濱特爾 (PNR) 2008 Q4 法說會逐字稿

Good morning.

At this time, I would like to welcome everyone to the Pentair Q4, 2008 earnings conference call.

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

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

(Operator Instructions).

Thank you.

I would now like to turn the call over to Mr.

Todd Gleason who will be followed by Randy Hogan, Chief Executive Officer, and John Stauch, Chief Financial Officer.

Sirs, you may begin the conference.

Thanks, Anita, and welcome to Pentair's 4th Quarter earnings release conference call.

We are glad you could join us.

I'm Todd Gleason, Head of Investor Relations, and 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 fourth quarter and full year 2008 results as well as up date you on Pentair's outlook for 2009.

Before we begin let me remind you that any statements made about the company's anticipated financial results or 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 Pentair's Web site at www.pentair.com.

We will reference these slides throughout our prepared remarks.

Any reference 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 over year number in today's calls and presentations 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 fourth quarter and full year 2008 results, pride his perspective on the results of our business's and the markets they serve, and provide an overview on how we are driving to deliver results in 2009.

Then John will conclude our formal comments with additional information regarding 2008 financials and more color on our 2009 outlook.

Randy.

Thanks Todd and thank you all for joining us today.

Let's begin by reviewing our fourth quarter results shown on slide number two.

What started out as an uncertain economic environment quickly became a quarter mired in rapid market declines.

Our original forecast did not predict this unprecedented decline but when we understood the magnitude we shared our observations, reset the bar, and accelerated additional cost actions.

Here are our results.

In the quarter we delivered reported earning per share from continuing operations of $0.22, which includes non-recurring items predominantly associated with the restructuring actions we announced early in Q4.

We will discuss these items later in the call in more detail.

If you remove those items, which is the basis outsourcer guidance, we delivered $0.41 of EPS on an adjusted basis.

The $0.41 is down 21% versus the $0.52 in the fourth quarter of 2007 and is at the midpoint of our $0.40 to $0.42 revised EPS guidance we provided in December.

Pentair's fourth quarter sales of $768 million were 5% below the $807 million in sales we generated in Q4 2007.

Fourth quarter sales in our Water segment were down 6% year over year.

Declines in each GBU reflect a sudden and significant volume declines in global markets.

In December we completed the sale of our Spa Bath business, which is reflected in discontinued operations in the press release.

To the first quarter, divestiture of our National Pool Tile business, the sale of this non-core business allows to us fully focus on our core businesses.

Our Technical Products business declined 2% in the fourth quarter, versus Q4 2007.

This 2% decline is in stark contrast to the 13% average growth rates we experienced through the first three quarters of 2008.

While we had initiated aggressive cost actions earlier in 2008, we were not able to offset the rapid volume declines in the quarter, and our margin has contracted 240 basis points for the total company.

Deposit of 400 basis point benefit from price and productivity could not offset the negative 640 basis point impact from inflation, volumes, and foreign exchange.

The negative $3 million expense related to the residential water filtration integration with GE is netted in productivity.

Relative to our adjusted EPS, our fourth quarter effective tax rate was 32%, reflecting the investments we have made to position our global operations more optimally.

In the fourth quarter we delivered $63 million of free cash flow, reduced year over year debt levels, yielded $3 million reduction in interest expense, and in the quarter, we bought back shares worth approximately $11.9 million.

So a difficult environment.

But as we'll discuss today we will continue to take aggressive cost actions.

Now let's turn to slide number three.

As you can see, what a difference a quarter makes.

During the third quarter of 2008 we recognized the global economy was slowing and we took additional action to say reduce our headcount and reduce our facility footprint.

In October, when we reported third quarter 2008 earnings, we also slightly lowered our full year 2008 expectations to reflect a more cautious outlook.

However, we did not forecast the magnitude and suddenness of the order and volume declines that are shown on this slide.

As the slide shows our orders, the red line on the graph, we are trending very positive in the first three quarters of 2008.

In the fourth quarter our orders declined 14% year-over-year.

The confluence of continued soft residential demand, tight credit restrictions, and aggressive commercial and industrial distributor inventory reductions negatively impacted our order rates in the period.

Since the majority of our businesses have short lead times the immediate drop in orders translated into a drop in Q4 sales.

As the data shows, on the top right section of the slide, sales in our technical products business were down 2% year-over-year.

Compare this to the 13% growth were experiencing through the first three quarters and it isn't hard to understand that we had to act quickly to further reduce our cost structure.

Our Water business also witnessed sales declines in the fourth quarter, but since we have a large residential exposure sequential sales declines were less pronounced, as those markets have been soft for some time as you know.

As the slide highlights we saw sequentially more pronounced declines in both EMEA and in Asia, where we had been growing over 20%, which includes the benefit of foreign exchange, we declined mid-single digits in the fourth quarter.

Of course you've all seen the head lines of practically every company has highlighted slow downs in October, November or December, or perhaps all three.

For Pentair the declines were felt most severely in the latter parts of the quarter.

The speed and severity of the decline was stunning, and precipitated our acceleration of cost actions.

We show this material as a lead into why and how Water and Technical Products businesses experienced the level of margin compression they did in the fourth quarter.

Certainly not every financial metric is a result of volume, but when the environment changes this quickly it's hard to adjust production and forecasting fast enough.

Let's take look at how the sudden drop in sales and demand impacted our two businesses.

Please turn to slide number four, which provides an overview of our Q4 water results.

Here are the highlights.

On the top of the slide you can see we provide our standard sales and operating income loss.

We will refer to these as we describe the performance of the Water Group.

Overall water sales were down $33 million to $509 million, down 6% versus last year's sales and down 7% organically in local currencies.

As you know, approximately 40% to 45% of our Water Group is exposed to residential markets.

Those businesses continue to be down double-digit as further softness in U.S.

and European residential markets continues to impact our sales.

In the quarter we also saw softness in non-residential markets as well as a slowing international market.

Our Global Flow Technology sales declined 5%.

Growth in municipal and agriculture, which was driven by new products, as well as continued global expansion in our commercial organization, could not overcome continued declines in residential flow.

Global filtration was down 2% in the fourth quarter versus last year, as the benefits from the Pentair Residential Water Filtration business combination could not overcome soft residential and commercial markets.

The Global Pool Equipment business was down 12% in the quarter, as new pool builds remain very low.

In fact residential pool permits in the U.S.

were down another 50% year-over-year in major markets such as California, Florida, and Arizona.

As we'll discuss in a few minutes, we remain very cautious regarding the pool markets.

Internationally, sales in Europe, the Middle East, and Africa, or EMEA, were down mid-single digits as broad-based declines in residential markets lowered volumes and offset growth in the Middle East.

In Asia water sales were down 5%, as sales in China increased double digits, but could not overcome declines in Australia and New Zealand as residential and pool markets in those countries continued to contract.

Let's shift gears and discuss the operating profit margins for our Water Group.

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

Adjusted margins were 10.2%, down 250 basis points year-over-year.

Inflation impacted water margins by over 370 basis points and cannot be overcome by productivity, price, and product mix.

Our fourth quarter adjusted margin includes a $3 million associated with the integration costs associated with setting up Pentair Residential Filtration, or as we call it PRF, which is the combination with GE.

As we announced in October, and reiterated in December, we are taking significant actions to rationalize our global footprint, reduce structure, and invest in our best growth opportunities.

We are executing well against these actions, but they have yet to read out as volumes declined more dramatically than we had forecasted and many of our cost reductions are not yet fully finalized.

As we mention in the head lines in December, we sold our Spa Bath business.

This better positions our Pool Equipment business to focus solely on its core, which is serving residential and commercial distributors, pool builders, and ends customers with leading pool systems technologies.

So I believe we continue to take the right steps in a challenging environment.

Now turn to slide number five and we will review Technical Products.

As we discussed a few minutes ago, orders in our Technical Products business dropped off materially in the fourth quarter.

This led to a sales shortfall versus the guidance we provided in October of approximately $25 million, which, when coupled with high materials costs in the quarter, drove margins down.

Let's review some of the details.

Year-over-year fourth quarter sales and Technical Products were down 2%, or flat in local currencies.

Our Global Electrical business grew slightly.

Solid growth in our energy vertical market, and a few commercial and industrial markets, overcame softness in other verticals, particularly automotive and machine tool.

Our Global Electronics business declined 6%, led by double-digit declines in Asia Pacific.

European sales grew in local currencies.

Looking at technical products margins, the headline is we declined 260 basis points year-over-year.

Several factors impacted margins the most.

The first was inflation, which you can see on the operating income walk on the top right section of the slide.

In the quarter we were expensing steel at around $850 to $900 a ton.

Earlier in the year, our steel expense was around $550 to $650 a ton.

With slowing sales and declining order, we moderated production levels in December, which created negative absorption, which cancelled out positive productivity.

Finally we did taking a aggressive cost actions in the quarter, the benefits of which will be realized starting in 2009.

So, we continue to take aggressive cost actions, as expenses associated with materials come down in 2009, we will benefit from much greater productivity.

Let's take a look at our full year results.

So please turn to slide number six.

For the year total company sales were $3.35 billion.

Year-over-year our sales were up 2%, as 9% growth in Technical Products more than offset a 1% decline in our Water Business.

Total company full year 2008 margins declined 30 basis points as the items that impacted us in the fourth quarter made a significant dent in our full year results.

The aggressive actions we took in each quarter of 2008 as well as the lower tax rate, share count and interest expense enabled to us deliver earnings per share of $2.20 on an adjusted basis, which was up 5% year-over-year.

As we articulated on the third quarter earnings call, our balance sheet remains healthy and our debt profile is very manageable.

So, while we hit new record sales and earnings levels, we exit the year with more difficult and unpredictable end markets, but also a number of cost actions underway to improve our cost structure and protect margins.

Let's turn to slide number seven to review our full year 2008 sales and operating income walks.

You can see the detail on the two walks on the slides.

I'm not going to go through all the data, as we just walked through our full year results.

Instead, let me share some observations.

Aside from our pool GBU, which declined 14%, sales grew for the full year in each of our other GBUs.

Technical Products led the way with 9% growth.

Flow Technologies grew 2%, as our non-residential businesses overall had a good year.

Filtration's 7% growth was aided by the formation of Pentair Residential Filtration and our continued growth in food service desalination in Europe and Asia geographically.

While we are disappointed at our fourth quarter sales declines impacted the year so heavily, overall we had a good year given we were battling soft residential and pool markets each quarter.

We benefited from our push in the new geographies and our growth in emerging markets of approximately 20% helped to broaden our global reach.

Furthermore, new products such as our food service (inaudible) enviro-filtration system and our aqua-line prefiltration system have been embraced by customers and partners.

On the margin side you can see the detail in the walk on the top right of the slide.

For the year margins declined 30 basis points.

We had negative impact from high commodity costs, foreign exchange, integration costs and expenses related to our factory shutdowns and moves.

We continue to invest in new systems to improve our infrastructure and also enable the formation of our GBUs.

As we've discussed throughout the year, our aggressive cost actions helped expand year-to-date margins until the sudden declines in the fourth quarter.

We have a number of cost actions underway and on track to provide significant benefits in 2009 and beyond.

Please go to slide number eight and I'll provide my perspective on 2008.

This slide is divided into four quadrants, financial results, key accomplishments, market observations, and our perspective going forward.

Through the first three quarters of 2008, our financial results met or exceeded our quarterly targets.

These results reflect the dedication and hard work our 15,000 employees demand of themselves and their teams as they serve customers.

And I thank them for that great service and performance.

Declines in the fourth quarter significantly impacted our full year results however and we are taking aggressive action to say prepare for 2009.

Our balance sheet remains healthy.

By year end 2008, we had reduced our long-term debt buy over $100 million.

We have secure credit facilities, very good fixed debt rates and ample free cash flow to satisfy our foreseeable needs.

And for the 33rd consecutive year, we increased our quarterly dividend, which now stands at $0.18 per share.

We have an opportunity to improve working capital in this contracting environment and this will be a key focus in 2009.

Under key accomplishments, we continue to drive growth in international markets, especially emerging regions.

In 2006 Pentair sales were only 28% international.

We improved that global balance at 32% in 2007.

In 2008, thanks to our rapid growth in emerging regions, our international sales were 35%.

This is great progress.

We've already discussed how we improved our portfolio with the formation of Pentair Residential Filtration and the sale of National Pool Tile and Spa Bath, all nice accomplishments in the year.

It's difficult to shut down over 10 facilities in a year, but we accomplished that task and we have another half dozen facilities underway.

While much of the benefit will be recognized in 2009, this is an important long-term structural cost improvement we are undertaking.

Remaining competitive with leading new products is extremely important as well.

Pentair stepped up our efforts in this area and we made solid progress in 2008.

I encourage you to review again, our September 2008 Analyst Day presentation, which is on our web site as we detail many of the new and exciting technologies and systems we are introducing to our markets.

At that Analyst Day we also outlined our long-term strategy for growth, productivity, and key initiatives.

While the challenging economic environment has accelerated our cost actions, it has also reinforced the strategy we outlined in September.

Our market observations likely mirror those of many of our peer companies.

It's a challenging market.

It's very unpredictable and there's lots of moving parts right now.

Markets in 2008 taught us all that thinking you are being conservative doesn't necessarily mean you are being conservative.

Residential markets were worse than our original expectations and our original expectations were lower than most everybody else's.

Almost all global Industrial and Commercial markets have slowed dramatically.

There are few bright spots, but the majority are in decline.

It's not our place to predict the bottom, but it's clear it hasn't come yet.

The good news is materials are also coming down and that we, like many others, are taking swift cost reduction actions.

We know what we can control and that's our focus in 2009 and we will control it.

So going forward we are driving labor and materials productivity and accelerating our G&A consolidation actions which are always our focus for 2009.

We have a significant focus on cash and are committed to do driving inventory improvements and continuing to generate strong free cash flow.

The cash will be used to pay our recently increased dividends and also reduce debt.

At this time, that is our only plan for cash usage.

Being realistic about the market headwinds we face and other challenges that may come our way in 2009 is also a key thing.

This is why slide number nine is important to review.

Before I turn it over to John let's take a quick look at some of our major actions heading in 2009 in more detail.

The information and data on this slide tell the story.

The data shows we reduced our headcount by 9% in the second half of 2008.

Savings from this will read out in 2009.

Additionally, we've announced action to take our headcount down further to a total of 16% reductions versus the end of Q2 2008.

And you can see it as both salaried and hourly workforce that is impacted.

All in the savings will be $85 million.

Related to this headcount reduction is the number of facilities we are exiting.

The total number of facilities closures between 2008 and 2009 is 17.

With most of the production shifting to best cost regions.

This is important not just because our volume declines warrant facility rationalizations, but also because the formation of our GBU structure enables more consolidated manufacturing assembly and distribution will help us become more competitive and benefit our customers too.

And every GBU is driving for material savings.

We have a tremendous opportunity to deliver bottom line improvements in this critical area and I believe we can do better than the 2% to 3% shown here.

It's a good start and certainly an area we are counting on to deliver to the tune of $40 million.

Now, I will hand it over to John who will provide additional details on our financials and also discuss our 2009 guidance in more detail.

Then we will answer questions.

John.

Thanks, Randy.

Please turn to slide number ten.

We've been using this slide the last few quarters so you can reconcile the GAAP to non-GAAP EPS results for 2008.

Let's review.

On the top of the slide we show our GAAP, or reported EPS results for the fourth quarter and full year 2008.

As you can see we generated $2.59 for the full year.

This is up over 20% versus the $2.12 of full year EPS in 2008.

Moving down the slide, the middle section shows the major adjustments that bring us to our most comparable performance related earnings per share for the fourth quarter and full year.

The first adjustment is the $0.86 per share gain we recognize in the second quarter of 2008 from the formation of Pentair Residential Filtration along with GE.

The second item, which is a $0.14 charge, also relates to a second quarter action when we settled the 1994 Horizon legal case.

You can see both items are in the full year 2008 column, as there was no impact in the fourth quarter.

The final adjustment is the $0.33 of restructuring charges we took in 2008.

We took $0.19 in the fourth quarter which is shown in the first column.

We had already taken $0.14 through the first three quarters of the year.

Thus, the total for the year is the $0.33 per share as shown on this slide.

As we'll discuss in a few minutes, by taking these $0.33 of restructuring actions, we will significantly improve our cost structure.

These adjustments bring us to the $0.41 of EPS for Q4, and $2.00 of EPS for the full year 2008 -- or $2.20 for the full year 2008.

The 2007 figures are on a continuing operations basis reflecting our sale of both National Pool Tile and Spa Bath in 2008.

Those are the reconciliations between reported and adjusted EPS for the quarter and full year.

Now let's take a look at our balance sheet and cash flow metrics as we exit 2008.

Please go to slide number 11.

The left half of the slide provides a walk from net income to free cash flow for 2008, as well as an outlook for 2009.

We'll discuss our guidance for 2009 in a few minutes, but as you read in our press release, we have maintained full year 2009 EPS at $1.70 to $2.00, which was the same guidance we provided back in December.

So that income for 2009 reflects that guidance range.

Let me touch on some of the highlights in the cash flow walk.

First, for 2008 we delivered $218 million of free cash flow before several discrete payments.

This number was slightly blow our targeted cash flow of $235 million.

A portion of this, around $15 million, was related to the difference between plan and actual cash and our divested businesses of Spa Bath and National Pool Tile as well as heavy plant integration costs in our Residential Filtration business.

In addition, we utilized around $50 million of working capital, a bit more than planned as the dramatic slow down caught us holding some inventory as well as some collections of receivables at the end of the year were delayed by customers.

Cash versus accrued taxes and lower capital spending helped close the gap.

You can see the $218 million number in the middle section of the left-hand side of the page.

A portion of that cash flow generation was used to pay the Horizon legal settlement of $28 million.

Further, we used $18 million for severance payments associated with the restructuring and finally we had an incremental $8 million of pension funding in 2008.

So, that brings you to $164 million of free cash flow after these discrete items.

As we discussed, we are shutting down 17 facilities in 2008 and 2009.

This is approximately 25% of Pentair's total plants.

Since the majority of those factory shutdowns are well underway, or in the final stages of completion, we were burdened with redundant inventory at a number of locations.

This helped maintain customer service levels.

In fact, our on time delivery and warranty metrics both improved modestly despite all of these moving parts.

We know working capital represents a significant opportunity for us in 2009 and we have a number of actions underway to deliver much improved performance in this key area.

And while we missed our 2008 free cash flow goal of 100% conversion of net income, it comes on the heels of a year when we delivered over 130%.

So we have a solid track record of free cash flow generation and we believe 2009 will be another solid year.

The bottom section of the left side of the chart shows how we deployed the free cash flow in 2008.

We paid $67 million in dividends and repurchased $50 million of shares.

We also paid down long-term debt buy over $100 million.

Our expectations for 2009 are shown in the two columns immediately next to the 2008 column.

The columns tie to our low and high estimates for the year.

Our outlook demonstrates our commitment to improve working capital performance and our expectations around debt pay down, dividends and capital expenditures.

The right side of the slide provides details associated with our debt and key ratios.

Of note, we have $134 million of Senior Notes coming due in October of 2009.

We have ample cash and credit to satisfy this note.

You can also see our average debt is at about 5.13% which includes the 7.85% of Senior Note debt that we will retire in 2009.

So, we exit 2008 with a solid debt position, a healthy debt to capital ratio of 33.4%.

Now, let's review our 2009 outlook in more detail and our assumptions for the markets in which we participate.

Please turn to slide 12.

On this slide we show our key assumptions for 2009.

The top one-third of the slide shows our financial expectations as it relates to our guidance range.

The bottom two-thirds outlines our assumptions for the market environment as well as some of our expectations that have an impact to our EPS results.

As the slide shows, our view of US residential markets remains cautious.

With new home construction down over 25% and replacement flat to down slightly.

US non-residential markets have clearly softened and in almost every case we see commercial and industrial demand down double digits in 2009.

Internationally, Europe continues to soften and is expected to be down double digits in both residential and non-residential demand.

We see emerging markets, such as the Middle East and Asia, providing some growth opportunities but overall we are planning on those markets to slow compared to the recent period of rapid expansion.

So, we are expecting very difficult end markets in 2009 and we are taking cost actions to reflect these challenging times.

Embedded in our $1.70 to $2.00 EPS forecast are the following assumptions.

We expect a negative $0.05 EPS impact from foreign exchange as the dollar continues to be stronger in 2009 than the average 2008 rates.

We have used $1.20 to the Euro for our planning assumptions.

Both commodities and logistics are expected to be -- to experience deflation which will benefit EPS in 2009 when compared to 2008.

The largest commodity impacts for Pentair are steel, resins, and copper which are all expected to be lower than average costs for 2008.

Our investment in sales and R&D remains focused and prioritized to high growth platforms as we continue to invest for long-term growth even in this downturn.

Finally we expect our tax rate will remain around 32% to 33% while lower debt levels and interest rates will benefit interest expense buy about $9 million versus 2008 or around $0.06 per share.

With negative pension asset returns in 2008 and a discount rate of 6.5% we expect a negative $0.02 per share impact from pension.

So our market assumptions reflect the challenging environment.

However, we are taking aggressive cost action to ensure we deliver the highest level of profitability and earnings in 2009, given the market situation.

Now let's review our first quarter 2009 outlook.

Please go to slide number 13.

We are forecasting sales declines of approximately 15% in the first quarter.

We are forecasting monthly sales levels in the first quarter to remain at or near December 2008 run rate levels.

This is what we've seen so far in January and we believe distributors and dealers continue to manage inventories very aggressively.

Credit is still difficult for distributors and dealers, and financing for products like water softeners and pools is less available to our customers.

Additionally difficult comparisons in our pool business in Q1 contribute to significant sales declines in our water business which is expected to be down significantly in the first quarter.

We expect sales in our technical products business will be down approximately 25% as demand in commercial industrial segments continues to slow and distribution inventories are correcting.

Operating income and margins are expected to be down significantly in the first quarter as the volume declines and drop through are at a high conversion rate.

The benefits we will get from restructuring and materials deflation will not yet be realized in the first quarter but will begin to provide benefits sequentially throughout the year.

Our guidance for first quarter 2009 EPS has been updated to do reflect our outlook for $0.20 to $0.30 of earnings per share.

The updated range reflects the additional cost actions as well as our ongoing efforts to curb production to maintain inventory and working capital levels.

We expect to continue to have a 32% to 33% tax rate and interest expense will be lower buy about $2 million versus a year ago quarter.

Finally, as in the case in the first quarter each year free cash flow is expected to be negative for the quarter.

So, a challenging environment to start the year.

However, as we look out to the year we expect that off of this Q1 run rate we will see some modest seasonality increases in water shipments as we normally do in pool, flow, and the Asia Pacific region, as well as start to realize lower material costs as we burn out the negative factory variances on the balance sheet from Q4.

In addition we will continue to reduce salary and hourly headcount associated with the announced plant closures and begin to capitalize from the benefits of overall reduced operating expenses throughout Pentair.

Now let's summarize today's earnings review and then take questions.

Please go to slide number 14.

We are dealing with unprecedented levels of contraction in many of our end markets.

Our fourth quarter 2008 results reflect these challenging times.

We are taking aggressive actions to bolster our results and reflect the current economy.

While we are disappointed that the very end of 2008 had such a negative impact to our earnings, we are proud of many of our key accomplishments including improving our portfolio by divesting non-core businesses and advancing our filtration strategy by forming the Pentair Residential Filtration business with GE.

We strengthened our balance sheet by lowering debt levels and ensuring our credit facilities are in good shape.

We took quick and aggressive action to improve our cost structure, shutting down 17 plants between 2008 and 2009, as well as reducing our overall headcount by greater than 15%.

As we transition to 2009 we remain cautious that major markets globally will continue to be challenging.

The tough start to the year reflects this caution, as we forecast low sales in the first quarter, while still expensing higher costs associated with materials and headcount.

So, we understand the current environment and are focused on improving your company to deliver the optimal results given the weak market outlook.

We now would like to answer any questions you might have.

Operator, please open the lines for questions.

Thank you.

Yes, sir.

(Operator Instructions).

Your first question comes from the line of Michael Schneider of Robert W.

Baird.

Your line is open, sir.

Good morning, guys.

Good morning, Mike.

Maybe first we can address the cost savings laid out on slide nine.

You layout the headcount reductions are going to save you $85 million annually.

I'm just curious as that layers into the year, what would you actually expect to realize in 2009 of the 85 or is that the number?

Well clearly the 85 is what we expect.

So that't the -- the $85 million reflects the 2009 benefit, Mike, as it pertains to those headcount reductions.

Okay, then the spill in the 2010 would be roughly how much?

Probably another $10 million to $15 million or so.

Okay.

So, if you bear with me for second in an elevator ride here, if you add up the savings on slide nine you basically get to $145 million and your operating income assumption for the year at 350 is down, call it $41 million.

So, I'm trying to understand if you take $41 million of decline in operating income, add back the $145 million in savings on slide nine, it looks like you're assuming decremental margins now on this 10% revenue decline of about 55% which seems extremely severe given what's gone on even over the last quarter and then certainly given your historical decremental margins.

I'm curious in that savings versus decline in operating income, what I may be missing or why 55% is the assumption for decremental margins?

I don't think you are missing it, Mike.

The way we've put together the plan, Randy and I, and Mike Schrock, is we have laid it out and said we got sales minus material and let's look at variable contribution margin and let's assume that's tough.

And let's count on two forms of productivity.

And this is productivity we can absolutely see which is lower purchases and lower payroll and let's put behind us the challenges of capturing it by lean or capturing by program or initiative.

And so we put together what we think is a tight plan that reflects sales minus material over our payroll reduction and our purchase reduction.

And that's what we've guided people to and that's what we are reflecting here today.

You get incremental savings, I think we would feel that that would also trickle to the bottom line.

We are also not going to predict where the market goes.

We wanted volume, I mean I was talking before about trying to put volume on the upside.

Frankly who knows where to start there with the uncertainty in the market.

So we are trying to be -- we are trying to stay focused totally on what we can control as John just described well.

Okay, and then just two questions also in your assumptions.

So the material savings of $40 million I believe is about 3% on your raw material purchases.

John, just compare that to 2008.

On slide seven you call out that inflation cost you $113 million.

Are those two numbers comparable and --

That's total inflation.

That would include labor increases and material increases.

For a simplistic view, though, Mike you could do 50/50 roughly.

Okay, so the materials savings you expect to get in '09 don't even fully reverse or undue the inflation you experienced in materials in 2008.

That's correct.

Okay.

How do you arrive at the 3% number when we've got steal down massively, we have copper down massively, I'm just curious how you arrive at the 3%?

It's -- we planned on closer to two, Mike, and two things that factor into that.

One is we did a price lock last year in steel in Technical Products which gave us a little lift in Q1, where we were buying blow market rates.

We across over in Technical Products sometime late Q1, early Q2, for material savings.

So it's really taking the percentage change and only counting on about three quarters or a little bit more than two and a half quarters of benefit.

And I think would you agree, we have to roll off the balances from our -- the variances from our balance sheet and the new productivity and new purchases are a little bit delayed as you have to build the inventory, ship the inventory, then you recover.

If we didn't have so much inventory it wouldn't take so long.

That's fair, Randy.

And the flip side of that is the pricing assumption, you've got revenue down 10%, what amount of pricing have you baked in there?

We roughly are looking at around flattish price and the only price that we've counted on is price that's contractually in.

If we took that we'd be looking at about 1.5 to 2% up, Mike, and then we are counting on probably between now and the end of the year having to give some back.

Okay, thanks again guys.

Thank you.

Your next question comes from the line of Alex Potter of Piper Jaffray.

Your line is open, sir.

Thanks.

I was just wondering if you could comment first of all on food service.

It seems in the release today that food service was down and I was wondering if, at least at the Analyst Day presentation it seemed like it was a very, I guess, impressive presentation in that it seemed like there was a lot of energy savings and water savings benefits that go along with this kind of full total solution approach to the food service offering.

I was wondering why that's not attractive in the current economic environment?

Well, it was actually down low single digits in the fourth quarter which was the first time it's been down in ages.

We love our products.

We love our market position but you can't deny what's happening with -- if you look at the three different segments in food service.

The fast serve, the medium priced sit down and then the high-end.

You can read about how they are struggling.

There's a few at the low end that are doing well and we will do well with them and our globalization is goal well.

But you can't deny what's happening with some of the other restaurant chains.

That said, I like our competitive position.

I like our new products.

What we've done with that team is we've broadened the focus from being just food service to being food service and hospitality.

So we are actually cutting deals for broad-based, broad-based supply agreements, with some of the larger hospitality company's which I think are going to be a source of growth for us.

But even in -- even as we -- even with all of that we are not assuming that we can do much more than gain share because we -- you can't deny what's happening in the restaurant industry.

Sure.

Okay.

Fair enough.

That's good to hear that it wasn't down double digits or something totally catastrophic.

No.

And then also if we could just switch gears to residential flow.

I was wondering what's it going to take for residential flow to turnaround?

Is it basically just going to be stronger housing?

Is that the story?

Basically that's the key.

We had kind of a mixed bag in the fourth quarter.

The Pro-Channel and Residential Flow was down a lot which was inventory being adjusted.

Actually retail was strong because there was some early flooding in winter as it came up so actually retail came up.

The key is going to be housing.

That said, most economists think that housing is going to be the key to the whole turn in the industry.

So, I believe that's true.

The fundamentals say that should be true.

The question is when?

There's a lot of water yet to go under the bridge before I'll see the residential market turning, so.

What we are doing is we are focusing on getting our cost structure right, getting our channels strengthened and being there for when the market comes back.

That's both in Residential Flow and in Residential Filtration.

That's really what we are talking about.

Great.

And then I guess on the topic of trying to get things in the economy turned around, my last question here is, there's obviously, and you made clear, that you're just going to be focusing on things that you can control and things you can predict and there's a lot of uncertainty right now in terms of the stimulus package.

But was just wondering how you see Pentair as being positioned to benefit if and when something eventually does pass Congress?

Well, I mean there is, I don't know where it is today, but there has been targeted some $45 billion to $50 billion to go to water.

We, we through industry associations are engaged with understanding that.

We have a team set up to track those things to make sure that we get our bids in.

And I think we can win more than our fair share.

We are the most US centric supply for that equipment.

If it goes into wastewater plants or goes into water supply plants anything that requires pumps or filtration equipment, I think we'll do fine.

I think we'll do fine.

I'm hopeful that there will be a lot of that.

I'm also not building my plan based on it.

Okay.

Great.

That's all I've got.

Thanks.

Your next question comes from the line of Christopher Glynn of Oppenheimer.

Your line is open, sir.

Thanks, good afternoon.

Hi Chris.

On your slide 12 with the different vertical markets, it looks like US residential replacement flat to down, one of the more optimistic forecasts among the different verticals, could you go into what's behind that tall?

Well, residential replacement, if you think about our business whether it's in, this is water, right, we don't have Residential in Tech Products, you basically, if your sump pump breaks in the basement, and you have water in the basement.

it doesn't matter if you have a job or not have a new job you are going to get a new pump.

If you need a well pump you are going to get a well pump.

That's what the replacement market is.

Even on the pool side when we talk to people in the channel, as people's pumps break on their pool they are still going to replace it.

So this is really a, it's fundamental to how people operate.

And true with filtration too, if their filter system breaks they generally will replace it.

The only reason it's not up, it typically is up based on price, but we are not going for price and we are expecting some inventory downturn -- inventory drawdown in the channel.

So, I guess what did it do this year and it sounds like you don't really project any remodel impact in it?

It was flat and flow actually in the fourth quarter was a little up.

The flooding related business we would call that replacement.

That goes in the replacement category when there's flooding and people run out and by pumps.

Retail has been at low inventory levels for some time Chris and that does, this does go through the retail channel as well in the after market.

Then on Mike comments dissecting the earnings guidance, teasing out decrementals, et cetera, it sounded like part of the reason for the build up was the fact that you simply don't no exactly what the volume trends will be throughout the year.

Is the EPS range sensitized to more dramatic volume drop off than the narrow range that's kind of referenced?

I think the better way to think about it, Chris, is that we are taking a look at it sequentially, right?

So if you take a look at Q4 and you bring it into Q1, we would assume that things don't get better from what we've seen in December and January; that we continue to see the inventory corrections in the channels and that we continue to see some cautious views as far as taking product either for capital reasons or just through the distribution channels.

If you then take that sequentially and you go forward the question is what happens and what do we do about the seasonality that we usually get?

And we usually do get some seasonality in pool.

There's always a pool season, just a matter of how big it is.

Always has been up till now.

Always has been.

We are hopeful it happens again.

We tend to see seasonality in Q2 both in Technical Products and also across the Water businesses especially in Europe because there's more shippable days.

That will be a good gauge as to where the year is going to play out and I think as we start to exit Q2, we are going to get a clearer picture of what the back half of the year is.

So I would say that we feel we've got tons of cost action that is put us squarely in that range, Chris.

And we control those and that's what Randy was talking about and that's what we are focused on here.

We are probably going to go after more labor than even what we got identified.

We are going to make sure that we are utilizing the furlough options in our plants as most of our businesses have to not build inventory and to manage the cash position.

We got some room in interest as we continue to pay down the debt and then we'll give an update kind of where we are at the end of Q2.

But those markets are the uncertainty right now we can't predict.

Sure, and then just lastly I guess the first quarter margin impacts obviously a lot of different things, seems like significant under-absorption.

First, would we expect to see inventories come down a lot and second what's kind of netted out for some restructuring benefits in that quarter and what's the exit run rate, I'm guessing 25 million in the fourth quarter?

I'm trying to -- I'm sorry, Chris.

(Inaudible - multiple speakers) inventory.

You're talking about the end of the year or the end of the quarter.

Just kind of the impact on margins in the first quarter from under absorption and what you might be able to do with inventory levels.

When we exited Q4, directionally, we had about $13 million to $15 million of factory variances on the balance sheet that needed to be spun into Q1 and that's reflective in our number, Chris.

So easily, the easier way to say that, not to take you through an accounting exercise, the first $13 million to $15 million of inventory burn doesn't get you to the new pricing, right, so the material that's better than that and the purchase that's better than that doesn't get experienced until we work through that and that's what you're seeing in Q1.

That will all be gone by the end of Q1 and then you start to see sequentially better than that.

So that's a minimum.

Right, but one of the other things is we have taken production levels down, we believe in the first quarter to help keep from passing more variances threw to the next quarter.

We are trying to get production levels down so we don't keep just passing this forward.

Right.

That's in the quarter.

And that's obviously hurting as well, Chris.

Okay.

Thanks for the help.

Thank you.

Your next question comes from the line of Brian Drab of William Blair.

Your line is open, sir.

Good morning.

Good morning, Brian.

Just looking at your topline growth assumption for 2009, it looks -- I should say topline decline assumption, negative 8% to negative 10%, trying to get a better feel for the break down there.

I know you've already, through the answer to one question, said that you expect price to be flat and then did I hear correctly that for your FX you are assuming an exchange rate of $1.20?

Roughly.

For the Euro.

For the Euro, dollar to Euro.

For the Euro.

And what would you expect the impact to be on the topline given that assumption?

It's going to be about $20 million to $30 million, roughly.

$20 million to $30 million for the year?

Yes, call it a point, $30 million.

So just one percentage point is what you would expect?

Yes, they are going all different ways here, right, so you got the Canadian dollar, you have the US dollar, but we built a plan, dollar Euro is most meaningful to us right now is about $1.27 today when I looked last.

We built the plan at $1.20.

So I think we have a little cushion before we would see that impact.

But you've also got the Canadian currency, you got the Australian dollar, all of these move forward.

So, call it $30 million-ish or about a point of revenue reduction related to currency.

Okay.

It's a little bit -- I guess I'm not taking into account all the other currencies as much as I should but I would have expected that that would have been -- you would have had a much bigger impact (inaudible) year-over-year in 2008 had the exchange rate was favorable to you by about 3%.

No, if -- I mean you could do the math just to reverse it -- if you go to Randy's slide where he talked about full year Pentair performance on page seven, you could see the impact of currency was $51 million favorable.

Okay.

On the revenue side.

Yes.

So you can do kind of the calculation there, it rounds to two points.

Less than two.

So if you take a look at where it is this year, most of Q4 was less than the $1.30 to the Euro that we were experiencing in the first part of the year, so.

Okay?

Okay, sounds good.

So in terms of volume then I guess you could just say that you are expecting to be down in the high single-digit range also.

Okay.

Then one last question, could you give us a break down of volume and price for the segments for the most recent quarter here in water and technical products?

I'm pretty confident that's on the charts as well, right John?

The volume is.

That includes price in it.

I think you just have growth, total growth, with no breakdown.

Right.

We have price in water of it looks like 2%.

Okay.

Tech products of about 2% to 2.5%.

And just one point of clarification just to make sure you have it right, Brian, when you say price in 2009 of zero, that basically just so you know means that we give up price in 2009 because the tail end of our price action inside 2008 would naturally give us about a point and a half of price in 2009.

You get what I'm saying?

Yes.

Okay.

So that's base data that we basically have some price erosion naturally happening.

Okay.

Thank you very much.

Your next question

Go ahead Anita.

How many more do we have in the queue because I think we have about five minutes left?

You have two more in queue.

Okay let's go ahead and go through those.

Okay, and your next question comes from the line of Scott Graham of Ladenburg.

Your line is open.

Good afternoon.

Hi Scott.

I have several questions for you, when you do your walk through on the operating margin by segments, can you guys explain how operating income has green growth graph boxes to them when we have --

I got to answer this one.

Randy has got to answer this one, go ahead, Randy.

When they gave me this chart I had the same question.

Basically, our volume is down but price was positive.

And price has 100% margin.

So it's -- that's how that works.

So the growth on the op income side growth includes the acquisition and includes volume growth and it includes price.

So that's.

That's how it works.

If you do the math and you said 40%ish on the conversion on the downward side of volume, and then you add back in the price component, 100% as Randy said, that's how you get a small positive for growth.

That was pretty good conversion.

Next couple of questions are, any chance you guys can give us an idea of what the restructuring charge assumptions are as we roll through 2009?

Yes, I mean right now we have taken some sizeable actions in the tail end of 2008.

So everything that you are seeing today encompassed in the slides has been taken, and accrued for, as we exited 2008.

So, Scott, our outlook for 2009 is that we are only now going to be doing the pay as you go expenses, which is in the $1.70 to $2.00.

So as we move assets and other thing -- we just now call that pay as you go.

We are not going to charge that off.

Okay, so when you say in your press release that the heightened restructuring activity in the first quarter -- that's the pay as you go, those are not charges.

Correct, that 's things like scrap, it's negative efficiencies on moving it from one plant to another, it's the physical relocation costs of the capital expensing, it's consulting contracts related to ERP migrations, et cetera.

Here's one for the maybe the longer term which will be nice to talk about versus the current environment.

You guys have some very healthy expectations to grow out the size of your addressable markets.

And here we have this 15% reduction in employee headcount and 17 factories to be closed which I think is up from like 12 or 13 from when we last checked in with you guys.

And that's great for the current environment because it obviously gets us closer to $150 million savings number versus where you are previously.

But the flip side of course is that in 2010 and hopefully maybe even later this year when we really want to drive the -- look to drive the organic through the addressable market strategies, how does that impact us?

How does that impact that strategy and I think just as importantly, if volume does improve late in the year, how does the so many closures that are taking place right now, which are probably easier to do on volume declines, how does that, does that dynamic change, does that put you in some jeopardy manufacturing wise and does that slow the addressable market strategy?

Let me take that and John you can add to it if you want.

First, while we hadn't talked about the 17 plants, they were always in our plan.

We've, through acquisitions we've assembled some nice businesses, but we've always had too much structure and it's always been, we have, we've had too many plants.

So the 17 plants were always on the agenda.

What we've done is we've pulled them in and in particular our Sheboygan and our Cypress factories.

We've pulled in because of the near term reality of what our volumes were.

So we always want to do reduce our structure and continue to grow particularly in best cost country and in growing countries.

So, for example, we are increasing our capacity, right now, we are investing to increase our capacity in our CodeLine Vessels for our OD sale because we know that's a growth market.

We are still investing there.

We are still investing in China.

We are still investing in our Middle East.

So it's hard to on the one hand to be taking cost down in some places while your adding in other places but we are trying to remain disciplined on that.

The second point I would make is that we are on a journey to become a great company at lean.

Lean creates capacity.

Also our cost structures are such that we are not huge capital compared to a lot of industries.

So we can ramp volume just by adding back over time, adding back temporaries, and adding shifts.

So from a production standpoint we can ramp up pretty well.

I would say after we are done with this, we could still probably go up 15% without really a lot of capital.

There may be some bottlenecks and the like but I think that we will be okay from that capacity.

Then there's engineering.

We haven't cut back engineering that much.

We -- in fact I'd like to get back to continuing to invest in engineering.

So that's how we are thinking about it.

Mike and John and I and the president's are committed to being in a position to grow when it ends and I hope you're right, I hope we can actually talk about growth by the end of '09.

That's not what we are planning on though.

There is nothing that you feel Randy that you have done here that will impact these addressable market strategies, you are still incrementally adding some people, some feet on the ground kind of thing in the markets that you think are markets that you should be in?

Yes.

Now, not in the states, not in western Europe.

We are not adding feet on the Street there.

But we are keeping our investments in China.

We are keeping our investments in India.

Even in Technical Products which has gotten wacked here in the downturn, we are still investing in building a plant in India right now.

So I'm committed to grow again.

But what we have to do is persevere through this.

And Scott, just to dive a little deeper here, if you recall, and look at our Analyst presentation, our G&A is heavy so a lot of numbers you are talking about here are in G&A, there not in sales and marketing.

In fact we were very care full as we peeled back the onion and looked at the head count reductions.

We went lighter in sales and marketing and a lot heavier in the G&A and a lot of the one for one reductions in the factories are falling out.

What you are seeing here is also netted investment in Formosa which is a best cost country production facility for us as well as Suzhou.

If you look at the capacity levels of both those plants right now there is still excess capacity.

Well, we created more when we sold Spa and Bath.

Spa and Bath coming out of a factory is going to free up space for us.

I want to end by saying that's a great question and that's what we're looking at as an Executive Team and as we continue to look further out and the economy continues to be challenged further out those are the type of questions we are asking ourselves

I really look forward to proving that we can do this.

Right.

That's going to be a lot of fun.

You sound like you have a lot of confidence on the cost side and I think in this environment that's good enough for me.

So.

Thank you.

All right.

Thank you.

Anita, if there's no more questions.

Was there one more?

Is there one more?

There is one more if you have time for it.

We will take that one.

Very good.

That question comes from the line of John Quealy of Canaccord Adams.

Your line is open, sir.

Thanks, it's actually Chip Moore for John.

A follow up on that last question a little bit.

If you can provide maybe just a little bit more color on your export markets, obviously it has held up relatively well versus the US.

Recent quarters, just if you could talk about the visibility you have there particularly in the Middle East, China, et cetera.

Yes, when you look at the Middle East -- actually the Middle East residential -- we serve residential in the Middle East, Residential is down in the Middle East.

So to give you a sense of the fact that Residential is a global phenomenon.

And it's even slower in Asia than we would like because we are a big player in Residential.

But Commercial, and Municipal -- Municipal remains strong actually for news terms of backlogs and order rates.

We haven't really seen anything flagged there yet and in fact we've opened up a whole area in Australia, the Philippians and where we are actually bidding municipal jobs for the first time and we are very hopeful that that will be a positive.

Now these are small numbers, they are ones and two bids but it begins that way.

Right?

So Municipal we haven't seen any weakness yet.

Commercial, the shipments are good.

We are seeing order rates coming down.

Even in the Middle East.

Still up year-over-year but not at the same rate.

So we are seeing some deceleration if you will in the Middle East on the Commercial side.

But then again we still have a lot of share to get so I still am very pleased with the performance of our team in the Middle East.

They've done an incredible job of growing from pretty much being nothing to being 2% to 3% of the company now.

So, and then in China, again still growing but at a little slower rate.

Okay.

And you talk about Municipal there abroad, maybe domestically are you hearing anything or seeing anything from distributors?

We exited the year with the highest Municipal backlog that we've had.

But what we are doing in our planning we are assuming that some of this stuff is going to move out.

Maybe some of it gets accelerated with - if the money goes to the right place in the stimulus package but we are assuming that some of these, including some of the Commercial projects, may move out on us or get out right cancelled.

So we are cautious even though we look at the backlog and we are not (inaudible).

All right.

Great.

Thanks.

All right.

Thank you.

Thank you.

Anita is there anyone else in the queue?

No sir.

Okay, I don't want to jump to any conclusions again.

I guess we are going to go ahead and conclude.

If you want to give the replay information that would be great.

Thank you for your time everybody.

Yes, sir.

The replay of today's conference will be available starting in about two hours.

To access the replay dial 1-800-642-1687 and when prompted use the conference ID number from today which was 80028855.

Thank you ladies and gentlemen this does conclude today's conference call.

You may now disconnect your lines.