濱特爾 (PNR) 2009 Q2 法說會逐字稿

Good morning, my name is Patrick, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Pentair Q2 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.

Todd Gleason, you may begin your conference.

Thanks, Patrick.

Welcome to Pentair's second-quarter earnings release conference call.

We are glad you could join us.

I am 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 second-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, such as the risks outlined in Pentair's 10-K as of December 31, 2008 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 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 questions and answers after our prepared remarks.

I will now hand the call over to Randy, who will take you through Pentair's second-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 for the rest of 2009.

Then John will conclude our formal comments with additional information regarding second-quarter financials, and provide more detail on our outlook.

Randy?

Thanks, Todd.

Thank you all for joining us today.

Let's begin by reviewing our second-quarter results shown on Slide two.

Sales of $694 million were essentially at the low end of the guidance we provided in April.

We had some pluses and minuses with respect to sales, but the headline is North American residential markets showed signs of sequential improvement, while Europe and many commercial and industrial end markets continue to bump along the muddy bottom.

Sales in our Water business were down 18%, essentially in-line with our expectations.

Our largest market, North American residential, remains down year-over-year, we have seen steady sequential monthly improvements since March.

The seasonal uptick we forecasted for our Pool equipment business occurred at or above the pace we expected so that was a positive.

Our European Water business was weaker than expected, especially in April and May, which offset any upside our North American residential market sales may have been able to deliver in the quarter.

Technical product sales declined 32%, which was about 500 basis points below our expectations.

Similar to Water Europe, volumes in April and May were worse than forecast, but orders and sales picked up from there in June.

All of our major vertical markets and Technical Products experienced double-digit declines in the quarter.

Also in the quarter we delivered reported earnings per share from continuing operations of $0.33, which includes $0.05 of non-recurring items associated with new restructuring actions, and our early redemption of high interest rate notes, neither of which were in our Q2 guidance.

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

If you remove those items, we delivered $0.38 of adjusted EPS, which was down 46% when compared to adjusted EPS in the second quarter of 2008, which excluded the one-time gain in the formation of Pentair Residential Filtration, our combination with GE.

While down significantly year-over-year, adjusted Q2 EPS almost doubled sequentially, as the benefits from cost actions, material savings, and some seasonal volumes provided a strong lift over Q1 2009 adjusted EPS.

We remain on or ahead of schedule with regard to our major cost actions, and have already closed 15 of our 17 targeted facilities.

Furthermore, headcount is down 18% year-over-year.

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

Despite our well-executed aggressive cost actions, the dramatic volume declines in the quarter resulted in our margins contracting 370 basis points for the total Company, as positive benefits from productivity and price did not offset the negative impact from volume declines in foreign exchange.

Another way to consider our productivity results is by looking at sequential margins.

Second-quarter operating margins expanded 330 basis points when compared to the first quarter of this year.

Q2 sales grew about $60 million when compared to the first quarter, while income grew by about $27 million.

If you do the math, the operating income conversion from the additional sales was almost a 45% conversion rate.

So that is another indicator that productivity is yielding strong results.

Relative to our adjusted EPS, our second-quarter effective tax rate was 33%, up 3 points versus the first quarter, but in-line with our guidance.

We continue to expect our full year tax rate will be between 32% and 33%.

Finally we have produced $131 million of free cash flow in Q2.

Year-to-date we have generated approximately $40 million more free cash flow than in the first half of 2008.

Now let's turn to Slide three, which provides an overview of our Q2 Water results.

Here are the details.

On the top of the slide, we provide our standard sales and operating income [loss].

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

Overall, Water sales declined $107 million to $487 million, down 18% versus second-quarter 2008 sales, or down 17% organically in local currencies.

As I mentioned earlier, this was at the positive end of our sales guidance we provided in April.

Let's review our Water business unit performance individually.

Our Global Flow Technologies sales declined 17%.

Growth in our municipal markets did not overcome continued declines in residential and commercial, and softness in agricultural markets.

Global Filtration was down 14% in the second quarter versus last year, as the benefits from the formation of Pentair Residential Filtration did not overcome the general economic declines impact on residential and commercial markets.

Our Global Pool equipment business did benefit from a nice seasonal uptick versus the first quarter, but sales were still down 16% year-over-year, as pool permits and the overall pool equipment market remained depressed.

Internationally sales in Europe, the Middle East and Africa, or EMEA, were down approximately 24% in local currencies, which was below our expectations when we introduced guidance.

Worse than expected sales in April and May were not overcome by June volumes, which were more in-line with our original expectations.

In Asia, Water sales were down slightly in local currencies, as sales growth in China did not compensate for weakness in other parts of the region.

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 for Water.

Adjusted margins were 10.5%, down 330 basis points year-over-year.

Margins came in essentially in-line with our guidance, as productivity actions delivered meaningful results, but did not offset the impact the volume declines had on our margins year-over-year.

In the quarter we instituted new restructuring actions.

The charge associated with this is shown on the walk as a $1 million negative impact to op income, which is how you get to our reported operating income of $50 million.

So in sum, this is a very challenging environment, where we continue to take the right steps to position our Water business for better days.

Now please turn to Slide four and we will review Technical Products.

Year-over-year second-quarter sales in Technical Products were down 32%.

As I mentioned earlier, sales declined about 5 percentage points worse than we had anticipated.

April and May were very weak, as we did not see any improvement from the depressed Q1 levels.

However June sales more closely tracked the volumes we had expected, and proved to be the strongest month year-to-date.

Sales declines were experienced across-the-board in Technical Products, as all our major vertical markets contracted, with several dropping more than 30% lead by Datacom, which was down over 50%.

Looking at the businesses within Technical Products, our Global Electrical business declined 28%, while our Global Electronics business declined 32%.

Technical Products margins were 12%, a decline of 440 basis points year-over-year.

Aggressive cost actions and solid execution on our restructuring efforts did not make up for the dramatic declines in sales.

That said, margins improved sequentially almost 200 basis points, despite slightly lower sales volumes than in the first quarter.

So we are delivering the sequential margin improvements we expected.

As in Water we took new restructuring actions in the quarter.

The $1 million charge associated with those actions is shown on the walk, and reconciles to our reported operating income of $24 million.

Now please turn to Slide five and let's review some of the key takeaways from Q2.

Starting with some of the pluses or positives, we mentioned earlier that we are seeing sequential improvements in the North American residential markets.

In the second quarter, this market performed slightly better than we had originally forecast.

Since residential markets represent about 50% of our Water sales, this is an encouraging trend.

Next on the list is sequential volume conversion.

We anticipated that our cost actions would produce strong margin conversions from higher sales, and as we shared earlier we did generate nice sequential margins.

We expect to continue to deliver solid productivity results, which will continue to position us for sequential margin expansions going forward.

Moving to the next positive item, you may have seen our press release last week, announcing the largest contract in Pentair history, a $65 million municipal pump order with the Army Corps of Engineers, to help improve flood controls for the City of New Orleans.

The pump station is expected to be the largest in the world.

And deliveries are scheduled to commence in 2010, and culminate in 2011.

The record order demonstrates our position in the municipal markets.

And another plus coming out of the second quarter was free cash flow, which as mentioned earlier, was about $40 million higher than our cash generation and the [VIN] point of 2008.

The next few items are essentially neutral.

We expect the commercial and industrial markets to experience strong double-digit declines, and certainly we saw that in the second quarter of 2009.

So no blood really versus our guidance.

And while Asia and Middle East markets generally have slowed, we continue to see solid growth prospects in both Water and Technical Products.

We are being cautious in our sales forecast for these markets, and therefore not overly dependent on the growth rate we previously had generated, until we see the recession's impact on these regions.

We have already mentioned the two negatives, or minuses listed on this slide, Q2 sales in Europe were negatively impacted by the extremely soft April and May.

Technical products experienced a similar trend, as the first months of Q2 remained at or below Q1 levels.

Sales in June improved for both, but were not enough to bring either business up to the expectations we had when we started the quarter.

Overall, Q2 produced a balance of positive, neutral, and negative items, which is not uncommon of course.

We are encouraged that the positives are beginning to outweigh the negatives.

Let's take a look at our total Company productivity for the second quarter.

Please turn to Slide six.

We showed this slide during our Q1 earnings review, so this is just an update on our major productivity actions.

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 a positive $1 million.

Since you can see on the previous slide that we generated $16 million of price, you would be correct in calculating that material inflation was still a negative $15 million.

We continue to work off higher priced inventory, which has been a drag on our earnings in the first half of 2009.

Sequentially we did improve materials by approximately $10 million, so we are gaining traction.

Some of our material benefits from lower priced commodities is trapped in inventories on our Balance Sheet, so that should provide a lift in the second half, as cost of goods sold decreases in-line with those lower raw material costs already in inventory.

The next three buckets in the walk totaled $65 million in positive productivity, associated with wage and headcount reductions, and the results of our aggressive actions with regard to discretionary items.

Bottom line?

Our cost actions are yielding results.

The final component is labeled growth, but reflects a decline.

The total Company sales down 23%, or approximately $200 million.

The negative $119 million is simply the amount of non-material drop through, that occurs if we had not taken the actions we did to adjust our cost structure.

The bottom half of the slide details year-to-date results of our headcount reduction actions year-over-year.

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

Salary headcount is down 13%, another significant drop.

But what is most critical is that wages shown on the bottom right of the slide are down 20%.

That means our actions are yielding solid cost reductions, and since we continue to maintain our investments to R&D, global expansion, and organic growth initiatives, we have not sacrificed future growth for short-term benefits.

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

Please go to Slide seven and let's review full year 2009 productivity.

The three sections of this slide represent the three largest components of cost to our Company, materials, hourly labor, and salary labor.

We are 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 of net benefit from actions we have taken to secure lower price commodities and components.

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 the $30 million.

Next is hourly labor.

Previously, we had targeted about $70 million of savings from this cost bucket.

Our current view is that we should get between $75 million and $80 million of cost take out here, so while these actions are difficult, they are necessary with the sales drop, we and lots of other companies have seen during 2009.

The third section, salary labor is expected to be down another $70 million.

We remain on-track to achieve those savings, having already reduced our salary headcount by 13%.

So these top three productivity actions drive a significant portion of the cost savings we expect to achieve in 2009.

In total we currently expect to drive productivity savings of $250 million, up about $10 million versus our previous view.

This is critical to delivering on our commitment, as our end markets remain soft, and difficult to predict.

Now please turn to Slide eight.

This slide is also one of our standard update slides, and it 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 that.

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

The items highlighted in this section demonstrate our progress.

These are items we have already covered, so I won't repeat them.

We will continue to keep you posted on our progress, as taking out cost 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 are already making progress since year-to-date of approximately $40 million ahead of last year.

Moving to the top right of the slide, it is 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 business favorably for significant orders in the future.

The $65 million municipal pump contract I just talked about is a great example of our strength and position in an important market for Pentair, and our Engineered Flow business.

And this is in a market which is targeted for the government stimulus money.

We won several relatively small stimulus related programs already, and we will keep you informed as to the level of projects getting under way.

We are also proud to announce that our filtration solution Enviro Products, continues to be recognized as the leading reverse osmosis product in foodservice.

In May, McDonald's selected Enviro as the winner of the McDonald's Innovation Award.

The Enviro System sets new benchmarks in RO and Water efficiency, and we remain very positive on its prospects in foodservice and hospitality end markets.

The final section of the chart is labeled going forward.

We will continue to execute against our cost actions, and we are implementing additional actions to offset volume decline.

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

And finally we believe with our innovation and marketing investments, Pentair is positioned to take advantage of market opportunities as they emerge.

As I said earlier, we look forward to sharing our progress with you.

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

John?

Thanks, Randy.

Please turn to Slide nine.

This slide is divided into three sections.

The top section reflects the GAAP or reported earnings per share for Q2 year-to-date 2009, and our second half and full year outlook for EPS.

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

At the bottom of the slide we provide 2008 reported and adjusted EPS results for comparison purposes.

Starting with the first column labeled Q2 '09 actual, our GAAP reported earnings per share were $0.33.

Included in this result was $0.02 of EPS charge for severance costs, as we took new actions in the second quarter to reduce our headcount by an additional 100 people.

The next non-recurring item is the $0.03 charge associated with the early termination costs for our note redemption, an action we completed in April.

Removing the impact of these two items, you get to the $0.38 of adjusted earnings per share for Q2.

The $0.38 is down 46% versus the $0.70 earned in the second quarter of 2008.

Please shift one column to the right, which provides similar detail regarding our year-to-date totals.

Rather than walk through the numbers, I would simply point out we have a $0.07 delta between our reported year-to-date EPS of $0.50, and our adjusted EPS of $0.57.

The timing of certain non-recurring benefits is not easy to forecast, but we continue to work on several items that would offset or eclipse the restructuring and bond related charges for the year.

The following two columns represent our second half and full year 2009 outlook, in the same reconciliation format.

As you can see, we expect an additional $0.03 of restructuring charges in the third quarter, related to the closing of a Technical Products facility, and as I just mentioned, we are working on some positive non-recurring items that would provide about $0.10 of reported EPS.

So guidance for both our GAAP and non-GAAP EPS remains $1.40 plus, in a few minutes we will discuss our outlook for Q3 in more detail.

Please turn to Slide 10.

The top portion of the left-hand side of the page gives the major components of cash flow for the second quarter, and the year-over-year information.

As you can see, we delivered $131 million in free cash flow.

Working Capital management drove almost $100 million of cash flow in the quarter, and working capital drove over $40 million more in cash flow than the second quarter of 2008.

Similar to our execution around cost take outs, we are focused on free cash flow.

We continue to make nice progress leveraging our disciplined Lean efforts, and expect working capital will continue to generate strong free cash flow in the second half 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% note, which we completed in April, our earliest maturity on our remaining outstanding debt is 2012.

Overall our average interest rate is currently 4.1%.

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

So we are comfortable with our debt position, and we expect to reduce it further throughout 2009.

Please turn to Slide 11, and let's review cash and related metrics another way.

The top section of this slide provides a straightforward walk on our debt balance to start the year, and how we expect to pay down debt to approximately $800 million by the end of the year.

We also show our dividend payments of approximately $70 million for the year, which is the other use of cash in 2009.

The green boxes represent the 225 million of free cash flow that we intend to generate in 2009, which is obviously how we pay down debt, and fund our dividend.

The lower half of this slide shows some key cash related metrics.

We continue to have a big opportunity to reduce our working capital as a percent of sales.

It currently stands at 15%, which is 3 points above 2008 levels.

Our current receivables position remains good, but we have seen receivable days, or DSOs, creep up as global mix and in some cases customer terms, have each had a negative impact.

Conversely we are working to manage our payables to reflect the market realities.

Our DPP, or Days Payable, has increased to 62 days from 58 days in similar proportion as receivables increase, but on a smaller balance.

Finally our rapid decline in sales, and plant moves and closures, days inventory on hand, or DIOH, has grown to 89 days from 75 days a year ago.

We expect to lower this metric by about 10 days in the second half of the year.

As we complete our factory closures, we will have a more stable inventory system, and sales levels look to stabilize so our planning and inventory systems will continue to improve.

Please turn to Slide 12, and let's review our third quarter 2009 outlook.

This is an overview of our Q3 2009 forecast.

We expect Q3 revenue to be between $675 million and $695 million, down approximately 20% when compared against last year's sales of $856 million.

As you can see on the upper right of the slide, this revenue projection reflects a contraction in Water revenue of between 15% to 17%, and a contraction in Technical Products revenue of between 26% to 28%.

We expect Q3 operating income to be $70 million to $80 million, and produce double-digit operating margins for Pentair.

As we just covered, our outlook for Q3 EPS is between $0.35 to $0.45 per share on an adjusted basis.

The benefits from our cost actions will continue to read out, as substantial reductions in operating costs accelerate in Q3.

Additionally we expect year-over-year net material performance to be a larger positive than represented in Q2.

We expect our Q3 tax rate to be around 33%, which is essentially flat with the tax rate in Q2.

Interest expense is expected to be reduced by approximately $4 million year-over-year, as our interest rate profiles improve dramatically.

Finally we expect to generate free cash flow of about $60 million, which will keep us on track to deliver the $225 million of projected free cash flow for the year.

So a lot in common with the quarter we just completed.

Sales are expected to be slightly lower than Q2, but income should increase as benefits from our ongoing cost actions provide additional relief.

Please turn to Slide 13, and let's look at our Q2 to Q3 sequential sales and income in more detail.

We wanted to provide this detail to address potential questions regarding our Q3 outlook, which has sales dropping sequentially, but income rising.

Here is how we are delivering that dynamic.

First, we are forecasting sales to decline about $10 million sequentially.

We expect sales to drop $30 million from the absence of seasonal volumes that historically fall into the second quarter.

To somewhat offset that drop, we expect our European Water businesses and our Technical Products business, to each generate about $10 million of additional sales in Q3 versus Q2.

Both of these businesses will still be down year-over-year, but we do not expect the dramatically slower start to the quarter that we saw in April and May.

So that walks you to the midpoint of our sales range for Q3.

Let's do the same thing for operating income on a sequential basis.

As you can see, we estimate operating income to be up between $3 million and $13 million sequentially.

Here is the walk.

We expect the sequential drop in sales translates to a negative $5 million of income.

To offset that drop, savings from sourcing materials programs should deliver about $7 million of positive income versus the second quarter.

Finally, since we started our restructuring actions several quarters ago, we will begin to see the steady decline in pay as you go expenses and manufacturing related costs.

The pay as you go costs reflect our facility closure costs, such as dual leases, lower production yields, training ramp up costs, IT system migration costs, and asset depreciation acceleration.

So these incremental productivity items should deliver about $6 million more in operating income.

The total of these three items brings you to the midpoint of our third-quarter operating income guidance.

I hope that information was useful.

Please turn to Slide 14 and let's review our full year outlook.

We were maintaining the same full year guidance.

Our total Company full year sales outlook remains $2.7 billion, or down about 20%.

This is a drop of negative $600 million in revenue year-over-year.

We continue to expect our cost actions will deliver significant savings.

Currently we are forecasting $250 million in cost reductions in 2009.

While that will positively position our cost structure going forward, it isn't enough to keep operating income flat with 2008.

As such, we continue to expect our operating income will be down about 30% to approximately $255 million.

Finally, we are maintaining our EPS guidance of $1.40 plus.

While our end markets remain unpredictable, we continue to see signs of stabilization, and even some pockets of improvement, but it is too early to determine meaningful trends.

So we will continue to focus on our cost actions and cash generation, which will put us in a great position for 2010 and beyond.

Let's turn to our final slide, Number 15.

In summary, we executed against our major actions very well in the second quarter, but markets remain challenging.

We took additional actions, which were necessary to provide support to our full year outlook.

We have two facility closures remaining, and both are on track to be completed in the third quarter.

With headcount down 18% year-over-year, we have taken aggressive actions to ensure our cost structure reflects the market realities.

And with lower interest expense and strong free cash flow generation, we are in good shape with respect to our Balance Sheet.

Finally, we provided detail on our sequential sales and income assumptions, so we expect more productivity in the coming quarters.

And we remain convinced that 2009 earnings, while down substantially, reflect improved cost positions that will be leveraged when the markets return to growth.

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

Operator?

Please open the lines for questions.

Thanks.

(Operator Instructions).

Your first question comes from the line of Jim Lucas.

Thanks, good afternoon guys.

Hi, Jim.

First question, the costs taken out, the cash flow is a very good number, you are controlling the controllables if you will, and now with no major debt coming due for a little while now, can you speak to priorities of capital allocation?

Well, Jim, it really is the two D's, dividends and debt.

I am pleased with the cash flow that we are generating, and I am pleased with the progress on cost, but I think, and you have said it aptly, we have got control of the controllables, but I still think there are too many uncertainties in the external markets to commit to anything bolder than that.

Okay, so in terms of weighing share repurchases versus acquisitions, it sounds like that is on the back burner?

It is, Jim.

We want to continue to control our own destiny and we think right now, the best way to do that is to keep the debt at manageable levels, to continue to pay it down.

When we get to a comfortable level, either with more predictable round EBITDA, and our ability to lower that debt position, then I think we will look opportunistically at the ideas that you are suggesting.

But right now it is focused on debt reduction, and keeping destiny within our control.

And then switching gears on the filtration side of the business, could you perhaps give us a little bit more color, on both Porous and Everpure, of what you are seeing in their end markets right now?

Yes.

As we saw in the first -- I will go with the foodservice first.

No surprise that there is a challenge in the foodservice industry in terms of new placements.

I think Everpure is doing well though within Enviro, and our partnerships with Ecolab, and some of the other leaders.

I think we are positioned with winners in this environment.

People like McDonald's is boding well.

So we are down slightly, but I think we are actually gaining share.

We are also looking to extend that capability more deeply into the hospitality area.

Also an area that is challenged right now, but given the focus on sustainable water solutions, higher energy efficiency, and lower water usage, we are having some very encouraging discussions with a number of the larger hotel chains, so that is the EverPure and foodservice discussion.

In terms of Porous Media, we have a number of new initiatives, really I would say deepened initiatives, particularly in power and oil and gas that are very, very encouraging.

And so that is more of a flattish business right now, with our opportunities to penetrate more deeply into power and oil and gas.

Medical is actually a little bit -- it is probably the slowest one of the segments that Porous Media is seeing right now.

Okay, and finally with regards to the muni business, you talked about a few smaller stimulus projects that you won, and updates to come in the future, but could you talk about just your overall municipal strategy, which has been evolving here over the last couple of years?

Sure.

As you will recall, Jim, municipal was not a target for growth in Pentair 10 years ago, when we were really focused on Water, and that was largely, it admittedly may have been more of an internal view, but it was a business that basically is our Kansas City focus, Fairbanks Morse, plus some of our other larger engineered products -- engineered flow plants that serve that, but it wasn't making that much money.

It was sub-10% ROS, but thanks to Lean, and thanks to leadership in that unit and in engineered flow overall, we actually drove that up into the teens And when they got there, we said this is an area that, one, given the infrastructure -- given the super cycle investments expected in infrastructure, and our ability to compete more effectively while making good money, we started to invest.

So we started to invest in global reach.

So we have had wins in the Middle East, and we have had wins now in the Philippines, and expect more wins in Asia.

And we are aggressively positioned to win whatever money gets spent in water from the Stimulus package.

We put out a White Paper that you can get on our website, and it targets -- it shows about $15 billion of the stimulus money, which will go directly into areas of water.

Now we mentioned we won a few -- those are three projects that are wastewater projects, in sum they are less than $1 million.

But we have six more we are bidding right now, which will be over a couple million dollars.

So we expect to see this build, and in fact by February of next year much of that first traunch of money aimed at water should be let.

So we should have a very clear sense, as the end of the year hits, as to where some of the early larger opportunities will be from the stimulus money.

So we are investing and working with our distributors to win more than our fair share.

We actually happen to have the most Buy America footprint than anybody that serves this industry, which we think is an advantage.

So this is an area that is not just because of the stimulus, but because of the infrastructure super cycle, we continue to want to invest in.

Great.

Thank you very much.

Thanks, Jim.

Your next question comes from the line of Hamzah Mazari.

Good morning, thank you.

Good morning.

Just a couple of questions.

The first one is last conference call, you guys said that at Q4 you expect sales declines of less than 20%.

Is that thinking changed, or is that still accurate?

And can you give us a sense of how July is looking like for some of your major business lines?

What was the question specific to Q4 again?

I believe last conference call you guys had said that our top line will be down less than 20% (multiple speakers).

Yes, yes.

In the fourth quarter we said 10%, but that is really a lapping, because if you will recall we were down 14% in the fourth quarter of '08.

So we are really not saying that the fourth quarter is a better run rate of volume, it is just an easier comp.

That is really what we (inaudible).

And we still believe with everything you just said.

And if we just answer your second question around July, what we are doing internally here is taking a look at July, as it relates to April and May.

Year-over-year comparisons are usually the way we look at results.

Right now we are trying to take the best known period we have, which is the April-May start to the quarter, and all indications are that Q3 is starting out in those areas that Randy mentioned as being softer, are starting off better here in July than they did in April.

Yes, it is tough to look at year-over-year comps, in this month for example, around the Fourth of July holiday we had a number of plants that went on furlough, so that kind of makes compares really difficult.

But we are certainly -- we believe that we are going to deliver the $1.40 plus, and we think our cost is going to be delivered to get there.

I mean, I think we all would agree we need stabilization before we get recovery, and I think we have said that our residential markets have stabilized.

We knew there would be incremental softness in commercial industrial, like the rest of the market is participating in.

Europe feels more stable here in Q3 than it did in Q2, and the Tech products end markets feel more stable than they did in Q2.

Okay, and just bigger picture, your return on invested capital in your Water business has been much below expectations because of end markets.

What has to happen there for that to come back?

Is it just residential coming back, or are there other structural changes that need to happen in that business?

Well, we really need volume.

We need to globalize all of the Water businesses very aggressively, but particularly the filtration business and the residential business -- residential end market, and we need to drive volume.

So global volume and what I call product innovation volume, are the keys to getting the ROIC back, and we think we can.

We have taken a lot of action around the cost basis in Water.

Obviously goodwill is a fairly large component in investment base in Water, and that is where we need the growth.

And we need the incremental conversion on that growth, which is one of the reasons we highlighted the sequential improvement, we need to see that type of year-over-year improvement as we get the revenue.

Okay, that makes sense and just last question, is the higher priced inventory, how far are you along in working that off?

Is that behind you now?

And how is pricing holding up in your business?

It is flipping positive in July.

We have been realizing the purchase price variance in Q2 in a favorable area, it gets hung up in inventory, and now it is coming off, and starting in July we actually had positive variances on the Balance Sheet as we ended the quarter of Q2.

Okay, and just on pricing, are you seeing any pressure there across your business line?

If you look at the first quarter, we were up 1.9 points, and second quarter we were up 1.4, so it is moderating.

And as you will recall, I think we said in the last call that we expect -- we are not expecting a lot of benefit from price, but we are not expecting to give up a lot of price either in the second half.

And actually, ironically, the firming up of some material markets supports that.

All right, great.

Thanks a lot.

Thank you.

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

Hi, guys.

Hi, Shannon.

A little follow-up on the pricing question.

You talk about this sequential net material benefit going into Q3.

What do you expect for Q4, and is this something that flows into next year, or does it flatten out?

How do you see it playing out?

Absolutely.

It gets better from Q3 into Q4, and it carries over at least through the first half of 2010.

And then just like any company, we have got to go out and get incremental actions that improve it further.

But we have done all of the right things.

There has been a timing delay in when we are recognizing it.

It is starting to rollout here as substantially positive in the second half.

You will see another first half benefit for sure in 2010 against 2009 first half.

Does it continue to be a sequential benefit like it is in Q3?

Yes.

At about the same rate, or does it moderate?

Probably slightly better.

Slightly better, okay.

Then can you fill out a little bit, you are talking about pockets of improvement and North America residential pool a little better seasonally.

Can you fill out and give a little color on what you are seeing get better, and why you might be encouraged or hesitant?

Well, in just looking at the North American residential market, as we look at what we saw in the second quarter, it looked like we were seeing end market demand, so not a lot of distribution drawdown.

We saw additional distribution drawdown in the first quarter, and that seems to have -- I wouldn't say that they are building inventory yet, but they certainly aren't taking inventory out.

Actually in a couple of our businesses, we had -- as I mentioned we had a better Pool quarter than we had forecast.

I think a couple of things drove that.

One, I believe our market position and our outstanding sales force has held us in good stead, as well as our Eco Select line of products.

Just as a reminder, Eco Select is our line of sustainable environmental and energy sustainable products that we sell in Pool.

It includes a salt Chlorinator, it includes our IntelliFlo high efficiency multi-speed pump, it includes our IntelliTouch controls, it includes our LED lights.

And that actually was 36% of our sales in the quarter, and it was less than 30% not long ago, so we think that is share, so we are encouraged by that.

We are getting a lot more coverage.

A lot more utilities are actually rebating those products, so we think that is encouraging.

As well as when we look in residential filtration in particular, we are starting to see I think -- I hate the term green shoots, because they get overused, but in fact that is what we are seeing.

We are seeing more activity, more opportunity there in North America residential.

And that is our single biggest market, so we are encouraged by that.

Okay.

And just last one on tech products, you are modeling in a sequential bottom here.

You mentioned where some of the months flowed out in Q2, but Datacom looks really tough, Electrical obviously was below your plan overall for the segment and the quarter, what gives you kind of confidence in the sequential bottom there?

And are you seeing anything that encourages you there in terms of inventory destocking, or anything else?

Well the Datacom was down over 50%.

Part of that was -- those are end of life programs, so we have a good handle on those.

We mentioned cooling was down 38%.

Cooling is a nice margin, good business.

They were particularly hurt in April and May, and their run rate improved and I think that is going to help.

And then what we call the Big H, the Hoffman electrical business, we are seeing better daily order run rate at the end of the quarter, and so that is why we see it a little bit better.

It is still down year-over-year, but a little bit better.

And Shannon, just to put it in perspective, Q1 was down around 27%, Q2 down 32%, Q3 down 27%, so I don't want anybody to suggest we are thinking about a recovery.

Right.

We are thinking that Europe was abnormally soft in April and May for tech products as well in Europe, and we are just not seeing that repeat.

Okay, so the Europe thing, I mean did you guys ever sort of make sense of why it was so weak for two months?

Does it -- Europe looks like it is actually getting better now, versus those months?

Well I would say it is down at the rate that we would expected, and June was a decent order month.

One month doesn't make a trend, but we head into July with a little bit better backlog, and a little bit more predictability in the market.

A little color, it was like Europe was going through what the US went through in an accelerated fashion.

So we saw distributors really clamp down, and just particularly on the Water side just basically not order, as they adjusted to what they saw as the new reality there.

And then as that settled in, I think it was just happening two months instead of six -- in the US it was about six.

Thanks a lot.

Thanks Shannon.

Your next question comes from the line of Mike Schneider.

Good morning guys.

Hi, Mike.

Just continuing the European theme, how much visibility do you have into your customer plans for the third quarter?

Obviously August is a normal vacation or holiday period for them, but do your customers intend, or have you been able to discern if they intend to shut down for even greater extended holiday periods this year?

Well I think that is the question we will be looking at.

I mean, July could be strong, we could see August, normal shut down, and then September could be one of those months where it doesn't turn back on, right?

I think in our numbers, we put a little contingency in for that dynamic.

But right now, the orders and the customers that we are dealing with, especially in Technical Products, aren't relative to those shut down types of patterns that we would see.

On the Water side, I mean we are continually -- we are expecting a soft Q3 as well there, we are just not expecting it to be down 40%, which was what April and May were for us.

Right, okay.

And then just on the price question, per the charge it looks like you still had a fairly substantial amount, $16 million in price benefiting the quarter.

Could you remind us just how that gets anniversaried from some of the price increases last year, and what the comparable contribution looks like in the second half?

Yes, you will see Q3 as Randy mentioned drop down from the Q2 realization.

And then we tend to implement price increases in Q4 that begin to get realized the first of the year.

So being in the distribution business, most of our distributors don't like prices to be adjusted annually, and most of those are dealt with in Q4.

And just a little preview into 2010, I don't think we are expecting a robust pricing environment as we head into 2010.

Okay, and then on materials, a similar question.

In the slides you indicate that you expect a $30 million benefit for the year.

But building on Shannon's question, if there is a $7 million benefit in Q3, it implies $63 million in Q4, so it is more than a slight increase, or is my math not correct?

Well it is a little bit of the big wildcard in that number is mix, Mike.

So I mean the mix of our product lines is also netted in that negative number.

And we can -- if you think about it, you have got electronics versus electrical and tech products and then we have got the mix of municipal, which is lower margin than what we have in residential.

So the number I was alluding to accelerating rapidly is the net year-over-year procurement savings, which you can kind of see what it is in Q3.

It is at least double that on a procurement basis in Q4.

Got it, okay.

And in the Water business, so if Fairbanks Morse has this record order, it is incredible how big it is, relative to the size of Fairbanks Morse, but I guess two questions.

One, are there additional phases to this New Orleans project that come beyond 2011, that you would be bidding on?

And then secondly, meanwhile, do you have the capacity in Kansas City to take on more stimulus projects, and just how limited are you in the wake of the New Orleans order?

I will answer the second question, yes, we will have the capacity.

One of the reasons we reorganized like we did is to have focus in engineered flow.

And we have more flexibility across plants, when you think about our Aurora facility, and our Ashland facility, as well as our ability to contract out.

The $65 million includes buying out diesels, so we buy them in, so there is a fair bit of buy in content there, their diesel drive.

But as we look at the stimulus money, and what we want to do is make sure that we don't turn anything away because we can't make it.

So thanks to Lean, we have excess -- we have a lot of capacity in Fairbanks Morse, and thanks to bringing down the walls between the other engineered flow businesses, we will have more flexibility in how we serve it.

As for follow on orders for this particular plant, I guess the answer would be no, but for flood control projects I would say emphatically the answer is follow on, there are more.

There are a lot more.

And they even could be bigger.

There is a bigger one in New Orleans, Mike, that follows on to this one, that is at least equal in size, and we would like to be the winner of that one as well.

Okay.

And then final question, just conceptually, Water came in better than expected because of residential, and Technical Products maybe slightly lighter than expected.

And I notice in the reconciliations to the slides, it looks like you did raise your revenue forecast for Water and trimmed your Technical Products.

But was that adjustment solely due to the second quarter, or did you make a similar adjustment for the back half of the year between the segments?

I should have been solely -- the purpose of that was solely for Q2.

Okay, all right, thank you.

Thank you, Mike.

Your next question comes from the line of Deane Dray.

Thank you.

Going back to the question on the North American residential water improvement, how much of this might have been from the joint venture with GE, and how much of that is represented in the business today?

Well, I mean, you can say the specific numbers, John, but we did have a pick up year-over-year, but we factored that out when we went from the 18% down to the 17% down, together with foreign exchange.

We saw residential filtration down in the teens, but not because of the joint venture.

If we could separate it out, which is a little difficult to do, separate out the volume from GE or the volume from legacy Pentair, they were down similarly.

But what we see is we see more activity in the channel.

We see more activity among OEMs as well, so that is why we are encouraged that it is getting better.

And frankly, I think we are more in touch than we were a year ago in that we are more in touch with the customers there.

And again, Dean, it is not rapidly getting better.

It is turning positive sequentially which is something we haven't seen for three years.

So we have hit bottom, and we are beginning a recovery off the bottom.

Is there any difference in the go to market strategy there?

Do you think you are taking share in residential?

I don't think we are yet.

I think we are in a position to, and I look forward to seeing us do it.

Okay and then over on the Pool side, you did not benefit from an early buy earlier this year, so just give us a sense of are you seeing what would be characterized as more just in time orders?

Is there any more destocking, what does the inventory in the channel look like today?

Yes, I would say as the visibility we have, I think the sales actually were in-line with what we saw.

I think in general, there was a few that did a little bit better in the channel in the sales in the quarter.

But people are being really, really cautious.

We can tell from the nature of the orders that we are seeing more end market demand, right?

There are smaller orders with more variety on them, and they are more urgent, which tells you that is an end market order, not a stocking order.

So I was encouraged that our -- we got closer to what our business thought was their upside.

And we didn't use that upside, but we got closer to what they thought they could do.

And I think right now, we are being properly cautious as we look at the third quarter and the fourth quarter in our forecast, as to what to expect from Pool.

We are not expecting a return to past times.

We are expecting caution to hold sway.

You commented in the past about the financing issue for customers who want pools, but can't get financing for that.

How long do you think this lingers?

Well, until the banks decide, and we have been active in trying to get banks to help some of our better bigger pool builders, and banks are really not stepping up to fund them, So really the only pools that are getting built now are ones that are going to be built for cash.

So the market is probably about 90% replacement at this point.

That is my number, that is not the businesses number, but I don't know how it could be any different than that.

And just to clarify, on the New Orleans order, this does not get classified as any part of stimulus, this was all Army Core of Engineers?

Yes, this was Corps of Engineers.

And actually the Army Corps of Engineers is going to have some stimulus money, but money is fungible, but this isn't classified as a stimulus job.

It is classified as a flood control job for New Orleans.

And then wasn't there some orders right after Katrina that you got for flood control, and these are just follow-on projects?

Yes, actually this is a cool project.

But what they are doing is this is really a system that is going to basically pump water out of the flood control canals, so it is similar to the earlier project which was on the 17th Street Canal, which was actually a temporary measure.

Technically it is temporary, it will be there 25 years from now I am sure.

But the idea is a lot of the reason that the canals failed was because there was so much water in the canals, the levies couldn't handle it.

You have got to be able to get the water, once it is pumped out of the low spots into the flood control canals, you have got to be able to get the water out of the flood control canals into the Mississippi, or into the Pontchartrain.

This is an enormous pump station to do that.

These are 12-foot diameter pumps.

And Randy how would you characterize the win?

Is it a -- did you win on specs?

Did you win on an efficiency comparison?

Was there anything innovative in design?

Was it price?

I would say I think our competitors would tell you it is price, but I would tell you this.

It was based on our performance on prior programs, so very high confidence from the end customer, together with very solid technical solutions, so spec.

I would say we won on a relationship in spec.

I am not unhappy with the margins as bid.

And the first shipment is again, please?

Next year.

Great.

Thank you.

Your next question comes from the line of Michael Cox.

Yes, hi.

How is it going guys?

Good, Michael.

How are you?

I am doing great.

I was just curious on the non-recurring benefits, it looks like those went up in your projections by the same amount as your non-recurring charges.

Just wondering if you could give some color around what these benefits are, and is it just a coincidence that they seem to offset the charges?

It is not a coincidence.

It is just simply one tax refund that we are expecting from prior periods.

And consistent with our practices, we would disclose that, and call that a non-recurring benefit.

The timing of it is hard to gauge, because there a small piece of it is getting a reaudit, related to an R&D tax piece of it, so overall, it is one item, and it is about $10 million.

And that will be called out separately, and I assume that is not in your guidance?

No it is not, and we would call it out separately, and put it down there in the reported to adjusted line.

Okay, and on the -- I go to your Slide six where you go through the productivity improvements.

Let's say for the sake of example, that unit volumes next year rebound just as much as they were down this year, so you are sitting back where you were at 2008 levels.

How much of that $65 million maybe in percentage terms would be a permanent take out, versus what would come back in a better unit volume environment?

Gosh, I hope you are right on that rebound.

We are ready.

A lot of the benefit and changes in wages, a good chunk of that was volume related, but also plant closing related.

So we would think that you would start with sales minus a less material, and you would get a contribution margin, and we would not have to put in significant capacity to handle, call it a 5% revenue growth.

Now obviously that depends on where it is, but we should see some pretty good incremental margins, which is call it 35% to 40%.

We saw it sequentially 40%.

We would like to have it be 40%, but we would continue to try to invest in some Sales and Marketing and R&D programs, so let's say 35% of whatever sales volume we have, should drop through as incremental.

Okay, that is helpful and my last question is on the Asia Pacific region, decelerated in the second quarter versus Q1.

I know you have commented a lot about Europe, but could you talk a little bit about Asia Pacific?

Yes.

There are two things that are happening in Asia.

First of all, I think stimulus money has come back into the market quicker than we saw here in the States.

I think it is more focused, so I think as we take a look at Q3 and Q4, I think we will see a quicker recovery in some of the slowdown that happened.

And also just take you inside baseball here, but there were some valves that were being sold out of Asia into Europe, and are now directly being shipped from North America and Europe, so it is a temporary reset on our year-over-year performance in Asia.

Okay.

Thank you very much.

Thank you.

And your next question comes from the line of Mark Zepf.

Thank you.

On Slide seven, you cite $55 million of productivity carryover into 2010.

Is that a net number against any near term cost actions that would be expected to flow back into the P&L in 2010?

Yes, the reason I shared it this way on Page seven --- the reason we shared it this way on Page seven is I do think it is important to highlight the $20 million of furloughs and 401(k)s is something that we would not want to continue to realize benefit from, and so we would look at turning those programs on when the market recovers.

And that would be for particularly headwinds against those savings that we shared with you.

So the $55 million though was permanent (multiple speakers).

Yes, it is permanent.

Okay, that is helpful, and then just to reconcile the Tech products comments.

You have Q3 sequentially a little bit better than Q2, but there is a big spike in restructuring for Q3.

Is that just a lag effect in terms of timing, or if the decline is extended into 2010, will we be looking at potentially more actions on the Tech product side?

That particular action is an action we announced in early Q3, related to a Minnesota factory that we are closing and consolidating into our other Minnesota location, so it is a particular action.

Clearly we will continue to take a look at the cost basis in Technical Products as our other businesses, and take the necessary action if the markets don't recover.

So technically speaking we have talked about 17 plants previously.

We have now gone to 18, and we will have this plant closed by the end of the year as well.

And the entire charge will be taken in the third quarter?

Correct.

Yes.

Okay, thank you.

Thank you.

Your next question comes from the line of Christopher Glynn.

Thanks, hello.

Looking at the Datacom performance, I am just wondering how core you are viewing that business these days in strategic?

Yes, I mean, it is disappointing to see how much Datacom went down.

It is very lumpy in terms of demand, but it is one vertical market that the plant capacity is fungible in terms of the vertical markets we aim it at, so I think the real question is, how can we stabilize Datacom, so it doesn't have the lumpy effect it seems to have in our larger electronics vertical.

And as you may remember, we consolidated the organization in Tech products at one leader.

We are making the plants, if you will, end market agnostic, so that we can leverage -- those of you who were on our tour a number of years ago in Reynosa, Mexico, saw very, very busy Hoffman plants, and not so busy electronics plants, and now that is over.

We have all of the plants managed under one operator, so we can balance that volume better.

So I would say I think about Datacom as a market segment that is less attractive than some of the other ones, but it is a vertical market that we can serve without it costing us a lot, versus some of the others.

I would like to do, for instance I would like to do more OEM business in the industrial space, which would be more of electrical.

And I think there are going to be those opportunities.

We are seeing some of that in Europe right now.

We are seeing some of it in the US.

We are seeing some of it in Water in Europe actually, where folks are looking at their own footprint and saying, I may exit that manufacturing, and I will buy it, and we would like to be in a position to pick up some of that business.

So I would rather do more of that, and less Datacom, given the lumpiness of the Datacom.

Patrick, this is Todd Gleason.

We want to get to everyone's question.

I just thought I would ask, since we are running a little over, how many more people are there in the queue?

There are four more questioners in queue.

Okay, we will try to quickly go through them then.

I am not trying to cut Chris off.

Chris, did you have any other questions?

I will catch up with you later.

Okay.

Thanks, Chris.

Your next question comes from the line of John Quealy.

Good morning, thanks.

Hi, it is Chip Moore for John.

I think my questions have been answered.

Maybe if you could just provide an update on some of the longer term growth initiatives, kind of the traction you are seeing with some of the newer energy related product lines?

Thanks.

We talked about the energy related product lines in Pool already, but we have introduced a variable speed drive for the well pump market.

We think the variable speed drive applied in the HVAC setting, is going to be outstanding on the commercial side.

Our biggest opportunities are globalizing engineered flow, and that would include serving RO and Desal, and really driving our hospitality initiative globally.

Those are a couple that I am quite excited about.

And then water reuse, which is we have a number of interesting products in water reuse, but we haven't yet, and nobody has, really developed water reuse as a business.

And I think we have got as good a shot at that as anybody, and I have a lot of personal energy and excitement about that.

So we will talk more about that at our -- we have our Analyst meeting in September.

It is going to be in New York City, so we hope to see you all there, and we will share some of the exciting pieces of water reuse.

And I mentioned earlier power and petrochem in the industrial filtration area, which is kind of exciting, some new products and new applications.

Great.

Thanks.

Your next question comes from the line of [Jacob Strom].

Jacob?

If your line is on mute, please unmute your line.

Okay, we will move on.

Your next question comes from the line of Brian Drab.

Good morning.

Or good afternoon, I should say.

Good afternoon.

I will just ask one question.

When you look at the total targeted cost savings of $250 million, can you help us get a handle on, maybe break these costs down into temporary and permanent?

And of course everything is -- you can make an argument that any costs could fall into either one of those buckets, but could you just attempt to break it down into temporary and permanent cost savings?

And as you do that, could you tell us how much in overhead you took out of the cost structure in closing down these plants?

Okay, the first answer to your question if you look at Page seven, we have highlighted two of what I would call the non-permanent actions, which are the furloughs and 401(k)s.

The other piece that is hard to quantify is how much the discretionary spending that went away is permanent.

Now we are going to do our best to make almost all of it permanent, but we have cut travel, cut expenditures, certainly some of that will come back in some day when we grow, but we are going to do our best to manage it.

I think we will be a lot more parsimonious though, I think a lot of companies have found that they didn't need it, and we are one.

And then your final question is, how much true overhead.

If I looked at just the leases, the rents, the utility costs, et cetera, it is somewhere in the neighborhood of $10 million to $15 million a year permanent costs gone, because the rooftop is gone.

Okay, so maybe I am missing something, but when I add up the -- on Slide seven the $30 million and the $75 million and the $70 million, $175 million, plus you just said another $10 million to $15 million I think in overhead costs, what is the big bucket?

The rest is in the variable manufacturing bucket.

If you look on Page six, we highlighted that in last quarter as well, and that is things like freight, distribution costs, volume related activities as well.

Okay, thank you.

Thank you.

And your last question comes from the line of Scott Graham.

Hi, good morning.

Good afternoon, I should say.

Just two questions for you.

Randy, when you talk about, and I guess it is just maybe a fifth way to skin the same cat, but second quarter is seasonally better in Water, just by it's nature.

So when you are saying that you kind of started out of it -- came out of the gates a little slow, and then you kind of improved in June, and that kind of thing, are you essentially saying that, yes, all three months together, we essentially had a second quarter normal season sequentially from the first quarter?

Or are you saying that maybe in June, things were a little bit better than that?

Just help me understand in the context of second quarter being an in season quarter in Water, if you feel better about things, or just kind of the same as you did a quarter ago?

I will start, and then John can jump in.

April and May in Water, just talking about Water, were really bad in Europe, but we were off to a pretty, an as expected seasonality in the US residential, and then that is what really drives it.

It is usually flow, or residential flow and the Pool business that drive the seasonality in the second quarter.

And that was about the kind of seasonality we expected.

It is still down year-over-year, but the seasonality we expected.

And what happened was is Europe popped up in June to being down like we expected, so it was a run rate improvement from April, May to June, it was still down year-over-year.

So we felt good about that, because we were looking at April and May, and we were deeply concerned about Europe.

I would tell you that I am still very uncertain about Europe.

But as we said earlier in the call, June was better, and July seemed to be consistent -- more consistent with June than April and May.

So that is encouraging, but I wouldn't say it is -- I would say the uncertainty is still greater than confidence in my mind, when it comes to Europe.

And the only thing I would add is that normal seasonality would include a normal pool season, and we haven't seen a normal pool season in some time.

So we are not seeing any lift from Q1 to Q2 like we used to when the pool season hits its peak, and therefore we are not seeing the subsequent drop into the Q2 and Q3 and Q4 ranges like we used to.

Right.

Now we expected it to be higher first quarter to second quarter, because I think as Deane Dray mentioned earlier, we didn't have as much early buy shipping in the first quarter of '09 as we had in '08, so that decline year-over-year in pool was that much more dramatic.

So the step up from the first quarter in pool to the second quarter was bigger than the usual step up, and that was more because of the comp in the first quarter than it was any major seasonality increase.

But to summarize, yes, Q1 and Q2 in Water has seasonality, but we are reflecting that we think the markets are improving sequentially.

We are taking the seasonality out and saying the average daily order rate feels like it has bottomed in North American residential.

It is not getting significantly better, but it is no longer declining like it has for the last three years.

So your comment essentially -- that is really the answer I think -- your comment essentially considers the seasonality.

Correct.

Okay.

Was the weak start to the quarter in Europe, did that prompt the additional restructuring charges, or was that going to happen anyway?

I -- certainly it fed into it.

It might have happened anyway.

All right last question is, you have got this terrific order, and you have got -- out of New Orleans, and you have got the Enviro now under your belt.

How do we go out now and market these, particularly the Water -- the big water win, how do we sort of Stimulus market that?

How do we get the Enviro into more endpoints?

Could you talk a little bit about that?

Two separate points.

Enviro is -- actually it is not just McDonald's that likes it.

Starbucks likes it, everybody likes it, because it is very, very efficient.

Our RO system is a superior solution.

So we have a very effective sales force in our foodservice division, and they are marketing it, and you can see it online.

We have all kinds of promotions.

And we are working that -- as I mentioned, we are selling it into hospitality too, because we think it is going to be a major product for hotels.

So that is one of our I would say higher performing marketing groups anyway.

In terms of the promotion of a win like the New Orleans win, those are project and engineered based bids, so what we are doing there is we have -- and I would commend if you haven't looked at it on our website, you can see our White Paper on the Stimulus spending.

We have a website where we are working with our distributors more directly, and talking to them about the specific money that is targeted to their service areas, to make sure that we are bidding and quoting and -- those projects -- and that they understand our position in terms of our Buy America position, which is very strong, as well as our capabilities which that order affirms, if you will.

The Core of Engineers is always a good reference point.

But for history, about half of the pumps in flood control in New Orleans have been made by Pentair Company, so that is not a bluebird, that is a market that we compete in quite effectively.

I guess what I am asking here, Randy, and it sound like I think you are saying yes to this, is that off of these wins and placements, your guys are out there developing marketing plans, or maybe they have already been developed, and with these wins, they are kind of taking them --?

Absolutely.

We have not cut as deeply in R&D and in marketing and sales precisely so we can keep the pressure on to try to drive growth.

I am not happy to have had to lay off the people we hired.

It is a terrible thing to have to do, so I want to get volume.

I want to put people back to work.

Thanks very much.

All right, thanks.

We will end there.

Patrick?

Yes, I would like to remind everyone, this call has been recorded for playback.

If you would like to listen to today's call again, you may dial 1-800-642-1687, with the passcode 99593493.

Thank you.

This concludes today's conference call.

You may now disconnect.