濱特爾 (PNR) 2009 Q1 法說會逐字稿

Good morning, and welcome.

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

At this time, I would like to welcome everyone to the Pentair Q1 2009 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.

Mr.

Todd Gleason, you may begin your conference.

Thanks, Patricia.

And welcome to Pentair's first quarter earnings release conference call.

We're glad you could join us.

I'm Todd Gleason, Head 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 update 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 are forward-looking statements, subject to future risks and uncertainties, as well as the risks outlined in Pentair's 10-K as of 12-31-2008 and Pentair news releases.

Forward-looking statements included herein are --

Patricia, we can hear you.

Sorry about that, everyone.

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 website at www.Pentair.com.

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-over-year 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 question and answers after our prepared remarks.

I will now hand the call over to Randy, who will take you through Pentair's first quarter 2009 results, provide his perspective on the results of our businesses 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 our first quarter financials, provide more detail on 2009.

Randy?

Thanks, Todd.

Thank you all for joining us today.

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

Here are the headlines.

First, it was a much more challenging quarter than originally anticipated, as many of our markets were mired in credit paralysis, inventory destocking and a hesitation to launch new investments.

As a result, our first quarter sales results were 10 points worse than the guidance we provided in February.

However, through strong execution against our restructuring and other cost actions, we still delivered $0.20 of adjusted earnings per share, meeting the low end of our earnings guidance.

We achieved this by accelerating our facility closures and aggressively reducing labor costs.

In fact, we're ahead of schedule with regard to our major cost actions, having already closed 13 facilities out of the 17 facilities we indicated in late 2008.

Furthermore, total company head count is down 17% year-over-year.

While difficult actions, these are necessary to ensure we remain competitive and are positioned appropriately for the long-term.

The second headline is that markets remain unpredictable and as a result, we're planning that volumes will continue to be very soft throughout the year.

As a result of that sober sales outlook, we're lowering our full year EPS guidance to meet or exceed $1.40.

We'll revisit this topic in a few minutes to provide additional color on our full years assumptions and additional cost actions.

Finally, I suggest the third headline is that we expect the first quarter and full year 2009 represent the trough in earnings for Pentair.

The results of our productivity actions are reading out and will become a more powerful driver to our earnings as the year goes on.

Our free cash flow is ahead of last year and expected to be strong in 2009 and we continue to expand globally, maintain our investment in R&D, introduce innovative products, and position our businesses for growth.

All of which will be powerful when markets stabilize and recover.

So those are the headlines.

Here are some of the details.

In the quarter, we delivered reported earnings per share from continuing operations of $0.18 which includes $0.02 of nonrecurring items associated with new restructuring actions we took in the quarter.

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

If you remove those items, which was the basis of our guidance, we delivered $0.20 of EPS on an adjusted basis.

The $0.20 is down 62% versus the $0.53 in the first quarter of 2009.

Pentair first quarter sales of $634 million were 24% below the $830 million in sales we generated in Q1 2008.

First quarter sales in our Water segment were down 22% year-over-year.

Our Technical Products business declined 26% in the first quarter versus Q1 2008.

Each of our Technical Products' major vertical markets dropped double digits with some declining over 30% and 40%.

Despite our well executed aggressive cost actions, the dramatic volume declines in the quarter resulted in our margins contracting 540 basis points for the total company, as positive benefits from productivity and price could not offset the negative impact from volume declines, inflation and foreign exchange.

Relative to our adjusted EPS, our first quarter effective tax rate was 30%, reflecting the investment we have made to position our global operations more optimally.

While the first quarter is always a period of cash usage, we had a nice start to the year with respect to free cash flow, as we ended the quarter at a negative $33 million, which was favorable by $45 million versus the first quarter of 2008.

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

Additionally, the first quarter is also the period when we disburse variable compensation payments and customer and distributor rebates.

We're confident we will reduce working capital throughout 2009 and are targeting over $225 million in free cash flow for the full year.

So despite a difficult environment, our solid execution has delivered.

Now let's turn to slide number three, which provides an overview of our Q1 Water results.

Here are the details.

On the top of the slide, 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 $121 million to $424 million, or down 22% versus last year's first quarter sales and down 21% organically in local currencies.

Needless to say, this is not how we wanted to start the year.

Let's review our Water Global business unit's performance.

Our Global Flow Technology sales declined 18%.

Growth in our commercial markets fueled by global expansion could not overcome continued declines in residential flow and softness in agricultural markets.

Global Filtration was down 8% in the first quarter versus last year as the benefits from the Pentair Residential Water Filtration business combination with GE could not overcome soft residential and commercial markets.

The Global Pool Equipment business was down 45% as aggressive inventory destocking actions were implemented in the distributor channel.

Additionally, pool permits remained down 50% to 70% in major markets within Arizona, California, Florida, and Georgia.

Internationally, sales in Europe, Middle East and Africa, or EMEA, were down approximately 20% in local currencies, as broadbased declines in residential markets swamped growth in Middle East.

In Asia, Water sales were up 14% in local currencies and sales in China and India increased double digits, but were dampened by continued declines in Australia and New Zealand, as residential and pool markets in those countries continue to contract.

Now let's discuss operating profits and margins for our Water Group.

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

Adjusted margins were 6.7%, or down 520 basis points year-over-year.

The largest culprit in our margin contraction is related to volume decline, which negatively impacted operating income by $67 million and represented a 52% negative conversion on lost sales.

Our productivity actions yielded solid results as we accelerated cost reductions and more rapidly closed several facilities.

As I stated earlier, all of our facility closures are ahead of schedule, therefore we remain confident that our accelerated cost actions and steady execution will produce even stronger productivity in subsequent quarters, and we begin to see more material savings as the supply program read out in the P&L.

In the quarter, we instituted new structuring actions in Water related to the severance of several hundred more people.

The charge associated with this action is shown on the walk as a $1 million negative impact which is how you get to our reported operating income of $27 million.

So a very challenging environment where we continue to take the right steps to position our businesses for better days.

Please turn to slide number four and let's review Technical Products.

Year-over-year first quarter sales in Technical Products were down 26%.

As you know, industrial production and capacity utilization have fallen rapidly to very low levels, and capital spending has all but halted for many organizations.

Our channel has taken aggressive steps to reduce inventories and reaction to the sudden change in the industrial commercial market.

As I mentioned earlier, all of our major vertical markets declined double digits with some declining over 30% and 40%.

Looking at the businesses within Technical Products, our Global Electrical business declined 25%, while our Global Electronics business declined 21% in local currencies, led by declines in North America and Europe.

Looking at Technical Products margins, the headline is we declined 580 basis points year-over-year.

The volume impact removing positive price impacted operating income by negative $50 million.

The negative conversion on lost sales in Technical Products was over 65%.

However, through aggressive cost actions and solid execution on our restructuring efforts, we still delivered margins of greater than 10%.

We expect these margins represent a low point.

As we stabilize our volume levels, continue to execute on our restructuring and material productivity actions, we will begin to see sequential margin improvement.

As in Water, we took new structuring actions in the quarter.

The $1 million charge associated with those actions is shown on the walk and reconciles for our reported operating income of $20 million.

Let's take a look at our total company productivity for the first quarter.

Please turn to slide number five.

The walk at the top of the slide shows the major components impacting our year-over-year operating income.

The first bucket, labeled "Net Material and Price" is negative $6 million.

Since you can see on the previous business slides that we generated $19 million of price, you would be correct in calculating that material inflation was a negative $25 million.

Much of this inflation is from 2008 purchases as we continue to work off this higher priced inventory.

So we expect first quarter materials reflect the highest priced commodities for the year.

The next three buckets on the walk total $65 million in positive productivity associated with wages and head count reduction, and the results of our aggressive actions with regard to discretionary items.

John will revisit this topic later on in the call, but I'm proud of our organization's commitment to accelerate and execute against our cost actions.

These results demonstrate our success in this area.

The final component is labeled "Growth." But certainly it could be labeled "Decline." The total company sales down 24% to negative $116 million of straight volume drop through is what drove our company operating income to $40 million in the first quarter.

The bottom half of the slide details the year-to-date results of our head count reduction actions versus first quarter of 2008.

Hourly head count is down 21%, similar to our sales decline.

Salary head count is down 9%, another significant drop, and what's most critical is that wages shown on the bottom right of the slide are down 17%.

That means our actions are yielding solid cost reductions.

Since we continue to maintain our investment in R&D, global expansion and organic growth initiatives, we've not sacrificed future growth for short-term benefits.

So there has been significant progress on our cost actions, which lays a nice foundation for the remainder of 2009 and 2010.

Let's turn to Slide number six and review our full year 2009 revenue outlook by quarter.

John is going to discuss 2009 guidance in more detail but preceding that overview here are some observations.

I'm not going to go through all the detail in the slide, but you can see the quarterly sales projections for Water and Technical Products, which are approximate.

It isn't until the fourth quarter until we expect to see sales declines of less than 20%.

So the updated full year guidance assumes only a modest benefit from a seasonal sales uptick and a deeper and more prolonged market recession for our businesses -- i.e., no recovery this year.

We're seeing some markets moderating, but not many are improving.

At least we're not prepared to bet on improvement.

We would rather put volume on the upside in our forecast.

Now please go to slide number seven and we'll review full year 2009 productivity.

Since we just showed you that we expect sales to be down over 20% year-over-year, it is paramount we deliver on our cost actions.

The three sections of this slide represent the three largest components of costs to our company; materials, hourly labor, and salary labor.

We're driving actions in each to provide meaningful bottom line productivity in 2009 and to ensure we are positioning the company for 2010 and beyond.

Here are the major takeaways from each component.

First, in materials we expect $30 million in net benefit from actions we have taken to secure lower priced commodities and components.

As I mentioned earlier, first quarter materials was negative, as we worked off higher priced commodities from 2008.

For the balance of 2009, we will start to see solid improvement in materials and we expect to lower our materials as a percent of sales by 1%, or $30 million.

Next is hourly labor.

By the end of the first quarter, we lowered our hourly head count by over 20%.

Difficult, but necessary action when sales decline as they have.

Our annualized run rate savings already exceeds the $70 million we're targeting, so we feel very good about achieving these savings in 2009.

The third section, salary labor, is expected to be down 15% for the year.

This will save another $70 million, and again, we're on pace to achieve those savings, having already reduced our salaried wages by 11%.

The additional actions we took in the first quarter, coupled with new programs already being implemented across our businesses, give us confidence that we'll hit these savings targets.

So these top three productivity actions drive $170 million of the $240 million worth of savings expected in 2009 and are critical to achieving our earnings targets, while still leaving us in position for strong growth when markets recover.

Now please turn to slide number eight.

This slide is divided into four quadrants -- cost out, driving free cash flow, position for growth, and our perspective going forward.

As I previously detailed, we continue to execute against our cost actions.

We knew 2009 would be a very difficult year and so far, it has been worse than even we expected.

Only through solid execution will we deliver on our targeted results.

The items highlighted in this section demonstrate our progress.

These are items we've already covered, so I won't repeat them, and we'll continue to keep you posted on our progress, as taking out costs is clearly critical in this environment.

Moving down the left side of the slide, our ability to generate significant free cash flow remains a focus for the company.

We have a tremendous opportunity in working capital and we're already making progress.

While Q1 was a use of cash, as it always is for Pentair, we did improve free cash flow by approximately $45 million.

We improved our use of working capital by approximately $100 million and we are implementing more programs to drive our inventory levels lower and improve receivables and payables.

While capital expenditures were up slightly versus last year, we expect CapEx to be down for the full year.

Our balance sheet remains in good shape, and in January we increased our quarterly dividend for the 33rd consecutive year.

Moving to the top right of the slide, it's important to note that we remain energized about our long-term growth prospects in both Water and Technical Products.

While sales will remain in decline for 2009, we continue to introduce new products, win key orders, and position our businesses favorably for significant orders in the future.

As for the government stimulus package, we're uniquely positioned to benefit.

We have strong positions in municipal water and wastewater segments, which combined command the lion's share of the approximately $14 billion earmark for water.

And a vast majority of our manufacturing and assembly in this specific area is made in the USA.

As many of you know, the "made in America" clause requires that a majority of the manufacturing be done domestically, so we're encouraged by the prospects.

Furthermore, we recently engaged the channel with a Partner with Pentair campaign.

We launched the effort by publishing and distributing an E paper on the stimulus package with specific focus on water.

The paper is designed to educate the channel on the stimulus bill and position our network to target and mobilize on key projects.

So far, the response has been very good.

If you're interested, you can download the white paper and review how we're partnering with our channels at www.partnerwithpentair.com.

The next two bullets highlight recent wins in Asia that demonstrate our growing system focus and competence.

First, we recently secured a $1 million order to provide pretreatment and reverse osmosis system in Vietnam, our first significant order in that country.

This project includes our first installation of a skid mount RO system in Southeast Asia so it helps us position us for future projects there, too.

We also secured our first industrial filtration order to the China west-east natural gas pipeline.

Utilizing our media technology, the APAC team demonstrated the advantage of our solution which secured the order and positions us to develop an industrial filtration install base in China.

In order to continue to win these orders and launch innovative products, we continue to maintain our R&D investment, so we're not backing off our growth focus, despite the challenging markets.

The final section of the chart is labeled "Going forward." We will continue to execute against our cost actions and we're implementing additional actions to offset volume declines.

Each of our businesses is being proactive in different ways.

Some have instituted furloughs or salary reductions.

My salary was reduced 10% and our Board of Directors reduced their retainer by 10%, as well.

As we drive working capital actions, we're confident we can deliver at least $225 million of free cash flow for 2009, which will be used to pay our dividends and pay down debt.

And finally, we do know that with our innovation and market investment, we're positioning Pentair to take advantage of market opportunities as they emerge.

As I said earlier, we look forward to discussing our progress in these areas in the near future.

By taking out costs today, driving free cash flow so we can continue to invest in tomorrow, and developing new technologies and satisfying our customers every day, we will emerge stronger for the long-term.

Now I'll hand it over to John, who will provide additional detail on our financials and also discuss our full year 2009 outlook in more detail.

John?

Thanks, Randy.

Please turn to slide number nine.

The top portion of the left-hand side of the page gives the major components of cash flow for the first quarter of 2009, the first quarter 2008, and the year-over-year delta of the two periods.

The lower section of the left-hand side details the usage of cash for the same period.

The upper right section of the slide provides some color around our current debt position, and the bottom right of the slide gives you some of the key statistics that we are working to improve.

Starting with the Q1 2009 cash flow, we did well and we know we can do even better.

We traditionally have a sizable cash usage in Q1, as our pool business has not yet received payments for the shipments in Q4 of the previous year.

Our rebates and sales incentives to our channel partners are traditionally paid, as well as the payments of all variable incentive programs throughout Pentair are made.

Our first quarter free cash flow usage was $33 million, which was $45 million better than the first quarter of 2008.

The main component improvements was working capital, which was more than $100 million better, as less working capital was required because of year-over-year declines in revenue.

While our working capital metrics were respectable and in line with the rapid decline in revenue, if we would have kept working capital as a percent of sales constant with 2008, we would have generated an additional $100 million in cash flow.

Similar to our execution around cost takeout we are focused on free cash flow.

We continue to make nice progress, leveraging our disciplined lean efforts, and expect working capital to generate strong free cash flow in the second quarter and throughout the year.

To help you with the remaining details regarding the cash flow component, the main offsets to the working capital performance versus last year is in other accrual.

This is where we distributed cash from previously reserved liabilities such as severance, payroll and benefits, et cetera.

The majority of the year-over-year delta in other was severance.

Q4 2008 reserve balances for severance was around $35 million and we ended Q1 2009 at around $23 million.

This $23 million is expected to unwind by the end of the year.

As you can see on the lower left-hand side of the chart, our current cash usage objective is to continue to reduce debt.

We expect to lower debt to approximately $800 million by the end of 2009.

With the early redemption of our outstanding 7.85% coupon public bonds, which we just completed, our earliest maturity on our outstanding debt is 2012.

Overall, our average interest rate is currently 4.2%.

This represents a mixture of LIBOR plus 50 variable rate debt, along with fixed rate debt of approximately 5.5%.

So we are very comfortable with our manageable debt position and we expect to reduce that portion throughout 2009, which will provide tremendous flexibility to our company going forward.

Please turn to slide number 10.

This slide is divided into three sections.

The top section reflects the GAAP, or reported earnings per share, for the periods of Q1 2009, along with our current projections of Q2 2009 and our current full year 2009 outlook.

The middle section details the adjustments from GAAP to our adjusted earnings per share for the same period.

Finally, the bottom section provides 2008 reported and adjusted EPS results for comparison purposes.

As a reminder, the detailed GAAP to non-GAAP reconciliation for all numbers in this presentation are included in the appendix of this presentation and are also included in this morning's first quarter 2009 earnings release.

Starting with the first column labeled Q1 '09 actuals, our GAAP reported earnings per share were $0.18.

Included in this result was $2.8 million of pretax severance-related costs for actions we took early in Q1 to reduce our head count by an additional 340.

By removing the impact of this $0.02 per share charge, you get to the $0.20 of adjusted earnings per share for Q1.

The $0.20 reflects a year-over-year contraction of 62% versus the $0.53 earned in the first quarter of 2008.

Please shift one column to the right, which provides similar detail regarding our second quarter 2009 outlook.

On a GAAP basis, Q2 2009 is expected to be $0.32 to $0.42 per share.

Similar to previous quarters, removing the $0.03 nonrecurring charge associated with the early termination costs for our public bond redemption, our adjusted EPS guidance is $0.35 to $0.45.

If you take the midpoint of the range, we expect Q2 EPS to be down approximately 43% when compared against Q2 2008 adjusted EPS of $0.70.

The next column is our full year outlook.

We now expect earnings per share to exceed $1.40 on a GAAP basis and also exceed $1.40 on an adjusted basis.

This outlook includes certain nonrecurring benefits from prior period reserves, which we expect will generate positive earnings in 2009.

At this point, we expect the positive benefits to be of similar size as the negative charges associated with the Q1 restructuring actions and the Q2 bond redemption expense.

I will share more perspective on our assumptions regarding Q2 and full year guidance in a few minutes.

However, our EPS guidance is at least $1.40 is linked with 20% decline in sales that Randy mentioned.

While down approximately 36% year-over-year on an adjusted basis, we would expect accelerating sequential EPS performance, which we believe is the most likely scenario exiting the first quarter.

Please turn to slide number 11.

This is an overview of our Q2 2009 forecast.

We expect Q2 revenue to be between $690 million and $720 million, down approximately 20% when compared against last year's sales of $898 million.

As you can see on the upper right of the slide, this revenue projection reflects contraction in Water revenue between 15% to 20%, and a contraction in Technical Products revenue of between 25% to 30%.

While both segments are improving sequentially from first quarter 2009, last year Technical Products second quarter revenue was a record for the period.

Furthermore, last year Water had strong commercial and industrial end markets.

Second quarter volumes typically represent the higher levels of the year as season factors such as pool equipment shipments and pump equipment demands usually spike in the early summer months.

While our down 20% forecast is indicative of our cautious outlook, the past few weeks have yielded order stabilization or moderating declines, especially in our largest market, North American residential.

We expect Q2 operating income to be $65 million to $75 million which would produce double digit operating margins for Pentair.

As we just covered, our outlook for Q2 EPS is between $0.35 to $0.45 per share on an adjusted basis.

The benefits from our cost actions will begin to read out as substantial reductions in operating costs accelerate in Q2.

Additionally, we expect year-over-year net material performance to be positive for the first time in over 12 months, as moderating raw material costs, aggressive sourcing actions, and new product design, reduce our material spend.

And since we started our restructuring actions several quarters ago we'll begin to see the steady decline in pay-as-you-go expenses.

These items are not typically discussed but can be meaningful.

Examples include dual leases, lower production yield, training ramp-up costs, IT systems migration costs, and asset depreciation acceleration.

By distancing ourselves from these necessary expenses, our profit margins will expand.

We expect our Q2 tax rate to be around 33% as the larger mix of domestic income, driven by seasonal revenues, drives up our rate a few points versus the first quarter.

Interest expense is expected to be reduced by approximately $5 million year-over-year as our interest rate profile has improved dramatically.

Finally, we expect to generate free cash flow of about $80 million which will keep us on track to deliver the $225 million of projected free cash flow for the year.

Please turn slide number 12.

As Randy discussed earlier, we continue to expect a challenging year related to sales volume, therefore our total company, full year sales outlook of $2.7 billion reflects this perspective and represents a negative $600 million drop in revenue year-over-year.

The $600 million drop in revenue translates into a negative $360 million drop in variable contribution margin, or the difference between sales and the approximate 40% of material costs.

We are executing against our cost actions and productivity initiatives to work to offset this as much as possible.

As Randy described earlier, for the full year we expect to reduce our net material as a percent of sales which will yield approximately $30 million in net benefit.

Additionally, the benefit from our completed and announced salary and hourly labor actions are expected to yield another $140 million of benefits.

And finally, the reduction of discretionary spending, variable manufacturing, and volume related costs are expected to drive another $70 million of year-over-year benefit.

So in aggregate, these major actions drive $240 million of expected productivity which significantly mitigates the impact of lost sales.

As the slide shows, we expect these full year puts and takes to exceed $250 million of operating income and place the bottom of our full year EPS guidance at $1.40.

This is no doubt a challenging period.

In the first quarter, we endured tremendous market head winds in international, residential, and industrial markets, which were all downgraded 20%.

This is the first time we, like many our companies, have seen such steep declines across a vast majority of our industries and geographies.

There's no one market or region to blame.

It is broad based.

That said, we believe Q1 2009 reflected a trough in Pentair earnings.

Order declines are moderating in our residential businesses.

While year-over-year comparables may still be negative, even the most modest sequential improvement is an improvement we have not seen for over three years in this business.

As Randy will close with, our cost actions prove we are executing quickly and holistically across the entire company, with minor to no customer service disruptions.

Our manufacturing footprint will be more attractive once we are finished with our restructuring actions.

Our global business unit structure continues its journey to leverage efficiencies and find areas for growth.

We have several large project opportunities and customer partnership programs, which we expect to announce in the near future.

And finally, our liquidity position has passed our own stress test and we feel our discipline on staying focused on organic growth positions our company best in this challenging environment.

I'm now going to turn it back over to Randy, who will review our summary on slide 13 and then we will open it up for questions.

Thank you.

Randy?

Thanks, John.

We're dealing with unprecedented levels of contraction in many end markets.

We're continuing to take actions to make sure our businesses and company are competitively positioned and these actions are yielding positive results.

We've closed 13 of the 17 facilities we announced and have reduced our head count by 17%.

As John highlighted in this section, we redeemed the bonds that were maturing later this year so our interest expense will be lower going forward.

And we will continue to generate outstanding free cash flow.

We're realistic about the current environment and focused on improving our results through disciplined cost actions and investing for organic growth.

While we're not sure what 2010 may hold, we expect 2009 is the trough for Pentair and we're positioned to take advantage of stabilizing a rebounding market when they do occur.

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

Operator, Patricia, please open the lines for questions.

Thanks.

(Operator Instructions) Your first question comes from the line of Jim Lucas of Janney Montgomery S C.

Your line is open, sir.

Good afternoon, gents.

First question, and I guess it really applies to both segments, but a little more interested on the Technical Products side.

We've heard across the board, and everybody realizes that, yes, unprecedented times, but when you are looking at your business, do you get any sense of what's happened of demand versus inventory correction?

And when you're making the comment about seeing first quarter the trough, what are you seeing in terms of inventory in the distribution channel?

It really varies by electrical and electronic.

As you know, electrical is about 85% sold through distribution and we believe that the volume we shipped in is lower than the volume that was shipped out.

In other words, inventories were drawn down.

Couple reasons.

One is just the uncertainty and concern that the distribution channel has about the future volumes.

Secondly, it's money availability.

There's a lot of people in our channel that, in both Water and Tech Products, have less access to capital than they did, and that's a direct result of the situation in the banking industry.

So that's the electric side.

On the electronics side, it's largely OEM-based and a couple of the markets are down significantly.

Some of our datacom OEM and even our China business was down year-over-year, which is largely OEM.

So we think there's a mix of both end market and distribution declines for that.

Okay, and in your prepared remarks, you talked about going into the year, that the first quarter you felt things obviously worse than what you had originally expected.

If you had to characterize the top couple of things that were substantially worse off than what you thought going into the year, what caught you, for lack of a better term, by surprise?

the number one was pool, down 45%.

That's our shipments in.

And I really do think while the pool market is down, a big factor of that is bank and credit availability.

I mentioned in prior calls there were 30,000 pools that wanted to get built, but people couldn't get financing for them.

Those are people that used to be considered decent credit risk.

Nobody's lending against building new pools.

30,000 pools would be $100 million in pool.

That would give you a sense of what the consequences are of lack of credit in some of these end markets.

We just didn't expect after two and a half years of decline that pool could go down another 45%.

Or residential flow being down further after, again, two or three years.

Those are the ones that I think were the ones that were most disappointing.

Europe going down as much as it did as quickly as it did was another surprise.

I mean we really were in the 24% sales decline.

That's 10 points worse than our worst case, not our worst, worst case, but our planned case.

Right, understood.

And finally, I don't know if this is for you, Randy, or John, but when you're looking at cash flow that you're generating and balance sheet in good shape, could you expand a little bit on priorities for capital allocation as we're looking out a little bit longer term here?

Jim, first things first.

We are committed to carrying investment grade status and that means something different now than it did maybe three or four years ago.

So our goal right now is to get the debt situation and the debt to EBITDA in a range that we feel very comfortable with that will allow us then to have flexibility to choose what we want to do when the markets recover -- i.e., more bolt-on acquisitions and/or reinstituting some form of buyback program.

Right now we think the prudent thing to do is focus on the debt paydown, continue our dividends to our share owners, and that's the way we're looking at the capital structure today.

Okay.

Fair enough.

Thank you, guys.

Did that answer your question, Jim?

Yes, it did.

Thank you.

Your next question comes from the line of Shannon O'Callaghan of Barclays Capital.

Your line is open.

Hi, guys.

All the actions and the cost savings that you're talking about, could you give us a little more feel in terms of how this plays out sequentially?

Some of it must have hit in 1Q.

I know you said it's kind of limited, but as we look into Q 2, I know there's a seasonality in pool, but technical, probably less so.

You got a pretty decent margin improvement there.

Can you just give us the, what's really changing in terms of how the cost saves flow quarterly?

Two things, Shannon.

I'll hit material first, as Randy alluded to.

We purchased that obviously ahead of shipments, so we're buying material cheaper today than we bought it in the past, but we have to work the higher level inventory, or the material through our inventory system, before we realize the benefit.

That's where we're sharing with you.

That's got the biggest change between the Q1 year-over-year impact that we experienced from last year having price locked and our year-over-year comparables not being where we want them to be, and then what we know to be the case because of what we're purchasing material at today.

That's the biggest changes as we work through the year.

On the hourly and the salary side, we're a lot further ahead on the hourly side as we started to work out overtime, temporary labor and use furloughs associated with those declines.

We have another maybe three to five points of salary labor to get out and we've got those actions identified and those are in motion right now proceeding through the rest of the year.

So I think we've got the majority, which we tried to highlight, of the benefits associated with this, if you will, locked in to pace against the 20% sales decline and we'll obviously evaluate what else we need to do if sales continue in the decline.

And going along with that would be the price side of it.

Are you seeing any increased price pressure, or are you trying t get more aggressive on price for share reasons, or what's the dynamic?

As you can see in the numbers that we presented, price was actually positive, as we expect it to be in the first quarter.

We expect that to be a moderating benefit as we lap.

We haven't raised prices in a while, but we will lap some of the price increases we had last year.

And we expect some price, some price pressure.

So our outlook doesn't assume we run -- we get the same kind of price going forward.

And we don't believe we lost market share.

We don't intend to either.

We intend to be responsive.

Okay, but that's just a planning thing rather than something you're really seeing people get a lot more aggressive on right now?

We definitely are seeing it.

You see a 24% decline in sales.

We're seeing more special pricing requests than we ever have.

So, so we expect, we literally expect it to be less of a benefit going in the rest of the year as we saw, than we saw in the first quarter.

As Randy alluded to, the biggest former price we're seeing in our dealer distributor channels is former terms.

We're looking at that very mindfully, not wanting to permanently change the terms that we're going to place into our industry.

Okay, thanks, guys.

Your next question comes from the line of Michael Cox of Piper Jaffray.

Your line is open.

Thank you very much.

And thanks, again, for the great detail you provide on these conference calls.

My first question is in the pool segment, you mentioned that it caught you off guard.

I would be curious what your outlook is for the balance of the year as the destocking works its course.

Yes, we don't expect it to be down 45% every quarter because we do think a big part of that was destocking.

Right now the channel doesn't have much inventory in it and as it seasonally goes up while we expect it to be down year-over-year, we don't expect it to be down that significantly.

And so, I don't know, John, whether you put a number on that or not.

Definitely going to be down 20-ish percent for the year as the way we would look at the pool business.

Okay.

That's helpful.

On the margin profile of the tech products business, I would be curious, perhaps, what sort of timetable or maybe a better or more appropriate way to look at it is what level of sales would be needed to get back to the mid teens type operating margin level?

Have you looked at it in those terms and could you talk a little bit?

We haven't, but I can, while John's looking something up, I'll just give you the framework to think about it.

They manage to still maintain double-digit performance despite the fact that they had the big decline in sales, 26%, and by the way, they are the ones that ate most of the material inflation in the first quarter.

So as that reverses and they get material improvement and they just go flat, they are going to start getting back to the 12%, 13% range.

I think I've talked on prior calls that in a lower market, 13% was where I would expect them to be.

We just got to that lower market a lot faster than I thought we would.

But I think we can get back to mid teens with as little as 5% growth in activity, 5% growth and we're there.

What would you say, John?

I totally agree with Randy.

Q1, you said it exactly right, had the most material burnoff.

Those are purchase price variances that you bring through your P&L and I think we'll knock on the door of 13% in Q2 and we'll definitely be north of 13% in the back half of the year.

Pretty happy with the aggressive cost take-out of Technical Products.

We got after it a lot quicker in this down cycle than we did the last one and the team here is really focused on making sure that our productivity continues.

Okay, that's great.

My last question is you called out the 13 of the 17 closures completed and a lot of the head count reductions finished as well.

Is it safe to assume that barring another leg down in sales activity that all of the restructuring will be taken care of here in the second quarter?

We probably will lap a little into Q3.

We've got one big factory, Sheboygan.

But the costs.

The majority of the costs, yes, ramps down.

Q2 will probably be the last significant quarter for the pay-as-you-go expenses, and Q3 and Q4, those are moderate.

Our businesses obviously are identifying more opportunities.

I think this was a pretty healthy reduction of factories and facilities that we've attacked and I think our cost position's in pretty good shape now.

Yes, I would just add one thing.

We said it on the call, but I would just like to reiterate it because I think our team has done a heck of a job getting 13 or 17.

Two of those 13, they weren't planned to be closed yet and they got them done.

The other four have all been pulled in and will be done sooner, so everything's ahead of schedule.

Even more powerfully than that, we track our performance to customer requests and that's actually improved year-over-year in the first quarter by about almost, almost 400 basis points.

So while we're taking all of these actions, we still actually have improved our customer performance and I think that's a mark and a tribute to the great job that the Pentair team is doing.

Great.

Well, thank you very much.

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

Baird.

Your line is open.

Good morning, guys.

Maybe first we could just focus on inventory levels.

And I apologize if I missed it, but looking at the published numbers, a year ago you were at $402 million.

You finished the year at $417 million, and today you sit at $393 million.

Just curious what you would expect to take that down by during 2009.

And secondarily, just why hasn't more inventory come out during Q1?

Two things.

Taking you through the end of the year, Mike, there's two things that play into the inventory levels between now and the end of the year depending where volumes end up at.

We could see a situation where we're actually increasing sequential volumes and therefore driving some of the inventory levels up.

So I would say that we would expect inventory to end maybe modestly below where it is today, but we're also seeing that we would have some sequential volumes as we begin to move forward.

The real issue is we planned on somewhere between 10% and 15% of volume decline and we saw north of 20% volume decline.

And, our supply chains just aren't that just in time and we've ended upbringing in a little bit more inventory than we would have preferred to.

It is an area of, I think, improvement for us, is to be more facile in adjusting the spigot on incoming materials based on changes.

And we saw this in the fourth quarter, as well.

Just a little slow to adjust the incoming as rapidly as sales went down.

I think we can do a better job of that.

Yes, it's just simple math.

If sales are down 24%, but basically inventories flat or down a tick or two year-over-year.

Is there just a natural lag as you guys play catchup in the supply chain, or is there something preventing--

All that, $15 million, $20 million of inventory that we brought in from GE, but the rest of it is our catchup in the supply chain that we've got to work out.

There is a piece, although we don't use it internally as an excuse, related to all the plant moves we're doing, which are in these numbers.

As we do the pitching and the catching and the plant moves, we tend to build some safety stock to make sure our on time delivery is solid to our customers.

And then just in the revenue outlook that you laid out in slide 6, you've got Water sequentially going from $424 million to $495 million, so about a $70 million sequential increase.

Given your comments that you only expect a modest seasonal uptick, that actually seems aggressive to me just because traditionally on much higher revenue levels, you see about a $50 million to $100 million sequential increase in Water revenue and you're anticipating $70 million on a much lower base, so the percentage seems to imply fairly meaningful seasonal uptick in Water revenue.

Can you just put some bounds around that?

Yes, the big one is we'll start with the one that makes up about $40 million of the delta and that's pool, coming off an all-time record low, at least in the years that we track it.

And Q1 is a significant correction to a very modest Q2 number, one that's just barely triple digits.

And then we've got also in the sequential uptick flow tends to see a correction from Q1 to Q2 in the summer flow.

And our view is that both in flow and in pool, that the channel is -- the cupboards are bare.

That's part of our thinking.

Would the $40 million in pool sequential increase, would that be more or less than you have traditionally seen?

It's slightly more on a sequential basis, Mike, but it's not dramatically.

Like we'll be down 20% in Q2 is what we're planning on for pool year-over-year.

I think it's still a fairly realistic view.

The early orders in April in pool have been very solid, but we don't know how much of this is inventory correction in the quarter.

So we're not ready to pound the table yet and say that pool's going to flow through the number, but I think we're being realistic.

In fact on pool, can you walk us through traditionally what had been your discounting pattern to level load the pool business and then what you've actually done December through April this year and this season given the status of the market?

Typically in the early -- you're referencing the early buy program which is the biggest one, the early buy typically we do 5% discount truckload orders, something like that, and then terms.

We give out six-month terms to help level the factory.

As you know, one of the reasons we were down in this part of being down in the first quarter we were counting on, was the early buy program was down significantly.

People didn't lay in the early buy, so there wasn't much early buy to ship in the first quarter and we already had that in our plan.

It was the further reductions to steady orders, or flow orders in the first quarter that took us by surprise a little bit.

So we actually are not seeing, if you will, our mix, because there's fewer early buy, pricing's better.

And to just add to Randy's comment, Mike, we shipped about $125 million of pool revenue in Q4 of last year and, as I alluded it was roughly around $60 million in Q1.

We did not do any major special programs last Q4 other than our normal extended terms, and in fact, our program was that we wouldn't raise price and we would ship at the current price.

So that was the natural demand that came into our system.

You could see that obviously they probably balanced the inventory between Q4 and Q1 and now I'm planning somewhere close to 100, which is still down versus last Q4.

I think these numbers feel right to us and as we enter next early buy, we're not planning on a significant uptick to early buy (inaudible) 2010 as well.

I guess what I'm trying to understand, is your pricing actions in the pool channel and terms seem to have actually exacerbated the seasonality this year such that you'll see more just-in-time orders during Q2 to the extent there is a season.

Could be.

Could be.

I just want to reiterate, we didn't do any special pricing terms this year.

And last year.

So this would be the demand.

I actually think it's more of what Randy's talking about, that there isn't a lot of financing in this industry and if you take a look at balance sheets of the prospective customers, they are probably tight.

And so they are probably ordering shorter lead time than what they have traditionally done.

Okay.

I'm just trying to understand the sequential increase in Water.

It seems like it is fair to assume that pool has a bigger sequentials increase this year because, again, all these factors seem to incent distributors or even force distributors to wait on ordering as long as they can?

That's correct.

Okay.

Just on that April update you mentioned orders in pool had been good.

Can you give us a sense across some of the other major GBUs just what April has looked like so far?

Obviously reflected in the numbers we gave, we're tracking at least at those numbers, if not slightly better, and so I think we're seeing the average daily order take better than it was in Q1.

Some of that is because the seasonality, Mike, and the rest of it is because we do see things like residential moderating and actually sequentially getting better.

We think the best planning basis is, as we've said in the press release, is that we're not going to see further declines.

Okay.

And then final question, just on the cost actions you've taken, $240 million in total for '09.

Can you quantify just how much spills over incrementally into 2010 based on the timing of when these things layer in during this year?

Yes, I think if you take a look at the head count numbers last year, Mike, you'll see we started the heavy work in Q3 and Q4 of last year, anniversarying in Q1 and Q2.

So I would say roughly about a quarter of this is what I would think would roll over into next year.

A quarter of the $240 million or a quarter on top of the $240 million?

Quarter of the $240 million.

Okay, so the $240 million is an annualized number, but you will only realize three quarters of that this year in 2009?

Actually the opposite.

It's $300 million of an annualized number.

$240 million is recognized this year.

Mike said it right the first time.

$240 million plus -- correct.

Got it.

Okay.

Thanks a lot, guys.

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

Your line is open.

Thanks.

This is Chip Moore for John.

I was wondering if you could give us a quick update on some of the new products, if everything's on track there, and then if this is a case where you could potentially accelerate some of your investments in the downturn and try to capture some market opportunity.

We've got a couple.

We've talked about before, enviro, which is, the food service business has been a little tougher than we've ever seen before.

It was down in the first quarter and it's rarely been down before.

But the enviro product, and I'm not in a position to announce it, but we've had some -- announce specifics, but we've had some really nice wins with that product, wins that the customers are really valuing, not just the product, but the fact of how we applies the solution to their product in the food service industry.

So we've got some nice wins there that I think will probably help us in sales in the second half.

We have some nice wins, again, and that's why we said we're going to be talking about some things in the future.

We know we've won, but we can't talk about yet in the flow business.

The product that we are selling in Vietnam actually is up.

It's the package.

We've talked about before being in the systems business and what we see is we see a sweet spot in the sub million dollar project range.

It's smaller than the big guys get into and it lends itself to packaged solutions and I consider that one of our new solutions.

That product, in fact, was designed in Asia.

It's going to be built in India.

Final installation is Vietnam.

Quite excited about those systems products.

We have a number of new products.

We sold our high performance RO pump.

We got some orders on that, which is good news, and then the last one I had mentioned is the gas filters that we were selling in China, which is a new application for us in (inaudible) media.

So it's really a range of those new products and we're excited about what will come out of Nano Terra, the alliance that we announced.

No products yet, but lots of good opportunities.

Okay.

That's helpful.

And going to switch gears and take a look at free cash flow a little closer.

Maybe you could just talk about the visibility there, how much your '09 outlook is reliant on working capital management to how that compares to last year.

Yes, the forecast we have is, as you take a look and you go through the components, call net income down around $80 million.

And right now we've got the assumption in there that working capital makes up that delta in net income.

That would not be a great result for us, meaning we think working capital provides us significantly more opportunity than that and what we're covering is our pension increase that we have to make, as I'm sure many of the companies you're following are also in the same situation, and also covering the $35 million of severance this year related to our cost actions.

So I would say it doesn't provide a significant increase in performance.

It's something we feel is realistic and we're committed to.

Great, thank you very much.

And your next question comes from the line of Christopher Glynn of Oppenheimer.

Your line is open, sir.

Thanks.

Drilling into the Water margin trends a little bit, some of the things that are tougher to really point out and corner the impacts, but maybe some commentary on overhead, under absorption, collateral impacts of actions on plant moves related to inefficiencies there?

Sure.

I think if you took a look at the stuff that we don't call out between reported and adjusted on a quarterly basis, Q1 probably had, related to plant moves, somewhere between $5 million and $7 million of what we would call pay-as-you-go costs, which is asset accelerations, dual lease costs, the things I mentioned.

I would say Q2 will probably be somewhere just south of $5 million.

And then we trail off to maybe $1 million or $2 million in Q3 and then it's behind us.

The absorption issue clearly is the largest component, as Randy mentioned.

We take a look at sales over material and about a $0.60 on a dollar contribution, you can only take costs out so quick.

We're getting after the labor, and we're certainly getting after the materials side.

The last component there would be things like leases and energy costs and et cetera.

We think we've weathered the storm, Chris.

We think as we said, the trough was in Q1 and now we build up sequentially from here.

That's why we see that margins are going to improve rapidly.

Right, and on that bridge to the second quarter, how much of that's volume dependent, how much of it is incrementally more savings from your initiatives, just bridging from the 6, 7 to the 11?

If I looked at it, obviously if you think of the $60 million sequential sales in the Water, and again, you think about $0.60 on the dollar flowthrough, you'll see a lot of it is the volume leverage that we get.

There is some head count benefits related to the fact that we got after some of these actions later in Q1, so we didn't get the full benefit of them in Q1.

So call that maybe $4 million or $5 million sequentially.

And materials.

And materials.

Which isn't obviously overhead issues.

And no major contribution from the first to the second quarter from the timing of plant closures and getting some of that behind you?

No, we have not put that into the Q2.

It's primarily in Q3.

Okay, great.

Thank you.

Patricia, this is Todd.

Just want to check to see, we want to get to everybody, of course, in the queue, if possible.

Do you know how many we have left?

There are three -- two and then a follow-up question.

Okay.

We'll try to get to those.

Okay.

Your next question comes from Brian Drab of William Blair.

Your line is open.

Good afternoon now.

I'll be quick.

I just want to go back to the restructuring just for a second.

At the end of the fourth quarter you talked about $145 million in annual savings that you had targeted.

Now it's $240 million.

Is that an apples to apples comparison?

No, it's not.

What we're picking up in the $240 million is also variable manufacturing and things like freight reductions, warranty reductions, et cetera.

The rest of it clearly would be more apples to apples on the labor of $140 million.

Okay, so my basic question is how much more cost savings have you found, identified since the last time you reported?

Hard to quantify exactly.

I do know that we were looking at roughly planning for 12% to 13% labor takeout when we started the plan and we're now forecasting 17% to 20% and I would say that delta would represent the incremental that we've identified.

We've taken out no additional factories in this plan.

It's mainly the additional head count associated.

Okay, thanks.

And then just one last quick one, the tax rate this quarter came in a little bit below what you expected.

What drove that?

It's really, not to get nitty-gritty with you guys, I mean every percentage of tax rate is $100,000 now, so it's really when you don't make a lot of income, there's a lot more variability in the tax rate.

We think we're somewhere between 30% to 34% for the year.

Hard to call the mix of income.

Our low tax jurisdictions are obviously Europe and Switzerland.

And then also what we manufacture and produce in China.

We made less money in our highest cost market, the United States of America.

Okay.

That makes sense.

Thanks a lot.

Thank you.

Next question?

Your next question comes from the line of Scott Graham of Ladenburg Thalmann.

Your line is open.

Good afternoon.

I've got a couple questions for you guys.

Could you talk about what the costs in first quarter that were incurred for things like severance and non-called out restructuring, if you will?

The $0.02, I assume, is incremental to what you were expecting to expend in the first quarter.

So I'm wondering what that first quarter's expense was.

I want to break it into two components.

What we do is we call out, between the reported and the adjusted, only the categories of severance, asset writedown, so a full writedown of an asset, we would also call out some type of legal settlement or some litigation that's non-related to our business, and that's what's in that adjusted reported line.

The costs that you're mentioning, which are the leases and the redundancy costs and the training costs, those all run through the P&L.

And as I mentioned earlier, it's roughly around $7 million-ish or close to $0.05 in Q1.

Okay.

So when you said that, you gave guidance back in February that the first quarter will include costs to lower your costs, that's what you're referring to?

That was the $0.05 we were referring to, correct.

The difference between the 20 and 18 was an incremental 340 people that we felt were prudent to go after given the further decline.

Lower sales environment.

The next question relates more to sales on more of a 30,000-foot basis.

Now, in early February, we were thinking 10%, maybe more than that, sales decline.

Yes, 12% to 15%, somewhere in there.

Okay.

Now we're thinking minus 20%.

At the same time, you're saying that in the last several weeks, the order rates have actually stabilized and in some cases have improved.

This would suggest that February and March were like dreadful months for you guys.

That's correct.

They were.

That reflects the 24% year-over-year decline in Q1.

Yes, and January wasn't hot either.

We just thought that January was a hangover, if you will, from the fourth quarter, and we were expecting February and March to be a little bit better and they weren't.

I see.

So you were expecting a little bit of a seasonal lift in February-March which you did not get.

Actually not seasonal.

We thought we would still be down, we just didn't think we would be down as much as we saw in January.

And what we saw was, we saw no recovery.

When we say that things are firm, what we mean is we are bouncing along the bottom.

It's not really firmer, it's now that we've adjusted our expectations, our expectations are closer to what we're seeing.

Okay.

That's very clear.

So I would take that to mean that it's not like things got so much worse in March than they were in January.

They just were equally dreadful in both months.

Exactly.

They just didn't get better the way we thought they would.

And that's why as we look out, we just don't want to bet on volume we can't see.

That's why the 20% for the year.

And then the 10% in December decline that we showed is in our outlook, it's really based upon the fact that we had a 14% decline in '08 Q4.

So, yes, an easier comp.

So now the other question I would have for you is on the cost reductions.

Now, maybe I just misunderstood the answer to a previous question, but of this $240 million, how does that roll through 2009 versus 210, even if percentage is something you're comfortable with?

As I said earlier, we think it's annualized to a little over $300 million, which $240 million comes through '09 and remainder goes into 2010.

Okay.

That's a big number to roll through.

I guess what I'm struggling with a little bit is if it's $240 million in '09, at a 70% inverse tax rate, 99 million shares, that's $1.70 of just pure cost cutting and your guidance is $1.40.

Yes, the piece you got to take is the volume decline.

As I mentioned, in this forecast, we're looking at $600 million of volume decline year-over-year, which hurts me about $0.60 on the dollar.

So we're getting $240 million of cost reduction to mitigate $360-ish million of revenue decline.

Right, but when you add the $170 million to last year's $215 million and then deduct that same volume decline, it would seem to me that $140 million should be a drop in the bucket for you.

Easy for you to say.

I think mathematically what we're saying is that we clearly think Q2 is our season and we'll adjust and identify where we are in Q2 and as we see improvements in Q3 and Q4 we'll certainly communicate those with you.

Okay.

I'm with you.

But let me also maybe take a different slant on this.

Is it possible--

We got to get to the other questions, I think.

I mean we're not here to debate it.

We're telling you what we -- we're telling you like we see it.

We would be glad to take questions after, but I want to make sure we get to all the questions, if you don't mind.

Can we do that?

Yes.

No problem.

I'm done.

And your next question, your last question, is a follow-up question from Mike Schneider of Robert W.

Baird.

Go ahead, sir.

You can't get away that easy because I'm going to follow up on Scott's question.

And in fact, that's where I was headed.

If you look at the additional $6 million in 2010, that's $0.42 a share.

You've had pay-as-you-go expenses this year, as John laid out, probably somewhere in about the $0.12 range.

So you're looking at just incrementally in 2010 another $0.54.

Which means you're talking somewhere under just close to $2.00 in 2010 assuming no volume growth or decline for that matter.

No volume growth or decline to get to near $2.00.

Does that math hang together?

It does, Mike and Scott.

Here's what I would suggest you guys focus on, not just with Pentair, but everybody else.

There are benefits in the 2009 numbers related to furloughs, related to no wage increases, related, as Randy mentioned, he took a salary cut.

These are not things that you would expect when the market rebounds that we'll be able to sustain either for the benefit of the employees or the benefit of the company.

So you will start to see, call it inflation, as you will, against some benefits that are being realized this year that will start to come back as a head wind to both our company and other companies.

And that's what you're missing in the equation as you look forward between now and 2010.

As our markets improve, we will be forced to give our employees the wage increases they have expected for stepping up so significantly.

I wouldn't say force, we'll do it because they will learn it.

That's fair, thanks, Randy.

But I add -- that's exactly right.

There are a number of things here that are in the $240 million which are more temporary and they will be, if you will, a head wind going forward.

But if you just go up to 30,000 feet, and I would tell you I agree, I think the actions we've taken right now position us pretty well for 2010.

We haven't put out a 2010 number.

I don't know what it is.

We haven't scrimmaged it and I don't like playing air ball with numbers.

But in general, the costs, most of the cost actions we're taking, 80%, are structural and will improve the company, and then when volume comes back, I look at 2010.

That's why we said that we believe that this quarter, Q1 in 2009 the year, is the trough for us and so I'm actually fairly bullish for Pentair's prospects, if not for the next couple of quarters, certainly for next year.

So it sounds like we answered both Scott's and Mike's question in one shot.

I'm sure they will follow up.

Patricia, did we have anyone else in the queue?

There are no questions at this time.

Okay.

Thanks for everyone sticking with us a couple extra minutes, and be glad to answer any questions you might have for the balance of the day.

Randy, did you want to make any final comment?

I think I just did, I think I just made it.

Thank you.

Thank you all.

This does conclude today's conference.

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If you would like to listen to that, the number is 800-642-1687.

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