濱特爾 (PNR) 2009 Q4 法說會逐字稿

Good morning.

My name is Stephanie.

I will be your conference operator today.

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

(Operator Instructions) I would now like to turn the call over to Todd Gleason, Vice President of Investor Relations.

Please go ahead, sir.

Thanks, Stephanie.

And, welcome to Pentair's fourth quarter, 2009 earnings 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 fourth quarter and full-year 2009 results as well as update you on Pentair's outlook for 2010.

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 10K 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 information information section of Pentair's web site at www.pentair.com.

Following our prepared remarks, we will open the line for questions and answers.

I will now hand the call over to Randy.

Randy?

Thanks, Todd.

Thank you all for joining us today.

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

The headline for the fourth quarter is that we exceeded the earnings expectations we provided in October by about $0.04 to $0.05 driven by stronger sales and in line operating margins.

Sales of $702 million were down 9% year over year.

Sales in both water and technical products exceeded our initial outlook providing about $30 million of upside versus our estimate.

While year-over-year sales were negative for both businesses, trends continue to improve sequentially.

Fourth quarter negative 9% sales Delta was the best comparison of the year.

Sales in our water business were down 7%.

Our largest market, North American Residential continues to improve sequentially and we continue to benefit from strong municipal water sales.

Technical product sales declined 12%.

However, several key vertical markets did show expansion in the quarter led by infrastructure, security and defense.

In Q4, we delivered reported earnings per share from continuing operations of $0.29 which was negatively impacted by $0.18 of non recurring items associated with intangible and asset impairment charges and restructuring actions.

If you remove those non recurring items we delivered $0.47 of adjusted EPS which was up 15% year-over-year.

While sales were down 9%, our adjusted EPS grew double digits highlighting the positive results of our productivity initiatives.

Total company operating margins on an adjusted basis expanded 140 basis points.

The positive benefit from productivity and materials deflation more than offset the negative impact from the sales decline.

Relative to our adjusted EPS, our fourth quarter effective tax rate was slightly over 30% and interest expense was better by $4 million year-over-year.

Finally, we delivered $30 million of free cash flow in Q4 before a discretionary pension contribution that we made in December.

Now let's turn to slide number three which provides an overview of our Q4 water results.

Here are those details.

On the top of the slide, we provide our standard sale and operating income walks.

We will refer to these as we describe the performance of the water group.

Overall, water sales declined $34 million to $475 million, down 7% versus fourth quarter 2008 or down 9% in local currencies.

As I mentioned earlier this was a few percentage points better than the sales outlook we shared in October.

Our flow technologies business was down 3% year-over-year.

Growth in our municipal business could not completely offset continued decline in US commercial and industrial markets.

Sales and residential were down modestly but continue to show sequential improvement.

Filtration was down 9% as modest growth in residential and food service did not overcome double digit sales declines in industrial and other commercial markets.

As we said last quarter, we're seeing stabilization US residential filtration markets with industry shipments improving sequentially.

With our new product launches and growing systems capabilities, we believe we are well positioned for growth in 2010.

Pool equipment was down 13% which represents the smallest quarterly year-over-year decline in the year.

The prolonged decline in North American Residential new pool builds persists but we continue to see better sell through at our distributors and demand for our eco select energy efficient products remains strong.

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 walk for water.

Adjusted margins were 11.6% up 140 basis points year-over-year.

Margins came in essentially in line with our guidance as productivity actions and material savings delivered meaningful results and more than offset the impact of volume declines on margins year-over-year.

While not included on the walk, pay as you go restructuring expenses, abbreviated as PAYG on the slide, are tailing off as we have completely completed a majority of our plant shutdowns and moves.

In the quarter, we took a charge of $21 million shown on the walk which gets to you $34 million of reported operating income in the quarter.

The majority of the $21 million is the writedown of intangibles and other asset impairments.

These charges were determined following end of year impairment tests which determined that book value of certain intangibles and other assets could no longer be supported after 3.5 years of sales declines in our residential businesses.

While disappointing, we expect sales in residential markets to steadily improve in 2010 and eventually return to more normal levels.

To summarize, water's Q4, we are seeing an improving landscape.

And despite sales being down in the quarter, the expansion of water margins demonstrates the results of our productivity initiative.

Now let's turn to slide number four and take a look at technical product.

Year-over-year fourth quarter sales of technical products were down 12% or down 15% in local currencies.

Sales exceeded our original expectations as several key markets have stronger quarters than anticipated.

Looking at the businesses within technical products our global electrical markets declined 16% while global electronics sales declined 13% in local currencies.

Technical products adjusted margins were 15.3%, an increase of 220 basis points versus Q4, 2008.

Aggressive cost actions and solid execution on our restructuring efforts more than offset the decline in sales year-over-year.

Margins expanded sequentially each quarter this year which demonstrates the growing impact of our cost actions.

Technical products took additional restructuring actions in the quarter.

The $3 million charge is associated with closing an engineering facility outside Chicago that has been consolidated into other locations.

This helps to reconcile our reported operating income of $32 million.

Now please turn to slide number five and let's review full-year 2009 results.

For the year, total Company sales were $2.7 billion.

Year-over-year our sales were down approximately 20% as water declined 16% and technical products was down 26%.

It's been such a challenging environment sometimes I still do a double take when I take a look at those numbers.

I'll tell you, this will not be our new normal.

Total Company full-year 2009 margins decline 210 basis points as tremendous execution against our cost actions could not fully overcome the 20% drop in the sales volume.

For the year, we deliver adjusted earnings per share of $1.47.

While down significantly year-over-year, the result was modestly better than the $1.40 plus that we forecasted for 2009.

For the year, we generated $232 million of free cash flow, excluding the discretionary pension contribution.

That is 160% conversion of net income.

As John will highlight in a few minutes, our balance sheet remains healthy as we significantly lowered our debt balance.

In January, we announced we are increasing our annual dividend for the 34th consecutive year to $0.76 per share.

Please turn to slide number six and let's review some of the key accomplishments of 2009.

Before I begin, we're proud of the tremendous effort of our 13,000 plus employees and what they exhibited throughout 2009.

The relentless drive, their ideas, their energy helped ensure 2009 was a year of progress.

While markets were dreadful and sales dropped significantly, our teams remain focused and dedicated.

I thank them all.

With that, let's review the hits and misses in 2009.

First productivity.

Early in 2009, we laid out an aggressive plan to accelerate our multiyear footprint consolidation plan.

Our new goal was to reduce our cost structure by $300 million and deliver over $250 million to the bottom line productivity savings in 2009.

We accomplished that goal.

You can see the results of these cost actions in the Q4 performance we just reviewed.

Margins and earnings grew despite year-over-year sales declining 9%.

That's solid productivity.

Furthermore, much of this productivity is permanent.

We've earlier outlined as markets recover we expect to drive growth.

When Pentair reaches the same sales levels of 2008 or $3.4 billion, our earnings per share should eclipse $3 per share which is $0.80 higher than the $2.20 of adjusted EPS we delivered in 2008.

So, if you will, our earnings capability has increased $0.80 per share as a result of these cost actions.

Next, let's review how we invested in innovation and future growth.

We maintained our investment levels in R&D, sales and marketing while aggressively reducing our manufacturing and administrative cost structure.

In fact, as a percent of total Company sales, R&D and sales and marketing payroll expense went up about 90 basis points.

This investment will allow to us continue to introduce leading new products and grow in new markets and regions.

While investment is important for long-term growth, booking orders is proof of concept.

In 2009, our municipal water business put the largest order in Company history, the $60 million Gulf Intracoastal Waterway Project in New Orleans.

This will yield about a dozen pumps that will be delivered to the Army Corps of Engineers in 2010 and 2011 to drive the largest pump station in the world.

Throughout the year, we highlighted innovative new products which we're introducing the markets around the world.

A few examples include our residential flows, variable frequency drive controls to improve energy efficiency in residential water systems.

Technical products global enclosure product line fusion which will add to our leadership position in global electronics protection.

Additionally we have highlighted our growing capabilities around systems and advanced solutions.

One recent example is our revolutionary rainwater reuse system to be used by the Minnesota Twins in their new stadium which opens in April 2010 against the Red Sox.

We're excited to become the Minnesota Twins official sustainable water provider.

The rainwater system sets the Twins apart as the leader in sustainable applications for professional sports venue, and we're proud and excited to be part of the action.

Unfortunately, growth was negative in 2009 as market conditions slowed the traction of many new products and growth initiatives.

While we're disappointed sales did not meet our expectations, we are not deterred.

We have a host of exciting new products and as market conditions improve, we expect to see solid growth.

Towards the bottom of the slide, we highlight a few additional accomplishments, most of which are already covered so I won't repeat them now.

One item; however, is the last bullet point.

I think it sums up our commitment to our shareholders.

We're not satisfied with sales of $2.7 billion or adjusted EPS of $1.47 and we believe we are doing the right things to get Pentair back to higher levels with urgency.

Before I hand it over to John, let me share my perspectives as we enter 2010.

Please turn to slide number seven.

As our press release indicated, our full-year 2010 EPS range was updated to $1.75 to $1.90 a share.

At the mid point, this represents a 24% increase versus 2009 adjusted EPS which seems pretty good, especially after 2009.

We would point out while a nice increase, it is only half of the way back to 2008 adjusted EPS of $2.20.

Our goal is to drive growth and productivity with urgency to get back to these record levels as soon as possible.

The good news is our sales trends are encouraging.

As the slide highlights, quarterly 2009 sales Delta, although negative year over year, improved throughout the year.

The fourth quarter Delta was the best of the year and showed solid improvements in many markets.

We'll need steady growth to reach our ultimate goal and we expect 2010 will begin to demonstrate that growth.

Speaking of 2010, for the first quarter, we're forecasting mid-single digit sales growth.

Current orders in our sales and market profile suggest we should see -- expect modest growth from improving residential activity.

Additionally, our municipal business should continue to benefit from our strong backlog and the revenue from the record New Orleans project.

Fast growth areas such as China, Latin America, and the Middle East remain growth regions for Pentair.

As we continue to penetrate and invest in those areas.

Finally, distributor inventories remain low from an historical perspective so as markets improve, distributors will sell through and restock.

As the slide suggests, our balance sheet and free cash flow generation provides us with appropriate flexibility to both reduce debt and consider acquisitions or other deployment of our cash such as share buy backs.

So those are some of the key positives that inform our thinking as we enter 2010.

As always, uncertainties and head winds must be accounted for, too.

The past six to seven years we've witnessed a volatile commodity market with steel, copper, aluminum and oil among others all hitting record highs with big price swings.

We have an outstanding materials management organization driving a number of projects to ensure we are efficient in our materials purchases.

We're aware that in any quarter raw material costs can spike.

However, given our history of solid pricing discipline we would expect to be able to offset material inflation.

Unlike materials where we can drive aggressive productivity initiatives and monitor our pricing actions, the next three bullets are not things we or anybody else can necessarily manage.

The global economic situation is improving but at what pace?

Furthermore, credit for important segments of our market such as pool construction remain elusive.

While we're encouraged that government stimulus monies are being deployed to invigorate global economies, the impact of a recovery are still in question.

Our current 2010 guidance takes all of this into account and we feel good about controlling our destiny.

Now I'll hand it over to John who will provide additional details on our financials and also discuss our 2010 outlook in more detail.

John?

Thanks, Randy.

Please turn to slide number eight.

This slide is divided into three sections.

The top section reflects GAAP or reported earnings per share for Q4 and full year 2009.

The middle section details the adjustments from GAAP to 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 Q4 2009 actual our GAAP reported earnings per share were $0.29.

Included in this result, were $0.04 of EPS charges for restructuring costs primarily associated with the closure of our technical products Chicago engineering and design facility.

As Randy mentioned earlier, we transitioned the work from this facility to other locations over the past few years.

So this is the charge to completely exit the facility.

Also included in our GAAP EPS was $0.14 of charges as a result of asset into tangible impairments.

At the end of 2009, we determined that book valuations for certain intangible items and other assets required lowering after three years of revenue decline in our residential water businesses.

These charges reflect the revaluation of these items.

Additionally, as part of completing a distribution and manufacturing JV in China and transition the manufacturing to our Suzhou facility, we wrote off nonperforming assets related to that JV.

Removing the impact of these costs gets you to the $0.47 of adjusted earnings per share for Q4, 2009.

The $0.47 is up 15% versus the $0.41 of adjusted earnings in the fourth quarter of 2008.

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

Rather than walk through the numbers, I'd simply point out that we have $0.30 of negative Delta between our 2009 reported GAAP EPS and adjusted EPS of $1.47.

As you can see at the bottom of the slide in 2008, we had the opposite result.

Reported GAAP 2008 EPS was $0.39 higher than adjusted EPS as gains outweighed non recurring charges in 2008.

Thus when you net 2008 and 2009 nonrecurring items, the difference is minimal.

Please turn to slide number nine.

The top half of the slide is a full-year debt balance walk, which shows the progress remaining on reducing debt levels in 2009.

Moving from left to right, we ended 2008 with $954 million of debt.

If you add back the $44 million of receivables which we securitized at the end of 2008, which is how our rating agencies look at debt, our adjusted debt balance was $998 million.

We generated $232 million of free cash flow which we used to pay down $207 million of debt as well as prepay our 2010 $25 million pension obligation.

As we indicated on our third quarter earnings call, we did not securitize any receivables in fourth quarter 2009, therefore, we did not add to our debt a new securitization program.

The $44 million receivables which were securitized in 2008 were collected in the first half of 2009.

So, as the walk indicates, that amount is now zero.

In 2009, dividend payments were $71 million and other items of $12 million get you to the ending balance sheet debt of $806 million.

So, to summarize, about a 20% reduction in our debt year-over-year, keeps us in a comfortable position as we indicate at the bottom of the slide.

Let's move on to slide number 10.

The upper left section of the slide outlines the major components of cash flow for the full year 2009 and year-over-year details.

As the walk shows, we generated $207 million in free cash flow after our $25 million discretionary pension contribution.

Working capital delivered almost $64 million of cash flow on the year which was approximately $118 million more than working capital contributed in 2008.

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 feel very good about our full year cash flow generation.

As we viewed on the previous slide, our cash usage was primarily focused to reduce debt to $806 million which is shown in the bottom left of the slide.

Our current debt has an average interest rate of 4.4% about 10 basis points higher than Q3 2009.

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

So we remain very comfortable with our debt position and going forward, we expect to increase our EBITDA, which will provide additional flexibility with respect to cash usage.

Please turn to slide number 11 and let's discuss our 2010 outlook.

We showed a similar slide in December when we provided our baseline 2010 outlook.

We've updated it to reflect new guidance for Q1 and full year 2010.

The top section of the slide shows the baseline we provided in December.

In it, we projected Q1 EPS of $0.30 plus on mid single digit sales.

Additionally, our baseline for the full year was EPS of $1.70 plus on sales of around 5%.

Our updated Q1 guidance which is shown in the mid-section of the slide has EPS between $0.32 and $0.35.

We now expect Q1 sales to be up mid to high single digits as our backlog is better and market trends have improved modestly.

Our expectation is that the second quarter will experience its standard seasonal uptick as residential construction markets are higher.

The full season is in full gear and other markets gain momentum.

Our early view is that Q2 EPS will be between $0.50 and $0.55.

Thus we expect the first half of 2010 will have EPS growth above 40% when compared to first half 2009 adjusted EPS.

Let's go to the far right column which highlights full-year EPS guidance.

In December, we introduced the baseline EPS outlook of $1.70 plus which we are now updating to $1.75 to $1.90 per share.

We continue to expect mid single digit sales growth for the full year which is incorporated in our $1.75 to $1.90 outlook.

As Randy highlighted, uncertainties remain with respect to the global economic situation.

But, with our leaner cost structure and improving market trends we believe Pentair is well positioned for solid EPS growth in 2010 of around 20% year-over-year.

Please turn to slide number 12 and let's review our first quarter 2010 outlook.

For Q1, we expect revenue to be between $680 million and $695 million, up mid to high single digits year-over-year.

We expect water revenue to be up 6 to 8% year-over-year.

We expect technical products to be up around 5 to 6% as backlogs and order trends have turned positive when compared to 2009.

Operating income is expected to be between $60 million and $65 million which would produce overall Pentair operating margins of around 9.5% up around 300 basis points year-over-year.

We expect water margins to be about 10% up over 300 basis points year-over-year.

And technical products margins to be about 14% up about 400 basis points year-over-year.

Q1 EPS, as previously mentioned, is expected to be between $0.32 and $0.35 per share up over 60% when compared to Q1 2009 adjusted EPS.

We expect our tax rate to be around 32% and our Q1 interest expense to be better by about $2 million year-over-year.

And finally, we expect cash flow will be negative which is typical for our first quarter but in line with 2009 Q1 cash performance.

So a solid start to 2010 with sales growth, margin expansion and very strong EPS growth.

Please turn to slide number 13.

The top of the slide shows the sequential EPS walk from Q4 adjusted earnings.

To the Q1 EPS guidance we just discussed.

We thought it might be helpful to have this data since we spent much of 2009 discussing sequential performance.

Starting with Q4 2009's $0.47 of adjusted EPS, we expect a slightly higher tax rate and share count to negatively impact Q1 2010 by $0.01.

We expect a negative $0.05 of EPS from incrementally higher employee benefits, such as pension expense, higher medical costs, 401k contributions, merit increases, sales incentives and bonus accruals.

We outline this expense when we provided our initial guidance.

For the full year, we expect about $30 million of head wind so this negative $0.05 represents one quarter of that total.

The next item is a seasonal impact from smaller sales and shipments in our pool business.

We expect that sequentially this will have a neglect $0.08 to $0.09 impact to Q1 EPS.

The seasonal impact is slightly better than normal when comparing Q4 to Q1 as we have moderated our participation in the pool early buy program.

All of our other businesses net to similar performance with Q4.

Those items walk you to $0.32 to $0.35 EPS guidance we provided for Q1.

While down versus Q4 2009 mainly due to seasonal factors, we expect Q1, 2010 EPS will be up approximately 60% in Q1 2009 so a solid start to the year.

Please turn to our final slide number 14.

In summary, 2009 was a challenging year.

We effectively dealt with the global recession by taking aggressive action to reduce our cost structure.

As we enter 2010, our balance sheet is in solid position and we expect another great year of free cash flow generation to provide additional flexibility.

While proud of the tremendous accomplishments with respect to our cost actions in 2009, the amount of facility closures and restructuring was disruptive.

In 2010 we will double down on productivity initiatives within our current facilities and functions to drive meaningful savings going forward.

And finally, as Randy mentioned earlier, we view 2010 as a critical year to get back on the growth track.

We have a healthy sense of urgency to get back to previous company sales EPS highs and 2010 is an important step along that path.

We'd now like to answer any questions you might have.

Stephanie, please open the lines for questions.

(Operator Instructions) Your first question comes from the line of Hamzah Mazari Credit Suisse.

Thanks.

A question on your water business.

You have a number of growth initiatives you guys are targeting over the next couple of years.

Some of them are coming off of a pretty small base.

When can we expect those initiatives to have a material impact on both your top and bottom line and how do you think about those initiatives impacting your margin profile longer term within that segment?

Yes, we do have a number of growth initiatives.

Because residential is our largest segment it's almost half of all of water.

The main most meaningful driver of growth is going to be the residential market actually turning up.

And that's why we expect -- that's the biggest driver of our growth that we expect this year.

We don't expect it to turn up rapidly, though we do expect it to be positive.

On top of the base market growth, we have a number of initiatives in terms of new customers, new channels, and new products in our residential filtration business in particular that I'm quite excited about both in the US and globally.

And I think that they will have a more meaningful impact in the second half of this year and going into next year.

Our whole systems initiative that we've talked a lot about is going to be a net drag, if you will, on our margins, but it's going to help us enter a number of new markets that are quite exciting.

The small commercial, small industrial, systems business in RO, the water reuse markets, which we think actually will-- while we use the example here of what we're doing with the Twins it gives us a nice platform to show people in the US the kinds of things we're going to be doing in India and we are doing in China.

So I think they will be a net drag on margins, but they are a net positive on the top line.

Now, what I'd like to do is counter the net drag on margins with really achieving operating excellence on our water side to the tune that we have in technical products.

We haven't gotten there yet.

We still have a lot of opportunity in water.

In fact, as we talk about it, we really have two businesses that I think are performing at the highest of highs.

That's technical products and actually our pool equipment business.

All of our other GBU's have the potential to get to that level from an operating excellence stand point.

So that's how I think about water.

That's very helpful.

And just one follow-up question on inventory levels, you talked about them being pretty low in the distribution channel.

Are you baking in any restocking bump in your 2010 guidance?

How should we think about that?

Not really.

I can't tell you right now whether the volume we're seeing in some of these markets, particularly the ones related to infrastructure, defense, security and technical products and residential.

How much of that is just the channel actually restocking to what I would call the stable level because they were drawn down too far and how much is real end market demand.

I hope to be able to get a clearer sense of that as this goes on.

But we're not counting on a pop.

We're counting on what we're seeing now to sustain, which I wouldn't characterize as a pop.

Okay.

Thank you very much.

Your next question comes from the line of Jim Lucas with Janney Montgomery Scott.

Thanks.

Good morning all.

Good morning, Jim.

Happy Groundhog Day.

Happy Groundhog Day to you.

Question first on technical products.

Could you just bring us up to date on the electrical versus electronic gap that one of the key areas of improvement was consolidating into a global GBU and could you just talk about the margin differential, how that gap is closed between the two and what you're seeing geographically within enclosures?

Yes I'll take the first half, Jim, and I'll have Randy chime in.

It'd be nice to say we'd closed the gap.

I'd say we haven't for a good reason.

The electrical margins continue to impress and to get larger.

We have made substantial progress on improving the electronics business in a down cycle.

So we have seen compression as we talked about the Chicago facility.

That is further examples of us being able to move into the existing technical products or electrical sites.

We closed on the electronics side three more factories within the year, and we're starting to merge the vertical markets together and start to share some of the regional sales forces to try to get some leverage around getting some better global electrical momentum.

So I think we made substantial progress this year, and we have improved the margins in electronics.

They're low single digits right now, Jim, and I think with some particular advancement in sales, we can continue to get closer to the 10% level.

But electric will continue to expand.

In fact, we have record margins in Q4 on our electrical side of the business.

I you want to add anything.

On the margin side, I think Europe has done a nice job which is predominantly electronics.

The European business has stabilized.

Actually, we saw a little bit of growth, and the margins are up.

So I feel good about that and it's always tougher to make that kind of progress over there in Europe.

So I'd say that that's looking good.

I think our efforts to globalize technical products remains our number one opportunity on the electrical side and we're making I would say baby steps, positive ones toward working with some of the global OEMs that so value the Hoffman product line.

The product line I mentioned, Fusion, is a global metric product line on the electrical side that really positions us well to serve those global folks like ABB, Yokogawa, Allen Bradley -- excuse me, Lockwell.

Jim, I think would I summarize by saying in no way, shape or form do we view these as technical product margins as what we call peak margin.

There's a lot more potential left in these.

Okay, great.

Thank you on that.

Then with regards to the capital allocation strategy going forward, in your prepared remarks you did make reference to acquisitions potentially one area of opportunity.

Could you just give us an update of where you stand on the capital allocation standpoint and with regards to the acquisition pipeline, you've talked about bolt-ons in the past.

How would you characterize the pipeline today?

Bolt-ons is still a primary focus we have obviously with the level of cash flow we have, and our balance sheet.

Those are the only ones that are logical from a cash standpoint.

We remain interested in ones that expand our technology base and expand our footprint in terms of reach to customers of global.

So global and technology that's what we've maintained.

And, we had not been focused on that over the last 18 months that aggressively, and we started to be more keenly focused on it in the fourth quarter.

And there's things out there.

There's things out there.

Okay.

Great.

Thank you.

Thank you.

Your next question comes from the line of Mike Schneider with Robert Baird.

Good morning, guys.

Good morning.

Maybe first just starting on water.

You mentioned the pay as you go restructuring costs winding down, John.

Can you give us a sense of what they did hit Q4 and just really how much is left?

Yes My estimate in Q4, Mike, and this isn't a precise number because we talked about inefficiencies as we swallowed demand in some of the facilities.

But, I'm estimating that to be about $2 million to $3 million in Q4 is what cost us in water.

I would think it's going to be only about a million dollars or so in Q1.

Okay.

And the estimate for Q1 is just the estimate of under absorption or what is actually now kind of baked into your estimate?

I would say what I've got there is that we're still running slightly higher labor rates and scrap rates versus what we were running in the pitching sites.

We're making progress on that but we haven't yet absorbed it to the level that it was at the pitching site.

What is actually left in terms of number of roof tops that have not been closed that will be closed in 2010?

We're actually in 2010 other than just finishing up the facility in tech products which will be done at the end of Q1, that's a further consolidation of our Minneapolis footprint.

Not anticipating taking on any closings in 2010 but getting back to four wall accountability and getting back to our lean efforts and making sure that we're making progress on quality delivery, scrap and making progress on lean.

Okay.

Then the New Orleans pump orders, what is the rough delivery schedule over the next 24 months?

I think it's between seven and eight this year and the balance next year.

That's close.

Anything delivered in the first half of this year?

No.

We've got some small, component delivery in Q1 and Q2, Mike, but it's relatively low.

Most of the deliveries are in Q3 and Q4

Okay.

Then pool price increases, I presume nothing was issued as of the start of the year, so can you give us a sense of how the prebuy or lack of prebuy and what you expect in Q1?

You mentioned the sequential hit it was less than ordinary.

Any more color on that just how this season will unfold?

The sell through actually remains positive and we had a good sell through in Q4.

We had a decent standard order quarter in Q4.

As I mentioned in the comments, we chose as well as the rest of the market also went along with a smaller early buy than we've seen in prior years.

We expect that to positively impact Q1 a little bit from the carryover from Q4 into Q1.

Right now, we're seeing sell through rates against some pretty low levels here, Mike.

We're three years down on the pool compression.

So we're starting to think that we're going to see year-over-year sales increases in pool.

Any appetite or I guess ability to issue price increases now given that at least according to slide three you're still down about a million bucks in the price cost curve?

Yes, I think real quickly, I think pool is not an area that we're looking at price increases this year at the moment.

We'll keep an eye on commodity costs and --

That's really going to be the trigger.

Our outlook actually isn't assuming we get any real benefit from price.

We saw the benefit of price over the course of 2009 wane from being a positive couple points in the first quarter to being diminimus in the fourth quarter.

So our focus is or our expectation, our plan, what's in our outlook is actually flat to maybe a little bit of giving up of price.

Now that said, if we see materials, we know how to hit the price button.

If we see materials inflation, we're in the kind of businesses where we have some pricing flexibility and we will use it.

That's really how we're approaching it right now.

Okay.

Then switching to technical products, there is the area where you're most behind in the price cost curve.

Looks again from slide four and just Q4 alone you were about negative $7 million.

I'm curious just what's been issued in price increases so far for January 1 period and just what's, your, I guess ability to get price increases there.

Real quick, Mike.

We've got modest price increases.

Let's count low single digits going forward in Q1.

I do want to share with you that although we had minimal price increases, we did have some sizable commodity benefit in Q4.

As we expected and anticipated.

As those commodity prices begin to firm up, and increase it gives us the ability to start thinking about price increases in the market.

So your outlook now just as you looked at your raw materials inputs steel, I presume, is rising within your costs of goods sold for [TP]?

Correct.

Okay.

And then I guess just looking at the kind of first half and full-year guidance, I'm just curious as to it appears as though you've got little or no sequential acceleration in the results, and what I want to just kind of roughly done, if you take fourth quarter earnings of $0.47, you take Q1 even at $0.33, you're up at $0.80 for the year.

And it sounds like New Orleans benefits the second half.

It sounds like maybe some pricing benefits the second half, and then even pool should have a delayed benefit given the lack of a prebuy.

It strikes me that if you just annualize either the Q4 and Q1 run rate or even the first half run rate of $0.89, there's no real acceleration built into the second half, again, despite some of these benefits, especially New Orleans in the second half.

Is there anything as you look at especially out to the second half guidance that would explain why there wouldn't be an acceleration?

Mike, I say one thing.

We think the fourth quarter showed a real acceleration already in our earnings capability.

That's really, we think, it's reading out already number one.

Number two it's easier to see all of those things you said on the positive side than the negative stuff that's going to happen that we don't know yet.

Okay.

And things are still so uncertain.

I know stuff's going to happen.

I just don't want to count on all of the good guys when I haven't seen all of the bad guys yet.

That's all.

Okay.

That's what I'm driving at.

It seems conservative and there's a cushion built in there.

I didn't say that.

Pardon me?

I didn't say I was conservative.

There's bad guys out there.

I just don't know them all yet.

Fair enough.

Thank you.

Congratulations to a strong finish on the year.

Thanks, Mike.

Thanks.

Your next question comes from the line of Deane Dray with FBR Capital Markets.

Thank you.

Good morning, everyone.

Good morning, Deane.

Just to follow up on that last point.

With regard to having some contingency built into your 2010 estimate it looked like that growth investments of $0.20 and that got mentioned earlier on the call, is that still the right number?

Yes

And how do you expect to see that during the course of the year?

Would that be, front end loaded?

Is it going to be linear?

How should we think about that?

I think we're going to be disciplined, Deane.

I think we want to see Q1 read out and Q2, have a good indication of our season in Q2.

Then we begin to put the investments out there for 2011 and beyond.

Got it.

Then we won't bring out the -- or accuse Randy or you all of being conservative.

It is interesting how you changed your approach to guidance.

Back in December you had a single point for the year.

Now you're framing a range.

What's changed in terms of your visibility or your risk tolerance in terms of giving a range and then related to that, looks like you're now in a pattern of giving a sequential two quarter forward guidance.

Is that going to be a practice of the balance of the year?

We've got two more months of actuals that made us more confident to actually put a top on the range.

That's simply the change.

Then also as we go out with the preguidance or sort of our view, we haven't seen the pension or the actuary studies yet.

We haven't seen where medical is ending and quite frankly, haven't finalized all of our year end and budgeting.

But I think we feel like there's more visibility predict Q1, Q2 right now.

Then we'll give a further update on the full year as it becomes more clear.

Good.

Then on the asset impairment, you said it was residential.

Is it filtration or pool?

Can you clarify which businesses were impacted?

Actually, it's brands related to the ones we use in residential flow and pool.

And just a question of the three year earnings decline.

That was the driver?

It's actually the volume decline and then our base case which is not for a snap back but for a slow growth from there.

We also have stopped using some of the brands in as broad a way as we had and frankly that was decisions made in marketing that didn't anticipate what that would do to intangibles.

That's a lesson learned.

Then on the comments regarding restructuring on a go forward basis.

We like seeing the pay as you go in the early comments in the call said it was winding down.

But, if I heard correctly towards the end, you all were going to be doubling down on productivity initiatives in 2010.

Is that just a realize to savings or actually incremental restructuring?

We've had-- if you think about the 18 facilities we moved last year it is a substantial utilization of our teams.

A lot of our lean people were involved in those moves.

We just want to go back to those four walls where we make the majority of our products and just focus back on the lean.

On the basic disciplines of continuous improvement in driving the safety quality, delivery cost and cash in the new facilities.

John mentioned that we have a number of facilities that really aren't productive.

They've accepted a lot, they've received a lot of new product.

That's really the day-to-day practice of lean enterprise is what we're talking about.

Great.

Thank you.

Thank you.

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

Thanks, guys.

Congratulations on the quarter.

I want to spend a minute on the restructuring charges.

To a question earlier about the pay as you go.

You've referenced some under absorption of labor and scrap.

I just want to clarify, is that included in your restructuring charges?

Is that what you are calling out for Q1?

No.

That was included in the adjusted operating income as part of our ongoing view.

That's why I was hinting that it would be slightly better in Q1.

Should we expect the call out of restructuring these kind of one-time items that have been cropping up.

Should those be done now?

I hope so.

Yes.

Done is a finite word.

But I would say we expect them to be very minimal going forward.

Okay.

So there's nothing embedded in your guidance for it?

No.

Then in the balance sheet cash flow side, do you have the 2010 year end debt level target that you're looking towards given your free cash flow assumptions?

I would say it's more dependent on the EBITDA.

We believe that we're going to continue to expand EBITDA going forward and we have a comfort level around our debt to EBITDA levels, so when you think about our debt level we'd like to trim a little bit more off the debt.

But the more EBITDA we get gives us more flexibility to make bolt-on acquisitions and/or purchase shares back on our share buyback program.

Okay.

In terms of the capital expenditure plan for the year, should we expect something similar to what we've seen in the last few years in the low $50 million range?

Yes.

I know it's premature, but is that a good run rate as we look forward over the next couple of years?

I would say it actually is.

We do what most companies do.

We dispend a budget.

The budget changes.

Sometimes you've got maintenance upgrades.

Sometimes you have plant restructuring sometimes you have capital related to software.

But we're not a very capital intensive business.

The other thing, every roof needs capital.

We've taken out 18 roofs, 18 buildings.

So we don't have the maintenance capital on that.

That's capital we can redeploy to support productivity and growth.

We have a number of facilities, particularly Poland and China and our new one in India which are not fully utilized yet.

So I mean, the investments will go into providing capability in those factories, but it'll still be inside that 50 to $60 million.

Right.

That's the nice thing.

Thanks a lot.

Thank you.

Your next question comes from the line of Christopher Glenn with Oppenheimer.

Thanks.

Good morning.

Good morning, Chris.

In the walk to 4Q to 1Q guidance was a comment that all other bucket sequential modest increase, just wondered if that includes tech products?

Yes.

Okay.

And then as we look out for the year then, any reason we wouldn't be looking at least a current run rates quarterly for the year?

You mean Q4 or Q1?

Well, looks like Q4, Q1 are lining up comparable at any rate.

Yes, I think, Chris, as we kind of alluded, we want to get through Q1 we take a look at Q2.

The season in Q2 means a lot to us.

And when we have that look we can see the back half of the year.

That will really give us a picture of what the residential market truly is.

The second quarter is our high quarter.

It's all driven by residential and flow filtration and pool.

It's so critical for us to understand what the environment is.

I agree.

Okay.

And then with the revenues certainly outperforming in the fourth quarter, did you use the opportunity for any early cost restoration?

We announced we've restarted our ESOP contributions, our employee stock options-- stock ownership plan where we contribute.

We are restarting our 401k match, and we are reinstituting our pay raises practices that we stopped.

Okay.

Those have all been announced.

Okay.

And those all impacted water in the quarter?

Didn't impact anything in Q4.

It's that $30 million head wind we talked about when we talk about 2010.

Those are those costs.

Chris, a little bit in the first quarter.

A couple-- the sales levels in some of our water business did trigger distributor rebate levels and did trigger some sales and distribution bonuses.

Got it.

Thank you.

Thank you.

Your next question comes from the line of [Brian Coningsburg] with Citi

Yes, hi.

This is Brian Coningsburg with Jeff Sprague's team.

Hi Brian

Hey, how are you?

Good

Most of my questions have been answered.

Just coming back to the bolt-on comments maybe you can just give some color on the quality and attractiveness of the pipeline today and maybe some pricing dynamics?

I would say that particularly on the water side, pricing expectations never did decline from the seller's standpoint.

So I can't talk to a specific number because I don't have a specific number in my head right now, but the quality of the assets are still good.

I mean, there's a number of interesting and intriguing technologies as well as interesting opportunities in the non-US opportunities.

We did buy one small business from [Grundfos] actually in Brazil to -- that we bought a small business that basically was their pool equipment business in Brazil.

Brazil's the second largest country after the specific country after the US.

It's a nice-- nice, typical simple bolt-on, small but gives us the opportunity to introduce our eco select products into Brazil which is kind of nice.

Those are the kind of things we're looking at.

Between that and $50 million.

That was diminimus that way.

And secondly, maybe you can just give an update on your view on the stimulus benefits coming through.

How do you see that?

We're tracking some 300 projects right now.

We've won probably $7 million worth of orders.

We didn't make a meal of it on the conference call though because it's only $7 million and of the 300 projects we're tracking right now, maybe that would yield another 15 to $20 million.

Not anything that's really significant at this point.

We're still waiting for that big tranche of projects to get released.

Got it.

Thank you very much.

Good quarter.

Thank you.

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

Just the first question-- you talked about -- extensively about the water business in general, but can you make some comments on what your expectations are for the JV with GE this year and next.

I know we had really high expectations for good EPS accretion from that for 2010 originally, but I imagine that's more of a kind of a story that's going to take some time to play out at this point?

I think you said that well.

We had high expectations and we still have high expectations.

We have yet to reach them.

I'm very encouraged by how the team's working together.

I'm very encouraged by the wins they're achieving in terms of new channel coverage and new product introduction, but it's going to take, I think, another couple years for us to achieve the level that we expect it to achieve.

Okay.

Great.

Then just a couple small items here.

I might have missed this.

Do you expect further pension contributions later in 2010 or is this it?

For us, our total pension expanse is about $10 million overall for Pentair and that's versus $5 million for 2009.

It doubled but I mean it's only $5 million to us on a year-over-year basis.

Yes, then last, with the $24 million in restructuring in the quarter, how does that break down between cogs and SG&A.

In the quarter, about $6 million of costs of goods sold.

The rest is SG&A, primarily G&A For the full year it's about $7 million.

Our downsizing line goes through G&A.

The only thing that really goes through the cost of goods sold would be asset reduction or asset impairments.

Thanks, guys.

Thank you.

Stephanie, we're checking in to see how many people remain in the queue?

We have five questions in queue sir.

We'll try to quickly get through them.

Thank you, sir.

The next question comes from the line of Jeff Hammond with Keybanc Capital Market.

Just a follow-up on water.

I you look historically over the last four or five years maybe last year being the exception, your water business was up sequentially 4Q to 1Q.

You talked about the sequential decline in pool that you expect, although a little bit less.

What's the offset?

Do you typically see flow and filtration tick up?

Correct.

Filtration and flow.

We usually see a pickup, primarily residential flow starts to see stocking orders for Q2 into the residential channel.

We have a modest increase expected in that business but not a significant increase expected.

Okay.

Just housekeeping item corporate expense for '10?

I think you're looking at Q4 rates being the sustainable rate going forward.

Okay.

Thanks, guys.

Thank you.

Your next question comes from the line of Garik Shmois with Longbow Research

Thanks for taking my question.

Really just on the free cash flow conversion on the slides in the December call you were looking for about 125% of net income.

Now on the slides it's equal or exceeding that income.

Is there a material difference we should be reading into there?

Not material.

I'm in my tenth year and I've committed to convert over 100%.

So we went back to my standard ten years' promise.

Okay.

So there's nothing operationally that's changed?

No.

Thank you.

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

Good morning.

I'm not going to bog down this call.

It's been long enough.

I've got some questions about the underlying verticals within each of the global business units.

I could gladly handle that with Todd afterwards.

Okay.

Thanks, Scott.

Your next question comes from the line of Mark Zepf of Goldman Sachs.

Thank you, good morning.

If you look at your business across geographies and verticals where you raised guidance for 2010 versus the December call, which markets or verticals did you not raise your expectations for?

Commercial.

Commercial construction.

I think it's every bit as bad as we thought.

It's going to be every bit as bad as we thought it would be.

Western Europe as well.

Yes.

We haven't raised that.

Okay.

Thank you.

Thank you.

Your last question comes from Shannon O'Callaghan of Barclays capital.

Good morning, guys.

Good morning, Shannon.

On the technical products end market could you just give us a little more color.

You mentioned infrastructure, security defense, just give us a little more color there.

And, also, what about the industrial-- broader industrial piece of that?

What do you see in there?

Yes, for the year, let's start with your last question.

For the year, industrial sales were down 23% year-over-year.

But in the fourth quarter, they're only down five.

That gives you a sense, if you will, the strengthening of the industrial sales as the year went on.

The ones I mentioned that were actually up in the fourth quarter were infrastructure, security and defense.

Everything else was down.

But the most meaningful change from the third quarter to the fourth quarter was, in fact, in that industrial arena.

Where we saw stocking orders improve and distributions.

I'd say that was the source of the biggest part of the upside surprise in sales for the fourth quarter.

Now, in terms of outlook, I think infrastructure will continue.

I think in particular tech products is probably seeing more of a bounce from the stimulus spending than water at this point.

The use of enclosures is ubiquitous.

Whether they're upgrading the lighting in the parking lot or the electrical system or the air conditioning system in a hospital, you buy boxes.

So we think that that's directly benefiting what we call our infrastructure area as well as security and defense has remained a decent market for us.

Not big enough in my opinion.

There's more we can do there.

So those are the ones.

Security and defense, infrastructure and I think industrial are the ones we expect to see be pretty good.

Energy actually interestingly enough, energy was strong in the fourth quarter of 2008.

It was down over 20% in the fourth quarter of 2009.

I think as energy prices stabilize and come up, I think we'll see energy improve as the year goes.

But commercial construction as I mentioned continued to be weak.

The general electronics and communications for us probably up and down.

Okay.

Thanks, guys.

Nice job.

Thank you.

Do we have any more calls or questions in the queue?

That was a pretty efficient five questions.

There are no further questions at this time.

Okay.

Thank you all.

We'd like to thank everyone for participating.

Stephanie, if you could give the replay information that would be helpful.

Thank you for participating in today's Pentair conference call.

This call will be available for replay beginning at 12 PM Eastern time today through 11:59 PM Eastern time Friday, March 5.

2010 The conference ID number for the replay is 49887994.

Again, the conference ID number for the replay is 49887994.

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