濱特爾 (PNR) 2008 Q1 法說會逐字稿

Good morning.

My name is Nicole and I'll be your conference operator today.

At this time, I would like to welcome everyone to the Pentair 2008 Q1 earnings conference call.

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

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

(OPERATOR INSTRUCTIONS) Thank you.

At this time I would like to turn the call over to Mr.

Todd Gleason, Vice President of Investor Relations.

Sir, please go ahead.

Thanks Nicole, and welcome to Pentair's first quarter earnings release conference call.

We're glad you could join us.

I'm Todd Gleason, Vice President of Investor Relations.

With me today is Randy Hogan, our Chairman and Chief Executive Officer and John Stauch, our Chief Financial Officer.

On today's call we will provide details on our First Quarter results as well as discuss our guidance for the Second Quarter and update you on Pentair's outlook for the remainder of 2008.

Before we begin let me remind 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 Pentair's 10-K as of December 31, 2007, and Pentair 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.

Today's Webcast is accompanied by a presentation which can be found in the Financial Information section of our website at www.Pentair.Com.

Please go to the webcast section.

It's located there.

We will reference these slides throughout our prepared remarks.

Any references to non-GAAP financials are reconciled in the appendix of the presentation.

I would also like to point out that all financial results and references to year-end numbers in today's call and presentation are on a continuing operations basis unless otherwise noted or highlighted.

As is our custom we will reserve time for questions and answers after our prepared remarks.

I will now hand the call over to Randy who will take you through Pentair's first quarter results and highlights, highlight key growth drivers and initiatives, provide his perspective on the markets in which we operate and describe some of the actions we're taking to insure we deliver expected results this year.

Then John will conclude our formal remarks with an overview of our second quarter and full year forecast.

Randy?

Thanks, Todd.

And thank you all for joining us today.

Let's begin by reviewing our first quarter results, shown on Slide two of the document Todd just referenced.

Summarizing our first quarter, we had very good performance and we're off to a great start in 2008.

We delivered $0.53 per share of earnings from continuing operations on revenue growth of 6%.

The $0.53 is up 26% versus the $0.42 clocked in the first quarter of 2007.

Additionally the $0.53 bested the high end our of EPS guidance of $0.46 to $0.48 by $0.05 per share.

You could think about this as a $0.04 beat from the strong growth in resulting margin leverage in our technical products business and a $0.01 beat from water margins.

We'll provide additional detail in each of the businesses in a few minutes.

Now let's review the highlights of our first quarter performance overall.

Pentair first quarter sales of $840 million was 6% above the $793 million in sales we generated in the first quarter last year.

Our organic growth was 3% in the quarter or flat in local currencies.

The diversity of our businesses and investments for growth in international, commercial and municipal markets enabled us to overcome the much headline softness in the North American residential markets.

Acquisitions added another 3% to our top line versus last year.

First quarter sales in our water segment were up 3% year-over-year.

Water margins were 11.6%, flat when compared to first quarter 2007 after adjusting for the sale of national pool tile in both periods.

We'll walk through the water sales and margin details in a few minutes.

Our technical products business grew 13% in the first quarter versus Q1 2007 as our electrical business and international electronics businesses achieved double digit growth.

Our North American electronics business grew single digits versus last year.

Overall, for technical products a 13% sales growth and the continued strong results from our lean driven productivity efforts enable us to expand first quarter operating margins an impressive 340 basis points.

As the slide shows, overall Pentair expanded margins 120 basis points, looking at total Company margins year-over-year the positive impact from volume, price, acquisitions and mix coupled with solid productivity provided 380 basis points of margin growth in aggregate.

This easily offset a negative 260 basis points impact from total inflation and foreign exchange.

As expected, our first quarter effective tax rate was lower.

The 34% rate reflects the great work our team has done.

We bought back shares worth $12.5 million in the quarter and we have $37.5 million remaining on our authorization which we expect to fully utilize in 2008.

And as the slide shows, interest expense hurt us by $0.01 of EPS versus last year as the 2007 acquisition of Young Pump and Porous Media resulted in higher debt levels.

We had a nice start to the year in free cash flow despite the fact it was a usage of cash of $78 million.

As you know, receivables and inventories grow in our first quarter as we prepare for seasonal sales in the coming months.

First quarter cash flows also typically impacted by the disbursement of bonuses and customer and distributer rebates.

The negative $78 million in free cash flow results met our expectations, and we're on track to deliver at least 100% conversion of income from continuing operations.

So, those are the Pentair level highlights for the first quarter.

Now let's turn to slide number three which highlights the divestiture we completed in the first quarter of National Pool Tile.

As we announced in the first quarter we sold the National Pool Tile business or NPT to Pool Corp.

NPT is a distributor of pool related tile and decking products for the North American pool market.

It has been a great growth business for us during the pool boom but it's not central to the equipment business.

By selling NPT, we honed our water portfolio to better match our strategy of focusing on core equipment solutions, and the business has a better home where it's part of their core strategy.

In 2007, MPT generated approximately $68 million in sales and lost a few million dollars in operating profit.

We're moving NPT from continuing operations improves water margins approximately 30 basis points.

The transaction is classified as discontinued operations and results in a negative $0.08 earnings per share hit in the quarter of which $0.07 was the loss on the sale of the business and $0.01 related to NPT's financial results during the portion of the first quarter while we still owned it.

So a good distribution asset for Pool Corporation and a good move for our portfolio.

Now let's dive into our ongoing water business and discuss first quarter results.

So, please turn to slide four where we'll cover that.

Overall, water grew sales $15 million to 555 million, up 3% versus last years sales.

Organic sales were down 4%.

The composition of our total water sales is shown on the top left section of the slide.

In the walk you can see we had a fairly sizeable decline in volumes versus the first quarter last year.

Of that $22 million decline about $15 million was because of the timing benefit we received in Q1 2007 for some of our Q4 2006 early buy orders carrying over into 2007.

We highlighted this during last years Q1 earnings call, and it makes up a bulk of our sales decline year-over-year.

Now let me give some color on our water global business units.

Starting with flow technologies GBU, sales grew 8% globally or up 5% when you adjust for the 2007 acquisition of Young Pump.

Flow continues to see strength in commercial, agricultural and municipal markets.

Flows commercial pump product line shipped a record number of units in the first quarter in large part because of strong International sales.

We expect over 30% of commercial pumps produced in the United States to be sold internationally this year.

This is up over 10 percentage points in international sales since the end of 2005.

Flows residential markets remain soft in the first quarter as expected, but the weather was a positive factor as the heavy rains and snowfall helped drive residential sump pump sales.

Our Farradyne joint venture continues on a positive trend as our customer acceptance of our pentek motor pumps remains greater than 90%.

In municipal we continue to have record backlog up 20% year-over-year.

This is particularly impressive when you take into consideration that last year our backlog included the $21 million New Orleans job.

If you exclude that project our backlog is up over 60%.

We made nice progress developing a global municipal pump strategy so we anticipate continued growth in this space.

In a few minutes we'll highlight one of our new leading energy efficient municipal pumps that enabled us to win a key project recently.

We are just beginning to introduce this technology to desalination projects and are starting to bid on the multitude of opportunities in that space.

Our filtration GBU was up 8% versus last year but down single digits when you exclude the 2007 acquisition of Porous Media.

The organic sales decline was driven entirely by softness in the North American residential market, where demand for water treatment systems is down double digits.

We continue to have good growth in our food service and industrial filtration product lines which are both up approximately 10%.

We'll highlight more about our food service and industrial filtration solutions again in a few minutes.

Our full GBU was down 10% year-over-year a little worse than expected.

Adjusting for the $15 million in 2007 first quarter carry over sales, our pool business was flat, despite pool and spa markets being down double digits.

Key pool markets such as California, Florida, Arizona and Texas are all experiencing pool permit declines in the 20% to 60 % range.

Despite these battered markets our pool business continues to maintain solid performance as our energy efficient and environmentally sensitive echo select initiative continues to drive sales volume.

We continue to invest in new applications and look to maintain our position as a leader in new product development.

In fact approximately 50% of the businesses technology budget is spent on new protects, many of which are new to the market, not just new to Pentair.

In commercial pool we grew sales over 30% in the quarter.

We'll highlight this segment more in a few minutes when we review our global growth initiatives.

So, our outlook for the residential pool and spa market is very cautious.

We continue to invest in new products, distribution and global solutions for our commercial applications.

We believe these actions coupled with the divestiture of the national pool tile business better position our pool business for future growth.

You can see on the chart that we provide growth figures for our international regions.

We continue to make solid progress integrating our regional teams and strategies to realize true global business units.

However we intend to still provide you with these regional figures so you can track the progress of our international growth.

The Europe, Middle East and Africa, or EMEA, was up 17% but about flat when you remove the positive impact of foreign exchange and acquisitions.

However, Eastern Europe and the Middle East grew almost 50% in the quarter.

We're flowing talent and other investments to these fast growing areas and we expect continued strong growth in 2008.

Asia continues to grow and was up 23% year-over-year.

More importantly orders were up over 40% in the first quarter.

This growth demonstrates the continued success we're having in the region.

Another item I'd point out is that our GBU's are working closely together to leverage each others strengths in distribution and technology.

For example, our desalination backlog associated with our code line vessels is at historic highs and our quote book is also at record levels.

We're working to leverage our code line knowledge and contacts within desalination and now have a quote backlog in our flow technologies business associated with numerous exciting desalination opportunities.

So, the major growth focus we would like to stress is that we continue to invest heavily in our global business unit structure and products for key markets.

This is a journey.

We're having success and we expect more growth throughout 2008 and more in 2009 from these investments.

On the top right, you can see our year-over-year operating income walk for water.

Margins were 11.6%, flat year-over-year, despite declining volumes in our North American residential related products.

High materials inflation and tough comps in pool.

We had a nice impact from productivity which contributed a positive 220 basis points.

Our lean initiatives are yielding positive results and we continue to work to reduce our fixed cost.

In aggregate, growth in productivity offset a negative 270 basis point impact from total inflation and enabled us to achieve first quarter water margins of 11.6%, a bit better than our expectations.

If you normalize for the $15 million in Q1 early buy benefit, last years margins expanded 40 basis points which is highlighted in the bullet points.

We point out that the sale of MPT does improve margins above 30 basis points from what we reported in water last year so we feel good about improving our water portfolio.

We continue to take new actions to improve our profitability and footprint.

In the quarter we initiated the shut down of a factory in the UK.

Additionally we are making good progress on the restructuring actions we took in the second half of 2007.

Let's now move to slide number five and review our technical products business.

Similar to water we provide you with total business sales and operating income walks at the upper half of the chart.

Technical products results in the first quarter were outstanding.

As we grew sales 13% and achieved margins of 15.9%.

Let's review what enabled our businesses to have better than originally expected performance in the quarter.

As we look at our sales results our global electrical business grew 10% versus last year as we continue to take advantage of a strong and diverse business model.

Our thermal and networking vertical markets each grew 30% year-over-year.

We continue to see solid performance at our Hoffman channels which serve over 20 different vertical markets.

Our global electronics business grew 18%.

Every region posted positive growth and our Asia Pacific electronics business grew 46%.

Looking at technical products margins, growth in productivity together contributed 520 basis points of margin expansion.

This easily offset the impact of a negative 180 basis points from total inflation.

Our lean driven productivity actions continue to prove solid results, as we had excellent conversion from the 13% sales growth.

We're executing well in the 2007 restructuring actions which include the shut down of facilities outside Chicago and one in the UK.

By reducing our technical products footprint we believe we will get even better operating leverage even if we see lower growth markets.

Given the increase in metal prices, mainly steel for technical products, we've recently introduced new priced actions in the segment.

We believe these actions have been accepted by our customers and are appropriately sized to offset commodity pressure.

We're also making great progress integrating our electrical and electronics organizations into one global business unit.

By leveraging best practices and sourcing in lean and leveraging administrative functions we believe we can continue the momentum we've started to build in technical products margin expansion.

So, in sum, technical products delivered a strong top line and had great execution to deliver outstanding bottom line results in Q1.

We believe this segment is well positioned for the balance of the year.

Let's move to slide number six which shows our financial metrics.

In particular I'd like to highlight cash and return on invested capital or ROIC.

As mentioned earlier we had a usage of $78 million of free cash flow in the first quarter, roughly equal to our results in the same period of 2007.

We continue to make progress in regard to working capital but there's still a lot of opportunity to improve further, particularly in inventories.

If we take a look at the components of return on invested capital, to the right of the slide, you'll see our four quarter trailing net operating profit after tax, or NOPAT, was $274 million.

Our average invested capital was $2.89 billion which gives us an after-tax ROIC of 9.5%.

This is up 50 basis points versus the same metric a year ago and we continue to drive for steady improvements in this key metric.

Our ending working capital is $512 million, an increase of $26 million versus last year, and our five quarter moving average working capital is $437 million, which is 12.9% of four quarters trailing sales.

Our total debt was just over $1.1 billion for a debt to total capital ratio of 36%.

As a reminder the non-GAAP to GAAP reconciliation of these calculations and numbers are included in the appendix to this presentation.

Now please turn to chart number seven.

The next three slides are designed to highlight how we view and are seizing market opportunities for growth.

Throughout 2008 we'll provide an update on market opportunities in our growth initiatives.

These next few charts lay the foundation for future quarterly updates.

This slide highlights global growth drivers that have attractive long term growth characteristics.

As the charts show, they are: energy efficiency, which represents the global demand for more cost effective solution; the environment, which represents the growing awareness and willingness to pay for new technical solutions that will reduce the impact on our global environment; infrastructure, which is a major opportunity for companies like Pentair that can assist emerging regions to develop industrial, commercial and residential infrastructure, as well as aid in the replacement of aging infrastructure in developed nations; regulation, which represents the changing and more stringent legislative actions that are being put in place to better husband our water resources; health and safety, which is garnering even more global awareness as developing areas often need advanced solutions to save off disease, also with global weather pattern shift there's a need to defend flood zones and protect coastal cities; and finally, industrialization, which is happening rapidly in Asia, Eastern Europe, Latin America, the Middle East and Africa.

These regions require water and natural resources for industrial development which is driving mining and exploration needs as well.

These processes are opportunities for our filtration, flow, and technical products solutions.

These global growth drivers aren't new and certainly we're not the only Company to focus on these as growth opportunities, but we highlight them today to animate why we're performing well.

We aren't just a residential focused Company.

You can see we have placed check marks next to each growth opportunity, as the next few slides demonstrate we're successfully providing specific solutions in each of these areas and we have strategies to capture more growth.

Now let's turn to slide number eight.

This slide shows our seven key growth initiatives.

To give some history on these initiatives, 18 months ago, as we began to see the decline in residential markets, we prioritized these seven areas as key opportunities for Pentair based on the growth drivers.

Now clearly we have many other growth initiatives within our businesses but these are ones where we have put additional resources and established global teams that have high level oversight with either Mike Schrock or me reviewing them on a monthly basis.

You can read the information on the chart so I'll just quickly walk through some of the detail.

The segment of industrial filtration we're focusing on is a large and growing $20 billion market.

We more than doubled our size in this space when we acquired Porous Media last year.

This area specifically addresses industrialization in environmental global themes.

We expect to grow our $100 million industrial filtration business by another 20% this year similar to our organic growth rate in 2007.

The second key growth initiative is food service.

I know we've made a pretty big deal about this segment over the past year but that's because it is a big deal for us.

First it is our most global business.

Also, last year we crossed $100 million mark in this market.

We have tremendous partnerships with Echo Lab and with our customers such as Starbucks, McDonald's and others.

Restaurants and food service providers are more concerned about health and safety and increasingly about the environment.

Our food service products help with water purity and efficiency within the food preparation process.

We see double digit growth in 2008 and our global expansion in this area continues to be very impressive.

The third initiative is RO desalination.

We continue to grow our code line product line where we have the leading market share in desalination installations.

As we aggressively introduce new pump and pre-filtration applications we're leveraging our project intimacy to get at bat for those products and we expect to grow even more rapidly in this $5 billion market space.

The fourth initiative is technical products India.

While currently very small in terms of revenue, we think the market is at least $400 million and not many companies are as uniquely qualified to participate as our technical products business.

We've invested in sales and distribution and we're going to establish a dedicated manufacturing facility in country by year-end.

The fifth initiative is commercial pools which plays into the energy efficiency and health and safety platforms.

As you know, most hotels have pools or spas.

The equipment installed in most of the world's pools is much less efficient than our current platform at Echo select products.

Last year we grew 30% in this $50 million market segment and have lots of room for growth since we estimate the market size at $1 billion globally.

The next initiative is our growth investment in Latin America, which is increasingly expanding its infrastructure and industrial footprint.

We currently sell about $80 million into the region but we have an ability to grow rapidly there.

We expect double digit growth in 2008 and our team is making real progress with sales channels and distribution.

And our seventh key initiative is water reuse which is becoming a hot topic with the growing crisis around water availability in more and more places.

In Australia there are a number of regulatory measures being considered that would require increased water reuse.

We have integrated pump and filtration solutions and more are being developed.

The market is estimated at over $1 billion but until major legislation is passed it is truly hard to estimate the size or the potential.

These seven key growth initiatives play into the global growth themes that we highlighted on slide number seven, and as you can see, we continue to make real progress with each initiative.

Let's turn to slide number nine and review a few specific products or initiatives at a more granular level.

As we drill in a little deeper, here is how we are changing what we do to get after these opportunities.

This slide shows four examples of programs or products driving our key growth initiatives.

Starting with industrial filtration, our Porous Media product line has developed leading filtration protects that serve the oil and gas extraction, refining, and petrochemical end markets.

Porus is heretofore focused on US opportunities almost exclusively.

Now, we're leveraging this technology to provide similar solutions in the Middle East, Europe and Asia.

The products improve up time with filter life several multiples higher than existing approaches and reduce disposal and operating costs by as much as 50%.

On the top part of the slide we highlight one offer our thermal solutions that we're driving in technical products.

Many outside observers of Pentair might not be aware of this growing thermal product line within technical products.

These products are becoming more critical as the power of electronics increase and as the global economy reaches in the new industrial areas.

Many of these emerging regions and deployments have harsher environments whether it's temperatures or other demanding environmental conditions.

Our thermal enclosures provide energy efficient cooling or heating devices to protect and extend the life of the critical electronic equipment.

This is one of the fastest growing areas of technical products.

As we mentioned it grew over 30% in the first quarter and it has double digit margins.

As I mentioned earlier, we're leveraging our code line market knowledge within the desalination market and we have introduced a line of large pumps that have three to four points of energy efficiency advantage for desalination projects.

In fact while not a desalination project, the City of New York purchased these pumps for their Crotonville, New York Municipal Treatment Center based on this greater efficiency.

Finally, our commercial pool applications are being installed with great success.

Last year, we showed you that we installed one of our hotel pool equipment solutions at the Shanghai Marriott, which saved the hotel 85% on their energy and maintenance costs.

We believe we're well positioned for both new construction and retrofit for energy and environmental upgrades.

So, those are just a few of the many exciting applications we have deployed to help our customers and to participate in the major global growth (background noise).

Before I turn it over to John let me update you on outlook for our major markets in 2008.

On slide number ten, you can see our current view of the major markets versus how we initially planned.

We also provide data on our original market expectations as well as the market performance in 2007.

To be helpful, the pie chart on the left of the slide is our geographic and market mix as we exited 2007.

This is from our fourth quarter earnings presentation.

Taking a look at our markets, we would say the US residential markets are in a more pronounced downturn in 2008 than we had originally expected.

We plan for down 15% to 20% in this market but we now expect at least a negative 25%.

This encompasses a number of variables including housing starts and pool permits.

This negative 25% for example, would assume 2008 housing starts of around 700,000 units.

So, it's pretty dismal.

Other than this market which you can see is red versus our initial outlook, we'd also point out that our other markets, while not always expanding as strongly as 2007, are generally in line with our planning assumptions and remember, we pointed out that many of our market assumptions were from moderating growth in key areas like commercial, industrial and Europe.

As we mentioned earlier, we're also increasing price in many of our product lines to reflect the increased costs associated with metals and other commodities so our planned price increase of 1% to 2%, were too low an we're stepping up to a higher level.

I'm sure we'll see market segments both outperform and under perform our current outlook.

But we feel we're closely monitoring the key trends that impact our business and we'll adjust our forecasts and actions accordingly.

Now, I'll turn it over to John for our second quarter and full year guidance overview.

John?

Thank you, Randy.

Let's start by reviewing slide number eleven and take a look at our expectations for the second quarter.

Our Q2 and full year forecast reflect our outlook that the North American residential market will not improve in 2008 and may even further contract, particularly in our pool equipment and our North American residential water treatment businesses.

In water, we expect sales to be flat to down.

We continue to see strong export related shipments in our industrial and commercial segments but these are not enough to offset the continued softness in North American residential.

Additionally, last year in the second quarter, we sold $21 million of municipal pumps to the City of New Orleans.

That project, coupled with our expectation that the pool market will remain down high single to low double digits, suppress our outlook for growth in the water business in the second quarter.

Overall though, we would say that 2008 Q2 is in line with our planned expectations including our corporate contingency.

Our forecast for sales growth for first half of 2008 does not properly reflect the organic growth run rate in water due to the year-over-year headwinds.

We believe waters real ongoing growth rate is around 3% for 2008 and once we begin to experience even a modest market recovery in North American residential, we expect to be back to our 5% to 8% targeted water organic growth rate.

We continue to fund our selling, marketing and R & D investments to serve the global demand in water for our products in growth regions.

As for technical products, we expect moderating markets to impact sales from the second quarter.

Although we enter the quarter with solid order trends, our forecast for the GBU is high single digit growth as compared to low teen growth in the first quarter.

We would suggest that our rebound in electronics is based on a few factors.

As you may remember, the first half of 2007 was down dramatically because the market consolidation and the timing of certain orders in our business.

Second, we continue to diversify and broaden our vertical market offerings which provides for more balance.

In electrical, the strong US industrial cycle continues, as the weak dollar provides insulation from other parts of the US economy, driving an increase in export shipments.

We have planned and forecasted for moderating growth in many of our verticals, therefore we continue to implement cost controls and pricing actions which we think is prudent.

Moving on, we expect operating income to be between $114 and $120 million.

This should produce operating margins of about 12.5% about flat with 2007 second quarter margins.

We expect margins to benefit from additional productivity driven by our lien initiatives, benefits from our growing pipeline of sourcing actions, our moves to emerging regions and a continual focus on reducing structure.

Also the acquisitions we made in 2007 provide margin support as they continue to perform very well.

We expect to maintain our 34% tax rate as we continue to realize the benefits of our European water business move to Switzerland in 2007 and the shift of manufacturing to more favorable tax regions.

Net interest expense is expected to be approximately $16 million, down about $2 million year-over-year, as our debt levels are expected to be reduced by cash generation.

Finally, we are forecasting second quarter free cash flow to be at least $125 million as we drive toward our full year target of at least 100% conversion of income from continuing operations.

So, as we've previously mentioned we expect second quarter EPS between $0.64 and $0.67 up between 5% and 10% on a year-over-year basis.

Another way to look at our second quarter performance is to consider how we expect to do given some of our year-over-year hurdles.

Please turn to slide twelve.

As we mentioned earlier, last year in the second quarter, we had a nice pick up from the large flow technologies municipal pump project in New Orleans.

We continue to see solid results in our municipal vertical market and our municipal orders and backlog are up double digits even after the completion of this project.

The upper 0.6 of this slide provides an analysis comparing our current second quarter forecast versus last year with and without this large New Orleans job.

We're not apologizing for the lumpy nature of these municipal projects but we thought it might be helpful to evaluate the second quarter year-over-year this way.

You'll also note at the bottom of the slide we highlight that our second quarter guidance also reflects the softer markets in pool and residential construction as well as higher than originally planned metals inflation.

Despite these market conditions, we continue to invest in our GBU growth initiatives and new technologies and still have a solid line of sight toward achieving our full year outlook.

Let's turn to slide thirteen and take a look at our EPS walks for the first quarter and for the balance of the year.

In the interest of time, I'm not going to go through all of the details but hopefully you'll find the information helpful.

As you can see, in the first quarter we received $0.11 of year-over-year EPS from what we call above the line items, i.e., the positive impact from organic growth, '07 acquisitions, and productivity net of inflation.

This represents all of our EPS gain versus first quarter 2007 as our below the line item from share count, interest, equity, and tax rate in aggregate netted to zero.

The next several columns indicate that for the balance of 2008, we expect to see more benefits from the below the line items which we invested in throughout 2007 and continue to drive in 2008.

Our tax rate should deliver more year-over-year EPS benefit throughout the year and our share count will be more meaningful (inaudible).

Additionally as we get into the second half of 2008, we expect our debt levels will be down versus 2007 and that lower interest expense will be a nice pick up.

Meanwhile, our above the line items remain steady, but is slightly less favorable levels than the first quarter.

We expect to see roughly the same levels in net productivity but the second half will have less positive benefits in the 2007 acquisitions as they were more fully integrated in last years second half results.

The middle section of the chart shows the impact we -- or the impact a more difficult economic and inflationary situation could have on our results.

We indicated that we were holding contingency for unknown economic impacts such as a more pronounced downturn in North American residential or perhaps higher commodity inflation, both of which may now be more likely to occur.

Meanwhile, we continue to invest in new technologies, global markets and in the completion of our global business unit organizations.

So, this middle section should provide you with some balance to how we see our ability to offset a world that never sits still versus our original expectations.

We also continue to evaluate and implement new price actions in businesses that continue to be hit with higher commodity costs, and as you know, in our mostly dealer distributed model, we typically can implement inflation related price increases through the channel rather effectively and will do so if necessary.

The final observation we would like to make is that we feel we have the right initiatives and contingency plans in place to meet our commitments for the year and we believe we are investing as needed to position your company for a solid 2009.

Turning to slide fourteen, let's review our outlook for the full year.

I might be jumping ahead to the key take away but as you saw in our press release this morning we have raised the lower end of our full year EPS guidance to $2.30.

This updates our guidance to $2.30 to there $2.40 up 10% to 14% year-over-year.

We get to the new full year EPS by seeing sales growth of 2% to 4%.

Given our view of the markets, we believe we have the right level of growth initiatives to produce these results.

Our water business continues to drive great growth in its key initiatives but we maintain an outlook for flattish organic growth as residential and pool markets remain very soft in North America.

Technical products continues to grow nicely and we see the full year up at least mid single digits.

We expect to increase both our operating income and margins and are forecasting overall margins of approximately 12%, up versus last year on a continuing basis.

We expect the combination of margin expansion in conjunction with a lower tax rate of around 34%, fewer shares outstanding and lower interest expense should produce earnings per share of $2.30 to $2.40 for the full year.

Again, this represents EPS growth of 10% to 14% versus adjusted 2007 earnings per share of $2.10.

Finally, we remain committed to our annual goal of generating cash in excess of income from continuing operations that continue to drive toward improving after-tax ROIC.

In summary, we are improving our guidance range for the full year based on a solid start to the year and we feel we will continue that momentum throughout the balance of 2008.

As a reminder, our 10-Q will be filed today so you can be on the look out for that later this afternoon.

That concludes our review.

Operator, we'll now open it up to questions.

(OPERATOR INSTRUCTIONS) Your first question is from Curt Woodworth of JP Morgan.

Good afternoon.

Hello, Curt.

Hello, Curt.

In looking at the water margin guidance for the Second Quarter of 13 % to 13.5% it looks like that's going to be down roughly 50 to 100 basis points and is that after adjusting for MPT, and is that mainly a function of just the tough comparison with the municipal and then kind of the higher margin pool market weakness?

Exactly.

We have, if we go back and adjust for MPT, to your point, we have somewhere close to 14.8%.

We had a really, really good quarter last year, Curt, because the New Orleans pump job was in there as well which was a high margin job that we identified and that coupled with the softness in the pool market in Q2 which is the pool season.

And residential filtration.

And residential filtration.

Which is a high margin business, as we said is weak in the first quarter.

Okay, and do you still feel confident in your 13% margin target for the year?

I don't know if we have to have 13%.

I want to make sure that point is clear, Curt.

Clearly we want to improve water margins because it's going to drive ROIC but we also want to improve water growth, so we're going to continue to invest in our water business.

We're experiencing some pretty good technical product strength right now which is allowing us to invest in that water growth but we want to continue to drive margins.

I would say we're probably closer to 13% margin right now, depending on how soft the North American residential markets get.

Okay, great.

And then in terms of residential filtration, I mean, a couple years ago is definitely listed as key growth opportunity for the company.

We had two years where I think you've seen negative growth in that market and clearly no longer a priority for the company.

Can you help us understand why that shift has occurred, kind of what's happened in that market relative to either overall market trends or your market share?

I would say -- I wouln't say it's mow longer a priority.

I think you've got to get growth where you can get it and we are the leading provider of equipment in the residential water treatment and filtration space, and it's a space we're committed to.

We just haven't been putting a lot of our resources to growing that because the degrees of freedom for growth there aren't as great as they are elsewhere.

Our market share was much lower in food service and industrial, for example.

And we are investing to globalize residential filtration, so I'd say one of the reasons that we're down in growth, we did have some market share losses because we lost some of the OEM business in the residential arena, but we haven't really offset that, and secondly I would tell you that the impact on residential with the market downturn is harder or worse than we anticipated it would be.

And that's sort of like the received wisdom was that it wouldn't be impacted as much as it has been, so I would tell you that it's not that we are de-emphasizing it.

It's just that we're flowing our resources to where the growth is to get.

Curt, I mean, there's -- you're talking about a new housing number a few years ago of $2 million plus, $2.2 drop into less than 700,000, so we've realized that impact and the filtration business and water treatment doesn't generate the amount of after market revenue that for instance our residential pump business would have so I think we've experienced a steeper downturn in that particular market segment but even despite that we still have average margins over 17%/18% of that space at this level, so it's about having the right technologies and the right solutions when the market turns up to be there for the customer.

Okay, great.

And in terms of the performance in North America, this quarter I mean, EMEA and Asia Pacific was up very strong.

Would that imply that North America or the Americas you were down organically probably high single digits this quarter in water?

I think that's about right, yes.

That's about right.

And if you include the pool downturn, which we're not trying to make an excuse for that but we carried that revenue over, yes, we would be down about 6% in North America and that would be despite some view that North American benefits through distributors and export sales as well.

Right and I guess if you normalize for the pool, pre-buy from last year it's probably more like low single digits?

Yes, thats worth about three points.

Okay alright, thanks.

Thank you, Curt.

Your next question is from Deane Dray of Goldman Sachs.

Your question on the enclosures, technical products margins, that was a pleasant surprise this quarter, and could we address how sustainable these margins are and how, I know you're going to say the business is different this time because it certainly is but if you go back to the last recession you saw some mid single digit margins, lots of Mike Schrock type improvements there, but what gives you the confidence about the resiliency of those margins in an economic downturn?

There's two things I would submit are different than before.

We have a much more diverse set of end markets that we don't think are all going to move together.

For example, the public market and the energy market and the food and beverage and pharmaceutical markets are specific vertical markets that we serve as a security and defense, they aren't moving with the overall markets, and in fact last time, every market went down.

I can give you all of the data on that if you want but I think you remember.

Everything went down all at once, and I don't think that will happen again, and there's evidence of that right now, not all markets are moving the same way right now.

The second thing is is we had cost structure in place at that time to be $1 billion and if you'll recall the peak was $780 million or something like that and then we went down from there, so we had a lot more cost structure than we have now, and we have a lot better lien disciplines and we continue to take costs out even though we're performing at a decent level, with the closure of the Chicago factory and the one in the UK , so those are the differences, those are the differences I would say now.

That doesn't say that we can sustain 16% if there's a big down draft, but I'd be disappointed if it didn't stay double

Got it, and then how about -- help us understand what the impact of foreign exchange is.

I mean you did the earnings walk by segment -- you could see the top line affect of foreign exchange but then it gets muttled in with the productivity and FX bucket on the operating income line so what's the operating income effect of FX?

Yes, for us -- and you know I won't take you through the math, I'll have Todd do this with you, believe it or not it's a very little impact to us because some of our units are actually hurt on the way that they're purchasing product on the wat that they are purchasing product and the impact of the foreign exchange as they buy it and we're pretty dollar denominated with a lot of our products.

So, areas like India which is a global business, we're selling in dollars but we're taking our cost in rubys so very little impact, about $1 million positive for us on the foreign exchange from operating income line which is less than a penny.

Good.

That's helpful and then how about from -- does it -- am I correct that Porus is going to be part of your core revenue growth in the second quarter?

Right, yes.

And how has that core growth been and what does that do to your core growth for water.

Because it's more of an industrial business as well.

It's all industrial and actually medical too.

Well I was just going to say, I'll answer the first question -- I'll let Randy tell you the strategy.

Industrial filtration, which is part of the slide that Todd was showing you and Porus is the leading part of that and then industrial filtration is up about 10% year-to-date and we're seeing a continued nice trend there, Dean.

I'll let Randy take a last --

Well, in fact, Porous Media is a big driver of that growth going forward on the organic basis.

We really have some great technology and Porous Media also not just in industrial, Porous Media Technology is what we're using in the pre-filtration solution that we're introducing using in desalination right now.

So, I would say that the Porous Media is helping to drive double digit growth in industrial, its going to help drive double digit growth in products beyond code line and desalination, and it's going to help us drive growth globally.

In the markets that they're serving, Dean, are not under the same type of challenges that the rest of the North American residential markets are facing.

They serve a lot of energy in end markets which are up nicely right now.

Okay, and then last question, just on the pool business down 10%, you may have addressed this but I just want to make sure I'm clear.

Is that, what was the effect of the early buy this year versus previous years?

Did you pull in how much (inaudible) business into the fourth quarter?

Yes, we didn't really pull in.

If you'll recall back in 2006 when we adjusted our cost structure down, we sized our Q4 2006 early buy -- production level to about I think it was about there $85 million or so, and it turned out that the early buy was better than that by about $15 million so we had to push it out.

This year, we sought last year in 2007 for early buy we sized our production level to a more normal level, so we carried over $15 million less but we still carried over some early buy into this year.

I forget the exact number, do you remember, John?

No, I don't but we can get it to you, Dean.

The real answer is that we aren't pulling in.

Oh, my answer wasn't a real answer?

No, it was right.

I just want to make sure -- its a good point Randy.

I just want to make sure, we're not pulling in here.

It's really indicative of the markers and the dealer channel and as Randy mentioned the pool permits are down significantly, so our distributors aren't stocking up or bringing in inventory into the channel like they normally would do.

Okay that's helpful, thank you.

I think Randy's answer is better, Dean.

Your next question is from Mike Sneider of Robert W.

Baird.

Good morning, guys.

Hi, Mike.

Hi, Mike.

Maybe we can stick to water for a second.

Just in the chart on Page ten, where you identify the North American replacement market and just the change from your plan, you identify that as a little less.

Does that relate to replacement sales at Ever Pure?

No, not Ever Pure.

That's -- let me get there.

It's pool -- is a little lighter and Ever Pure is not a -- they don't do much in residential, Mike as you know.

Yes, the split there is -- that should -- if there was more room it would say North American residential replacement.

Those are --

Got it.

We separate residential replacement, but no, the Ever Pure globally is doing just fine.

It's a little softer in North America than it is in other Markets because there's some -- it's interesting, in particular in the consumer spending has hit, what we would call the mid level restaurants and which is a big customer base for food service, so it's a little bit slower on the turns there, but actually, the quick serve, the fast foods and the high end restaurants are doing just fine.

And we still have a lot of momentum in terms of new placement.

Okay, and then you reduced the forecast by water, as you said from about 3% organic to flat for the year which is about there $70 million.

Is that really all coming out of pool mainly or are there some other just minor reductions across-the-board?

Well we really are taking it out everything related to residential and whether it's pool -- it's pool, it's filtration and its flow (inaudible).

Okay, and then Europe -- did I hear you correctly that Europe was flat in local currency?

Correct.

In water?

Correct.

And can you give us some sense of what the trends are there?

Is that also residential?

Well, yeah, exactly.

It very much, I think you may have heard this from other companies.

Residential has slowed in Europe and residential is a big segment of our European water business.

When I look at industrial it's looking pretty good and food service is looking good, but and we want to push energy with the Porous Media there, so we think residential is going to stay flat.

We don't expect the same kind of down draft that we've seen in North America.

And Mike, and Todd can follow back up with you.

We're getting better at some of our reporting but some of our, for instance, Middle East revenue is shipped from distributors out of the states or direct from North America, but to your point, Western Europe has slowed in our view.

Eastern Europe is still strong in areas like the Middle East are still booming.

Okay, and then just final question on margins and water.

You point out that margins were up 40 basis points if you exclude kind of this pool pre-buy that occurred and -- which implies 12%.

I'm curious though if you were able to really scrub Porus in the acquisitions out of that water operating income, were water margins actually down for the core business?

We'll have to get you that.

I mean, you're right that Young and Porus definitely helped and we would say 11.6 is properly stated by the way the prior year would be the one that would a little lower because of the pool.

Sure.

And it's hard to just isolate those things because you could pick a couple of others.

For instance because weather was strong in flow technology, we had the sump pumps, a lot of that goes for retail.

Retail is not as profitable channel as pro channel and there's lots of moving parts and I think that it's probably be worthwhile to have you explore that with Todd.

Okay.

Because it isn't just those things.

It's the fact that water treatment was down at a greater proportion and it is one of our most profitable businesses, so there's lots of different mix shifts.

I wouldn't punch it to just one or two things.

I think it's important to understand all of the dynamics.

Thank you again.

Thank you, Mike.

Alright, bye.

Your next question is from Christopher Glen of Oppenheimer.

Thanks, good afternoon.

Hi, Chris.

Just talk a little bit about the Asia Markets, some pretty good growth there obviously, and just give us an update on how the infrastructure is around that business, as well as the competition around some of the product lines and if you're shifting your emphasis among the sectors and end markets you're really targeting there.

Yes, you know, we've been investing there and we've talked about that before we've invested in sales and distribution and technology and we've highlighted a number of different focuses and what I would tell you is that our focus is beneath a lot of the competition, we're not focusing on the big infrastructure, we're focused on the smaller infrastructure, so I would say that we're focused on buildings and construction, we're focused on food service and we're focused on residential.

In particular -- and we're focusing on bundling our products into solutions, so for instance, we recently won the Beijing Financial Center, we've got 92 HVAC pumps in there.

It's just a very very large program, and it's something that we could focus on and sell our value.

Similarly in hospitality.

It's not just the pool business that we're driving there.

We're driving the flow technology and the filtration business.

We mentioned before the Beijing airport, for instance, where we're providing the (inaudible) water filtration system so we're kind of , if you will, at a more granular level in our focus particularly in China versus what I would call our larger competitors are focusing on large infrastructure and we think we're in a nice position because we got the products and we built the sales and distribution in order to serve those.

A couple of other areas we're focused on is schools and we are focused in residential, there, we're focused on the buildout of some of what I would call the middle class where they need water softeners and the water filtration in their home.

So, it's a very tailored strategy that John (Mah) and the team in Asia are driving and it's going very very well.

At the same time we've had a rebirth, really, of our Australia business, and we've seen a little bit of growth finally in Japan, so it's really quite satisfying to see the progress we've made there.

And it's all part of us really becoming a global company, and I think we've almost have earned the right to be able to say we are, but I'm not quite there

Okay, and then just on the pool guidance it sounds like it's for the same kind of year-over-year dynamic, as we just reported for the first quarter, the comps dramatically easier and you have the commercial pool kind of in a new dynamic than maybe we've ever seen it before.

Yes, commercial pool is really interesting because it does go particularly with the global thrust and Middle East and China in particular where they're building out hotels at a great clip and we have superior solutions, so for us it's a matter of getting there and while we reported about there 50 million and I'm sure we have more business going into the commercial applications we just aren't tracking it that well because it goes through distribution but what we're really tracking there is these programs and projects that we're really focused on driving.

Our echo select line which reduces the use of chemicals, it gives you cleaner water and it reduces the energy and gives you remote control and monitoring, is all very, very well received, so we expect the growth of that to continue, and it's largely outside North America where we see a lot of that growth coming.

But that's not an offset to --

No it's not big enough to offset the residential at the decline.

And we're talking about a business that's 15% of the size of North American -- North American residential pool is the single biggest pool market.

Right, but with a much easier comp coming up in the same sort of 10% decline forecast, are we just seeing --

We're struggling with that a little bit.

We actually had a decent pool year last year, Chris.

We grew 4% on a pool equipment business, so the 10% down draft that we're talking about in Q2 is a pretty significant down draft for us.

So, realtime that's just kind of quickly deteriorating further.

But you can take a note.

I think next years Q2 would be an easier comparison.

Noted, thank you.

Thanks, Chris.

Your next question is from Mike Hamilton of RBC.

Hi, Mike.

Hello?

Are you there?

Yes.

Here we are are, Mike.

I was wondering if you could just comment a little bit on what you're seeing on the municipal side, given some of the concerns on pipeline freezing and ability to get financing and whether you think that that becomes an issue or your business is just too much in demand on the part of municipalities, so it's not really a luxury buy on their part.

You know, I've got a review on Friday and that will be something we'll drill into a little deeper but I already know, the backlog is firm.

We don't report things in the backlog unless they're firm and we've got a good view all the way through into 2009 and when you take a look at a lot of these projects, they're real projects, they're urgent projects and I mentioned in my script, because I've been around the water business for, well, 31 years, after a big hiatus there in the middle, but people are willing to pay for water now.

It's the first time I've seen it where people are willing to pay, so I don't think there's an issue of the projects that we have firm in our backlog.

At the same time we're building out the capability to grow municipal globally.

We've put in three or four distributors in Southeast Asia, who are excited about selling our products and with the dollar where it is Kansas City is becoming a low cost producer, and so we actually can compete with product coming out of other areas of the world and we have superior technology and great technical applications, so, to tell you the truth, no, I'm not worried about municipal.

Okay, thanks, Randy.

Your next question is from Francesca McCann of Stanford Financial.

Hello, everybody.

Good afternoon.

Hi there.

How are you doing?

Doing all right, thanks.

Can you speak up a little.

We can't hear you.

Sure, I hope this is better.

Yes, it's better.

Follow-up to Mike's question on the European Markets, you kind of said western versus Eastern Europe, and then the Middle East.

Can you break down a little bit more kind of country by country for us what you're seeing particularly in Western Europe?

I think that would be difficult to do right here, all of the specifics.

I mean because we look at, I look at it in terms of Western Europe sort of the established markets and then Eastern Europe and Middle East -- Middle East is the highest growth region and Eastern Europe next and as we mentioned Western Europe was flat.

So for water, I don't know whether you want to add anything some

Yes, I'd say, Francesca, we would be happy to follow-up with you and Todd's got that data and I know your scheduled to call in and we'll see what we can do to get you to by the time the call is because you've really got to look at it through technical protects and water and they combined and there's varying degrees of -- I can't give you percentages because numbers are small.

Okay, that's fine.

We can follow-up on that and then on the pricing pass throughs, you had said kind of anticipating -- that you had been anticipating doing a 1% to 2% increase and now you're planning on doing more.

What push back to you get with that?

Well the ones we -- we implemented a number in the first quarter and people never like it, but the fact is that the oil is clocking at 116, we got carbon steel is up almost 60%, and these are real inputs and because of the structure of our business, through distribution, they tend to stick.

So, nobody ever likes the price increase though and so we don't ask them to vote.

We buy about $148 million or so -- $150 million of what we call metals and that's steel which is the largest component it's about $80 million for us and walking down from there, stainless steel would be about $30 million and we only do about $12 million of copper and about $10 million of pig iron.

That's relative to $1.2 billion direct material buy and so far we have not been significantly impacted because we tend to buy forward and we lock in at certain capacities.

So, we're anticipating that the second half is going to require us to do some actions out in the marketplace and where we would do these, are businesses in which we have a distributor type of model and which, we imagine, most people are experiencing exactly what we're experiencing and there will be everybody raising prices due to where we're struggling.

I think everybody is anticipating it, Francesca.

Okay.

So, possibly more in Q2 but definitely in the second half?

Correct.

Okay.

And then I guess just a little bit of commentary on what you're seeing on the acquisition landscape partly in terms of valuation, partly what you see out there?

You know, right now, our focus is on, we have a lot of opportunities that I characterized here on the call today, that were really organic in nature and we're flowing a lot of resources there but we're still in the flow of events, but there's nothing -- there's that I see on the horizon that obviously I wouldn't mention anything if there was, but besides bolt ons, and as I've said before, what we'd be interested -- we don't need to buy capacity, in fact we have plenty of capacity but market entry and capability expansion would be the only things I'm interested and the Young Pump and Porous Media were both examples of that.

They were pricey examples of that, but they were examples of that, and so I guess I'd just leave it at that.

Yes, and I would add-on the valuation side, Francesca, I don't think the valuation on deals that want to be done or could be done have dropped to the levels that we would be interested in.

That's a good point too.

And I think that's going to have to be a realization somewhere along the line, especially with the weak dollar in the global market.

Okay.

Great, thank you.

Thank you.

Your next question is from Jim Lucas of Janney Montgomery.

J Janney?

They changed the name of the firm on me.

Hello, how are doing?

Two questions, guys.

First off, Randy, can you give us an update on the technical products GBU with electrical now following the electrical and electronic together, kind of the early read of what you're seeing and is it delivering what you had hoped for putting the businesses under one GBU and secondly, if you could just provide any color that you might want to on the commercial construction market, both domestically and abroad?

Yes, sure, thanks, Jim.

First, I am -- of all of the GBU's I think the tech products one is not surprisingly given the Dell Nickel runs it, is off to a great start.

And the synergies we see in terms of running it more directly is one GBU or one business with the fact that Hoffman is our greatest practitioner of lien.

Hoffman is better than electronics on sourcing, and their vertical market focus is outstanding.

All of those practices are being rolled out.

At the same time we're looking at how we can consolidate back room to reduce cost and structure.

The other thing is we had electrical factories that were bursting at the seems and we had electronics factories that were under utilized and electrical opportunities that we weren't going after as aggressively.

That hasn't read out in the first the quarter, but our ability to leverage those electronics facilities more directly to electrical opportunities I think is a big deal.

In getting the thermal business, which is part of Hoffman more integrated with electronics, is going to be a big deal to help drive that growth, so I think the early returns are good.

I think the -- I mean the early reports are good, but they're not even reading.

The benefits aren't even reading out of the numbers yet, so I tell you I'm very bullish on the GBU, and in terms of commercial because there's a lot of focus on commercial, just to give you a little perspective, commercial is less than $18 million out of the $286 million of sales in the business, so it's 6% of our sales.

But also as it relates to water.

Oh, water is bigger than that.

I don't have that data right in front of me.

But just in terms of the overall margin?

Well, commercial has slowed in North America and in fact in the electrical GBU, it was flat and when we look around in water it slowed to single digits but commercial globally is really strong and that's what I was mentioning before.

Our Aurora pump business which is the one I was referencing, the exports are just screaming right now and we don't see that abating.

Those are exports to mostly the Middle East and Asia, so commercial as we mention in our charts is coming in about where we thought.

We thought it would slow in North America and it is, but that's sort of within our expectations.

I would say no surprise there.

Okay, great.

Thank you.

Okay thanks, Jim.

Nicole, we -- I don't know if we have time, we're running a little over, I don't know how many people are left in the queue, but definitely have time for at least one more.

Thank you.

Your final question is from John Quealy of Canaccord Adams.

Thanks, this is actually Chip Moore for John.

You touched briefly on the opportunity to improve working capital.

Wondering if you could just give us a sense of where channel inventories stand and how you see those progressing over the next couple of quarters.

Yes.

I was going to say I'll speak to the channel inventories.

I mean, the channel inventories in most of our Markets we would say are relatively modest primarily because we've been experiencing some significant downturns in North American residential and everybody has been a little bit queasy to add inventory in this particular down cycle.

Our particular inventories are doing okay with the exception of the areas where we're into the submersible pump where we carry a fair amount of inventory both of our stuff and for other market reasons.

And there's probably still too much in the channel.

And there's still too much in the channel there and the second area we would tend to take on more inventory especially in Q1 is pool, because even though pool will have a year-over-year drop in the pool season, there's still a huge ramp up from Q1 to Q2 from the seasonality of that market.

Other than that we've done a pretty good job of taking our inventories out but I would say we have at least $75 million to $100 million more to go before we would say we've done a good job.

But the channel inventories with the exception of the residential pump we would deem as pretty light right now.

Great.

Thanks.

You're welcome.

Okay that it?

Thanks everybody.

Okay, Nicole, thanks a lot and for everyone we'll be around all day, we'll speaking with you this afternoon and the rest of the week.

Thank you.

Thank you.

This concludes Today's conference.

You may now disconnect.