about having to remove cultural barriers, and I was wondering if you can expand on that specific comment.

I will give you my impression, first, James.

I was excited to come to Pentair, and I toured the operations, and I would say I am equally if not more excited after having toured the operations primarily to some of the things that Randy will mention he calls it for instance in water islands of lean, and you can see that, and you and I had a conversation.

You can go into a plant and there are plants that I have seen extreme lean in the sense that I haven't seen better plants in my career, and then we go into other plants that are just on the beginning phases of that lean journey, and I look at that as nothing but opportunity as far as our operational progress we can make.

I am going to let Randy speak to why that might have happened.

We're just farther ahead in some of our plants than we are in others, and we've got to take the best practices that we see and have worked in the businesses that have been able to establish those lean culture, that lean enterprise, and redeploy that across the plants that are lagging or the businesses that are lagging but I think our markets are solid.

We labeled or put out in front of everybody the pool market because Inc.

it is a very difficult market that we're playing in, but it is a fantastic franchise.

The fundamentals in the market are sound.

We have great relationships with our customers.

We have great technology and products, and when we get to the pointed where we can have the great operational performance, I think we'll really start to print money in the pool channel.

Our pump business is very solid.

We're facing a difficult dynamic, but I fully believe that we've got the fundamentals to continue to extend on that product line, and I don't want to go through all of them but Filtration I am really excited about Porous and what Porous adds with the ability to take the technology in different markets.

Really feel confident about our ability to make a difference here on the operational side, and feel that where we're moving in or I am coming in on the margin side we have nothing but upside.

Randy, do you want to handle the cultural questions?

Sure.

We talked a little bit about this before, James.

To me to really adopt a lean culture, to drive lean you have to have a cultural change.

It is not just a program.

If you take a look at where we've been most successful at it in Hoffman, we've had a President in Dell Nichol who lives and breathes it and sets the example, so we have leadership, and we have leadership supported by process, and commitment to using lean to solve using lean enterprise tools to solve problems.

In contrast with the acquisition of WFI core we had a lot of folks who started focusing very narrowly on specific actions and didn't use lean.

They didn't -- the leaders and the people didn't use the lean tools, lean disciplines to drive the results, so we had some businesses -- I won't name names, but when they got in trouble they stopped the lean efforts.

Rather than double down and use them to drive greater disciplines, they actually stopped them, so I really felt like I needed to delayer, I needed to get alignment around what's important, and I have that with Mike.

We're leveraging Dell Nichol in more than Hoffman now, and everyone gets it, and everyone gets it, and I think the WYCOR acquisition is a great acquisition, they're good businesses, they're good people, but we lost a lot of momentum in water in lean after that, so we are getting it back on track.

And when you talk about leveraging Dell beyond Hoffman, can you expand on that one as well, please?

Well, Mike asked them to help out in Technical Products in North America, so with the Pentair packaging business.

Okay.

Thank you.

Thank you.

Your next question is from Christopher Glen.

Hi.

How are you doing today?

Good.

Just wondering, maybe I missed it, but if you could clarify what you're seeing the end markets doing, I guess the residential side in particular in the second half on a year-over-year basis, relative to the 25 to 35% you're talking about for the first half?

We're actually using the 25% to 30% in the pool business.

We're using that as total year.

It will be down less.

If you take a look at we saw in some markets California the worst we saw pool permanent wise was about down 30% and so we think that for instance California will probably be okay in the third and fourth quarter where as Florida will still keep going down.

That's an average.

I would say in general maybe down 10% in the second half versus the more precipitous climbs in the first half.

We're assuming the same types of forecasts for the North American residential as it relates to the other products as well.

One of the things we did in our replanning if you will as John and Mike and I were going through the businesses again here in the first quarter is our original plan using the global insight outlook was that housing will bottom out in the third quarter.

We're not using that any more.

You're using bottoming out next year.

We still do see some decline in the second half, just not as big a decline.

Okay.

And with pool and spa going into the second quarter, what's the trade off between getting away from the lower margin early by shipments versus over head absorption?

I guess with the seasonality even despite the early buy in the first quarter you still have absolute higher sales volumes in the pool channel, is that correct?

That's correct, yes.

We would have a bigger spike in the second quarter plus we would have to double our plant capacity probably and not use it for two thirds of the year.

That's economically not a good --

Think about sequentially about 25 million more in sales in pool and spa in Q2 than Q1.

Okay.

And then with Technical Products, than Q1.

Okay.

And then with Technical Products, I am surprised the margins went down so much given that you probably should have seen some bore benefit from mix maybe, the electronic to lower margin side was down, the electrical side was up.

Can you maybe speak --

I think that's a fair question.

The issue was we got -- we raised prices, but we didn't get the full benefit of the prices versus the materials.

You know, we exited the fourth quarter -- the nickel had gone from about $8 to $18, and that's the key alloy in stainless steel, and we said we'll keep it at $18.

Now it is a $22, $23.

The inflation in stainless steel, stainless steel is up 80% year-over-year.

Some 30% of our metal is stainless steel.

So aluminum is up, and carbon steel is up as well, so we had a great run going, and in recovering inflation in Technical Products, and that flipped on us in the fourth quarter last year, and it got more severe here.

Now, we raised prices.

We raised them again on stainless steel, and we're trying to be to manage that because there is switching.

I mean, we have customer that is are looking at switching away from stainless steel products to other products, and then in some cases we're helping them do that, but stainless steel is it -- it is our best product.

We raised prices in Q1 in summary there, but with you didn't get the full benefit in Q1 because it didn't get implemented until later in Q1.

It is less of an impact in Q2 request it remains where it is and stainless remains where it is.

And if they stay where they are, do you feel the price increases that you put in on sufficient and they will be all in in the second quarter?

Yes.

And if customers are switching to other materials, is that -- how do you rate the risk/opportunity trade off with that?

Well, it really would be a case by case example.

If they're switching off, they're going to nonmetallic.

What they're doing, if they're buying a stainless steel enclosure you're they're basically looking for corrosion resistance.

They could go to aluminum, a lower quality stainless steel and paint it or go to nonmetallic.

We have all of those products, so there could be a mix change, generally we prefer to have them buy stainless, but we'll help them if we would rather have them go to one of our other products than to not buy at all.

Great.

Thanks very much.

Your next question is from Mike.

Hello.

Hello.

Hi.

Just a couple of quick questions.

First, it seems on both the water and Technical Products side that China and Asia Pacific was as strong geography for you.

Wondering if you can just give us some insights into what were the key drivers there?

Well, China itself is strong.

Japan wasn't that strong.

Japan was soft in the quarter.

It really was driven by China and actually some surprising strength in Australia and New Zealand in water, but it was really all China in new Technical Products.

I wouldn't say our growth rate out paces the rest of the people participating in those markets.

I mean 27% is what we were up in Asia Pac, water, we would estimate most of the markets we participate in to be somewhere around 20.

We're a little bit better than the market and maybe we have a little lower base than the competition and we're starting to make traction and I think we're start to go build a sizable business, but I don't think it is out stripping the market growth.

One other here.

Given your expectations for pool and spa, carrying through the full year here, do you have room for further cost reduction?

Is there margin left and will you be willing to lower prices if things worsen?

You know, the pool business isn't one where price moves -- you can move one customer or not.

The most price sensitive market of pool was the big builder, and the big builder is basically the one that's taking it in the neck because of the housing.

Most of the big builders build with new homes.

They're the one that is are down in the 50 and 60%.

So most of the other builders are buying features, functionality, packages, and reliability, so we haven't had that much pricing pressure on the other sides, so I am much pricing pressure on the other sides, so I am actually in pool equipment I am not that concerned about pricing.

On the cost side there is lots more opportunities as we talk about the Sanford operations which is our biggest plant where we still have real opportunities to drive supply management and lean harder there, and I think we're making progress, certainly the plans look good.

There was a nice result in the first quarter, and there is still lots of potential in the cost side.

The positively equipment business is pool equipment business has a lot of potential.

Thanks very much.

Thank you.

Maybe one more question given the time.

Your next question is from Mike Hamilton.

Good morning, everyone.

Hey, Mike.

A couple one just to follow on enclosure you're Technical Products, if do you sense your customers are doing any prebuying in the face of prices going up off of stainless?

We don't think so.

I don't think anyone wants to tie up their end and we haven't either.

No one wants to tie up their inventory.

Fair enough.

But there was actually a little less a bit buy ago head of the price [ inaudible ] increase than we thought there would be, not all bad when we need them and they're paying a higher price.

Right.

Finally, one of your competitors got a little sideways in noncompetitive bidding in New Orleans.

You've reviewed what's going on down there.

Can you give a little framework on your thinking of where you're positioned?

Our disciplines, our culture, I have a great deal of confidence in our culture, our processes in terms of our projects and bidding are sound, and we really have people that care about winning right.

We didn't win everything down there.

We won the things that we were technically superior.

We didn't win on price.

We won where we were technically superior, and where we were unique in our ability to supply both technically and in terms of timing, the orders we're delivering in the second and third quarter really it is time sensitive and trying to get them in-stalled before the next hurricane season.

Basically nothing in the area of noncompetitive bids that you're involved in?

No, and this one actually we lost first and then came back to us when the other one couldn't supply.

Thank you very much, Randy.

That's it for me.

Thank you.

Again, I would like to remind everybody, I want to thank you first of all for joining us and remind everybody the presentation that we spoke to today will be out on the web, so certainly encourage you to download it and view it, and if you have any questions, feel free to give us a call.

Thank you for your time.

This concludes today's conference.

You may now disconnect.