濱特爾 (PNR) 2010 Q2 法說會逐字稿

Good morning.

My name is Tabitha and I will your conference operator today.

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

second quarter 2010 earnings conference call.

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

After the speakers' remarks there will be a question-and-answer session.(Operator Instructions).

Thank you .

Thanks, Tabitha that and welcome to Pentair's second quarter earnings release conference call.

We're glad you can join us.

I'm Sarah 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 second quarter results as well as update on you 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 risk laid out in 10-K as of December 31st, 2009 and Pentair's news releases.

Forward-looking statements included here in 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 for anticipated.

Today's webcast is accompanied by a presentation which can be found in the finance information section of Pentair's web site at www.pentair.com.

We will reference these slides throughout our prepared remarks and any references to non-GAAP finances are reconciled in the a pen transmission of this presentation.

I would also like to point out that all financial and references to year-over-year numbers in today's call and presence are on a continuing operations basis a under comparative with prior year adjusted figures unless otherwise posted or highlight I will now matched the call over to Randy who I guess second quarter 2010 so you.

perspective on our markets and performance and then John will provide additional information regarding second quarter performance and our updated 2010 and is our customer we will reserve time for questions and answers after our prepared re parks.

Randy?

Thanks, Sara, and thank you all for joining us today.

Before I begun our business discussion I would like to recognize Todd Gleason for his tremendous efforts in Investor Relation as many of you know he is leaving strategy and marketing to help support the global growth initiatives that we'll be discussing today on the call.

I had also take welcome you, Sara.

Sara about sore is on board as the new head of Investor Relations, she will be instrumental in continuing to build our Investor Relations program and is already at work pulling together a great investor and analyst day in for you September.

With that let's begin on slide two.

The head line for the second quarter he is that all the lights went green and in the quarter that enabled us to enter double digit revenue gains and robust earnings growth.

This is an outstanding performance given that we believe the broader end market recovery has not nearly reached full steam.

Sales grew 15% in the quarter with broad based growth across our business signatures and markets and geographies.

Operating profits rose 51% and margins expanded 300 basis point accelerated from Q1.

Earnings-per-share grew to $0.61 expected range and we generated strong reliable free cash flow of $150 million in the quarter yielding almost 30% increase in cash flow for the first half of 2010.

These results underscore the strength of our portfolio today and demonstrate our ability to grow and improve profitability as markets begin to recover.

So now let's get into the details begin willing request our top line performance.

Sales grew to $796 million, up 15% in the quarter as both water and technical products delivered double digit grow.

While key markets clearly are beginning to recover much of Pentair 's differentiated growth was driven by new product introductions, increased distribution and channel penetration, and global expansion.

Sales in our Water Group were up 13% healthy growth within residence led by pool and double digit growth in industrial and municipal.

Technical products delivered robust growth of 19% with growth across all key markets as well as geography.

In the quarter Pentair's margins at 12.6% expanded 300 basis prior year Q2.

Driven by sales volume and solid productivity more than incremental growth investments and inflation.

Relative to earnings growth I would like to highlight the Faradyne joint venture which contributed a million dollars this quarter as volume and profit continued to improve in the business.

As we move forward we plan to leverage their strong operational capabilities and expand our customer base to build scale and continue to lower costs.

In Q2 we delivered earnings per share of $0.61, which is up over 60% when compared to adjusted EPS in the second quarter of 2009.

Stronger performance from both water and technical products grove EPS $0.6 above the high end of our guidance.

We continue to generate strong free cash flow with $150 million in the quarter which did include a $10 million voluntary pension contribution.

This brings our year-to-date free cash flow to $128 million, up almost 30% versus the first half of 2009 and represents an approximate 130% net income conversion.

Our teams have done a nice job of managing working capital.

We believe we're on track to deliver greater than $225 million of free cash flow for the full year.

In sum, I'm very pleased with the business performance in the second quarter.

The results under score the strength of our diverse portfolio and our teams focused execution.

We believe our growth and productivity issues yielding the desired out comes and position us well for the ultimate market recovery that is still ahead of us.

Over the next several slides I will take you through Q2 business results.

Our outlook for the back of 2010 and finally an update on the growth investments to pore our long-term growth outlook.

Now let's turn to slide three and look deeper at water.

Water performed well in the quarter in total second quarter water sales grew 13% to $549 million.

This is at the high end of the sales range we provided in April.

Several key factors distributed to our strong sales.

First, our pool business continued to outperform the market as we add dealers, grow energy efficient products, and gain share.

Simply put, we had a great season in pool this year.

Second, we continued to make significant progress in expanding our International water presence, particularly in China and India.

And third, our municipal business begins to benefits from the large pump shipments related to Gulf Intercoastal Water Way project which will ramp up further in the secretary whatever.

Let's review in greater detail our five water global business centers.

Our Residential Flow GBU was up by 4% in the quarter led by share gains in the professional channel as the energy efficient tell drive line continues to perform well.

Strong sales of agricultural products and emerging market growth also distributed while retail sales actually contracted for the first quarter.

As we discussed last quarter, we benefit approximate sump pump demands in Q1 due an unusually early spring and extensive flooding.

Residential Filtration was up 7% in the quarter or up 9% including FX led by strong International sales and contrast to just the steady US market.

And our key high growth markets China the Middle East and India we are building a retail presence and expanding our distributor networks.

We have a number of exciting new growth platforms.

In China, for example we partnered with a large retail Gomay to expand distribution of our product line to over 300 stores by the in of the year.

We're 100 stores into the rollouts and has been greater market access for our products and building our brands awareness.

While we're still building a foundation in Latin America we reached over 200 channel Pentair water universities in Brazil and Mexico.

This have proved effected in other markets and we're excited about what this could mean for this fast growing region.

Our pool GBU was up 31% in the quarter as we continue to see firming demands and chair gains.

Our pool team did and outstanding job of satisfying strong sales with short lead times while improving quality and delivering.

Our sustainability line Eco Select continues to win the marketplace and benefits from expanded rebate programs.

Two states, Arizona, and Vermont two states on the opposite end of many thing both add new rebate pool utility rebate programs to 24.

We've also launched a number of new products including an iPad application for automation and control.

With a stronger and differentiated product portfolio penetrate the dealer channel and out pace the market.

While we still estimate current distributor inventory levels to be low our Q2 year-over-year growth rate did benefit were some prior year destocking that slowed in the back half of 2009.

Engineered Flow sales were up 14% as continued strong municipalities and nice growth in industrial, more than offset declines in the mechanics pump market.

The municipal business continues to have decent order activity and we're epooped to leverage the broader portfolio.

We remain on track with the large GIWW project having shipped two of the 11 large pumps in the second quarter for $7 million in sales.

In the third quarter we expect to make shipments that will generate approximately $20 million in sales with the balance in the fourth quarter and early 2011.

Filtration Solutions was up 8% led my record sales in Food Service and growth in global systems in China and India which helped offset timing delays in large desalination project.

Food Services continues to gain share and grow sales double digits we have a leading market position, a great brands with Everpure and a dedicated sales team that is fobbing under on increased distribution and customer wins and it is clearly working.

Now let's move to operating profits and margins.

Operating margins were 13.8% up 330 basis points year-over-year.

In fact our margins have not been this high since the same quarter two years ago where we had almost $45 million more in sales to achieve that same 13.8% margin.

Illustrating the power of our reduced cost structure.

Productivity is being realized and opportunities pursued to position our water business for higher margins on the volumes we'll see at more normalized market levels.

On the operating profit watch we see productivity more than offset inflation which is inclusive of employee benefits restatements.

So in total water performed very well, good sales growth and margin expansion putting us in a solid position as we enter the back half of the year.

Please turn to slide four for a deeper review of Technical Products.

Second quarter sales were up 20% in local currencies as the breadth and depth of our product portfolio and market reach enable is to outperform the market.

Growth in Technical Products was driven by a solid demands across each of our end markets.

Our largest end market industrial posted an impressive 28% sales gain in the quarter along with strong double digit growth in most other key markets.

As we see a return to more typical capital expenditures and maintenance practices.

Technical Products growth was also balanced a gross geographies.

Our developed market including the US and Western Europe all delivered sales growth in the mid-teens while fast growth marked robust level up over 35%.

With a impressive growth incline a of over 65%.

We're make I guess slips progress on our new growth platforms and initiatives adding new rail way business, doubling our distributor basin China and rolling out new global products like infusion and spec in addition we continue to make encouraging progress on our energy project we're identifying addition all market opportunities and channel partners developing a standardized platform and are adding another pilot location.

As a remind energy is a European based modular charging station that combines electric automobile recharging with parking meters.

This demonstrate sustainable infrastructure isn't just a water theme and we continue to believe this could be a meaningful policemen for us in the future.

Technical Products once again delivered strong operating margin improvement as growth and productivity initiatives more than offset inflation.

Similar to pool our team did a great job in ramping up production to meet strong demands and leverage channel partners to turn sales in the highly profitable growth.

Now please turn to slide five for a look at our balance sheet and cash flow metrics.

We provide detail of our free cash in the left of the slide and in are summary debt levels and maturity dates on the top right SEC of the slide.

Cash flow continues to be a key priority for our team.

We demonstrated disciplined management of working capital during the downturn and continue to show good progress as we grow this year.

As you can see, we have a comfortable debt level and no maturities for several years.

Our key ratios including ROIC as shown in the bottom right section of the slide we're making standard a progress in improving our ROIC which is up 7.6% at the end of Q2.

While clearly headed in the right direction at are and almost a point ahead evidence first quarter is not where we would like it to be our near term goal continues to be to drive return capital back ultimately to 15%.

Now please turn to slide six and I will wrap up my discussion of the quarter before we move to the back half of the year.

Our Q2 sales performance illustrates our growth capability as end marks begin to recover.

Solid execution in both water and Technical Products to fuel or began he will growth enable us to outperform in many of the key markets we serve.

Productivity is being realize both from last year's restructuring efforts and ongoing efforts within the factory and in the office.

And our learn culture is growing as we expand lean principles I don't understand the farewells of the factory to sales process excellence in Food Service, supply management in pool, and new product development in customer configuration and Technical Products to name just a you few examples.

We continue to convert earnings growth to cash at very healthy rates.

The strong cash for the year on a solid balanced this morning re in states orders share buy back program to offset dilution.

And our great Q2 and first half performance results inroadsing our full year EPS to $1.86 to $1.96.

Turning to slide number seven, let's discuss how our first half of market trends balance of the year.

Beginning with our assessment of the key end markets we serve.

As you know, we serve diverse markets within both water and Technical Products.

This diversity in businesses has been an essential tenet of our strategy.

Our view of these markets remains positive and large original and we believe stronger underlying demands in many markets will help offset pockets of slower growth end marks a few market.

In the emerging markets we continue to see robust growth rates particularly in the key markets of China, India, and Latin America.

We expect this growth to continue and we believe we will continue to outperform the markets as we enjoy the from our ongoing investments in innovation and sales capabilities and distribution expansion.

We have seen a stronger than expected industrial recovery across each of our developed markets, the US, Europe and the developed parts of Asia-Pacific.

Within Technical Products we expect current sales levels to continue into Q3 supported by good order activity in July and while industrial water is one of our smaller markets we expect double digit sales growth to continue in the back half of the year as we invest in further global penetration and enjoy continued industrial strength.

In global residential we expect modest growth going forward.

While the pace of recovering the US is slower than many anticipated or certainly desired , it has proven to be not far off from our original forecast.

Keep in mind single family housing starts are up year and pool permits are up low double digits in key market a bit higher than expected but on a very low base.

More importantly, however, is that we're seeing a return to normalized maintenance and replacement spending.

This is significant as we estimate that over 80% of our North America residential business sales are now replacements maintenance in contrast to new construction.

Residential is also a market wherein investor relations is value and our channel penetration issues are well on track.

Our residential businesses have global scale and strength with non-US geography accounting for over 40% of sales of our Residential Flow and Residential Filtration GBU in total.

So as the US residential market rebounds we believe we are in a great position for accelerated growth on a very solid base.

In Global municipal we continue to expect good growth with a large GIWW project in the back half while under lying growth tend trends continue to be spotty and lastly global commercial continues to be a bit of a mixed bag.

On the positive side we expect Food Service and water to maintain double digit sales growth and International markets to continue to be a growth opportunity.

On the negative side commercial construction remains under significant pressure in the US and we still anticipate double digit declines in this market.

So on balance this positive view of our key market supports our 10% growth for the full year and trends in most narcotics remain encouraging.

We believe wear better positioned to capture that market growth and more than that across all of these businesses.

So now let's turn to slide eight, we'll provide a snap shot of our global products, systems and platforms that are going to drive our future growth.

In Residential Flow our energy and space saving Teledyne water pump I mentioned earlier continues to perform well with ample dealer penetration opportunities still ahead.

Residential Filtration now has a suite of point of products designed specifically for emerging market needs and we have recently launched six new water softener systems.

Eco collect product line continues to grow as our energy efficiently and automation value proposition is very compelling.

The Eco friendly equipment now represents over 32% of our pool sales.

In engineered flow we're extending the standard configurations for fire pumps, launch willing newly fuels focus on improving the incoherence owe of our brands channel coverage globally.

Filtration solutions has launched a series of standard RO systems emerging markets and has a range of products ready to address the desalination market and in Technical Products we continue to grow product set with strong positions in energy and infrastructure vertical markets.

In sum, we're reaping the benefits for maintaining throughout economic downturn with more to come as we continue to invest in key technologies and solutions.

Before I turn it over to John on slide nine I'll wrap up by sharing a summary of growth investments to support our long term outlook.

We're committed to invest in product and market innovation and are building localized marketing product development and productions to unlock future growth opportunities for the full year are Pentair.

In product innovation we have prioritized energy efficient products, global systems and, global water reuse systems particularly and a number of new innovative technologies.

We continue to invest in market innovation.

First we're strengthening our go to market capabilities as we expand our distribution network, explore new channels and add sales resources and capabilities.

Second, we're continuing to expanding our geographic presence in key markets, especially China, India, Latin America and the Middle East.

We plan to discuss these priority investments and growth platforms in greater detail at our Investor and Analyst Day in September.

We believe our strategies to invest in product and market innovation in concert with the Pentair management system or PIM will deliver strong sustainable profit growth as our second quarter results are beginning to demonstrate to you.

2010 is a critical step along the way to achieving our long-term growth and our ROIC targets and we're well on our way.

I will now hands it over to John who will walk you through our performance and outlook for Q3 and the full year.

Thanks, Randy.

These turn to slide number ten.

I would like to start with a review of our revenue and cost structure model which we laid out for you last year and discussed at the end of Q1.

We'll also review this model as it pertains to our long term goal during our analyst day presentation on the of September to getting ground under and could be you believe with the performance within this format hold ourselves accountable for delivering the expected organic growth that we deliver.

I will start with a review of first performance where we delivered 13% year-over-year revenue growth.

As Randy mentioned, willing marks were mixed.

With robust developing market growth and strong industrial growth helping to offset commercial declines in a slight a weaker North America residential recovery than we anticipated.

I think our performance against these markets is indicative of our growing confidence in the channel, geography and new product initiatives on which we are focused.

As we look out to the second half our full year expectation we expect the current performance level to remain without the Q2 seasonality carryover helping us to get to our revenue view around $2.95 billion up over 10% year-over-year.

Currently factored into this 2010 outlook is around $15 million of year-over-year foreign exchange headwind or less than a point of impact year-over-year based on current exchange rates.

All in we expect to achieve double digit organic sales growth for 2010.

Also included in this revenue outlook is a Gulf Intercoastal Water Way project which is on track to deliver approximately $45 million of revenue in 2010 with almost all of it in the third and fourth quarters in line with expectations.

As we look at our materials percent of sales impact of price material inflation we have achieved over $35 million of are year-to-date material productivity and price performance.

We end the first half at and arm of 40.2% with a second quarter rate of 48.5% which we expect to continue in the back half.

While material inflation is running generally in line with expectations we have taken a more targeted approach to pricing, particularly residence based on overall market conditions.

The expected net pricing for the full year in the 30 to 50 basis point range.

Also keep in mind that we are likely to experience year-over-year negative material performance as a sequential run rate of 40.5% will struggle against Q3 and Q4 2009 realization against normally low commodity steel copper, nickel and plastic.

Overall for the year we expect to deliver between 25 to $30 million of net performance which at the meet our 2010 goal and even at the low end give us a nice launching point heading into 2011.

I'll finish up page ten with a quick look at hourly labor as a percent of sales.

For the first half we delivered 10% which was in line with expectations as productivity worked to offset the reinstated employee costs as well as some incremental ramp up of plant costs specific to Q2.

We would expect results in the back half to improve as notes from Mexico and China facilities which nearly doubled in production levels for 2009 continued to improve their performance weekly and monthly basis.

Overall for the year we are on track to achieve a $20 million of improvement as the productivity from plants moves and continued lead productivity initiatives headwind from the reinstatement of provide employ cost by defined contribution pension benefits these costs are unique negative headwinds to 2010 and our ability to continue to driver productivity beyond facility closures and restructuring is encouraging for realizing further net productivity in 2011 and beyond.

Turning to page11 continuing to look at our cost model for gross margins we delivered 30.7% for the first half of 2010 and 31.2% for the Q2.

Reflecting higher volume and continued productivity action.

Our full year expectations have not changed.

We expect to realize the $50 million of carryover productivity plus $30 million of new manufacturing productivity netted by investment for a total of $80 million of year-over-year productivity.

This more than offsets the forecast in $30 million material inflation and $15 million of normal wage inflation and employee reinstatement costs yielding $35 million of net manufacturing productivity or 210 basis points of gross margin expansion.

This is in addition to the benefit of nearly $100 million from revenue growth.

Operating expenses came in slightly than our Q2 forecast and for the first whatever our expenses from 19.8% of sales.

Included in our full year forecast of 20.5% or approximately $35 million over restatement costs versus 2009.

These impact the 401K employee stock ownership sales bonuses, stock option expenses and management incentive plans.

We expect the employee benefit reinstatement costs included in both cost of sales and operating expenses to approximate $50 million.

I want to call these out because while they are a headwind for 2010 we expect these costs to remain relatively constant for 2011 meaning that the productivity realized this year is partly offset by these costs.

However, we believe the productivity we realized in 2011 should fall through to operating income and provide tremendous leverage towards achieving our ROIC goals.

Also included in this 20.5% full year operating expense target is nearly $20 million of new product and market innovation costs.

As Randy mentioned we are accelerating our commitment to fuel growth incline a India, Brazil, and Mexico.

The investment in localized marketing, engineering and sales challenge in these regions combined about efforts to around water use, energy efficiency, and saltless water softeners are just a few of the efforts included in these expenses.

I'm convinced that by investing now we are helping to create sustainable growth for the future.

Overall we think our current rather forecast combined with our cost sets us up nicely to deliver operating margins this year of greater than 11% to keep us on track for a goal of 15% operating margins by 2014.

Please turn to page 12 labeled Q3 2010 Pentair forecast.

For Q3 2010 we are forecasting revenue for Pentair to increase or organically by greater than 10% to around $735 million to this would represent around and 8% to 10% increase in water greater than a 15% increase in Technical Products.

We expect operating income will expand about 15% to 20% versus Q3 2009 to around $85 million to $90 million which would be greater than 11% operating margins for the full year are Pentair.

Operating margins in water are expect today expand to greater than 12%, the tech any scall products margin should knock on the door of 16% again.

We expect that the Q3 2010 tax rate will be between 33% and 34% which is nearly one to two points worse than 2009 driven by a higher contents of US income, interest expense will be around $9 million and the share count will be around a hundred million shares.

Overall we expect to grow EPS by approximately 20% to somewhere between $0.49 and $0.52 per share.

Included in these results is about $20 million of revenue related to the Gulf Intercoastal Water Way project.

This overall forecast assumes that current sales levels adjusted for seasonality will continue.

We expect cash flow for Q3 to again exceed our target of 125% of net income.

Please turn to slide number 13.

In the first half of 2010 we experienced broad based market growth across most segments, vertical markets, and geography.

This was driven by a better Pentair product portfolio and provides solid evidence of the significant efforts we are exerting for the full year enhance the reliability and sustain ability of growth along with converting that growth to predictable income and accelerated ROIC performance.

Behind us we expect our growth action and are vertically focused B driving in continues tee around searching our customers better and finding adjacent seats for further growth acceleration.

We are also acutely aware that the first half of 2010 much easier comparison than the back half of 2010.

We lead to continue to drive improvements in all controllable costs and execute road plans to maintain our growth trajectory.

We think we have taken a balanced view of the market as we guidance for the year.

Simply put we raised the mid point of our previous guidance range from $1.75 to $1.90 which was $0.08 higher than the midpoint of our guide I had ratings of $0.52 to $0.55.

This implies that you are o overall view of the second half is relatively I think changed from our original guidance.

Net material cost and foreign exchange are headwind in the back half we expect stronger sales and tech any programmed fast growth regions to help mitigate these factors.

Also the lack of a large seasonal uptake in North American residential for Q2 reflected a down particular Q2 levels in the Q3 and Q4.

Our large product in engineer flow is still on track and our order and shipment rate of Technical Products continue to be solids the lower year dollar hurts translation impact but gives our European businesses a better opportunity to compete on a global scale with a slightly weaker currency.

So as we review the lower right of page 13 we think we are poised achieve $1.86 to $1.96 per share of EPS up nearly 27% to 33% compared to adjusted EPS 2009 performance.

Please turn to our last slide.

Slide number 14.

Overall we are very pleased with our first half of 2010.

We delivered 13% revenue growth in the first half and expect that the year will be up around 10% versus 2009.

For the first half our net material performance was on track and we are managing cost well as we ramp up volume versus 2009.

Our manufacturing conversion performance in the first half is evident that our factory closers and migration to lower cost facilities are paying off.

With these closures now behind us we're getting back to our lean routes and four wall accountability.

Overall we expect to have lower labor and fixed cost for percentage of sales compared to 2008 operating levels and this means that we continue to drive sales growth with accelerated our earning power.

Our operating expenses are inline with expectations and although up year-over-year it's for the right reasons of fueling growth and rewarding our employees for their tremendous efforts to deliver on our productivity and restructuring actions while making meaningful progress in our top line growth initiatives.

All positioning us well for sustainable profitable long-term growth.

Sales for 2010 are expected to be around $2.95 billion, we expect operate willing income to be near $330 million at the mid point of our guidance range which will yield slightly higher than 11% and we are on track for cash flow in excess of $225 million for the 2010.

After tax ROIC or the year is forecasted slightly above 8%.

Clearly we are not at our long term target of 15% but we are showing nice progress and up nearly 200 basis point year-over-year.

This has proved to us that organic growth combined with productivity are the right ingredients to deliver accelerated returns to our shareholders.

As we turn to slide 15 again we want to remind everyone that we will be hosting our Annual Analyst day on September 8th and 9th in Minneapolis and we hope to see you there.

So we will now turn it over for questions.

Tabitha?

(Operator Instructions).

Line of James Lucas of Janney Montgomery Scott.

James Lucas: Thanks, good morning.

Good morning, Jim.

So, Randy, on the key pool markets is Vermont one of those?

I just couldn't resist.

It's like the yin and the yang.

It's interesting to call you out Faradyne.

We haven't heard much about that in awhile.

Clearly things are improved there.

We talked about some other opportunities that you may be looking at.

Could you give us an update on how -- what to think about that longer term in terms of what those opportunities could be.

Yes.

The reason I called it out is it's a manufacturing joint -- it's a manufacturing joint venture as you know with ITT.

And it's gone very well and certainly we were -- it was a defenses measure that we both took that has really gone well.

It's taken us a while to get the cost down and that's why I called it out.

We actually made money.

You know, we're aiming to make money.

We were aiming to say high quality products which we did from the get go.

We have extended rang and we made money and we've got the capacity now which will let us actually serve others.

We've been approached to serve others.

And -- besides ITT and ourselves and we sort of put that off end with and we're just saying we're confident enough to consider that now.

So that's -- what that reference was about.

And your other JV could you give us an update on how things are going there?

Yes.

The -- Pentair Residential Filtration, which is as a minority ownership position by GE of 20%.

It's really going well strategically and made nice progress on the top line and as you saw not as much as we would like because the US is really flat, but, you know, assumption we have a whole suite of point of views which was not and area of strength for us.

Point of views product that is aimed at the emerging market and that's what we're using at Go may and China that's what we're introducing incline a that's what we'll tends and we have already introduced it in the Middle East.

So we're getting it shall we're get willing all the strategic benefit, with aren't getting some very promising financial benefit and I -- think that business is really heading in the right direction.

Okay.

That's helpful.

And then, finally, I just wanted to you know obvious a lot of heavy have been done and starting to see the fruits of those labors.

So cash flow very good story.

Could you give us an update on around capital allocation strategies?

Sure.

Well, as we -- the board approved just this week reinstating our stock buy back program which is aimed at managing dilution and that was the -- one thing we did, if you will, in our capital allocation during the downturn we still raised dividends as you know.

So we did discontinued that.

Warren first toll is to second is to manage our debt under are at an appropriate level.

Third is to support our capital e he spend towers which has largely been in the development fast growth markets and then acquisition and we're looking -- we're back and actively looking at acquisition and then if we have anything left after that we'll -- look at more stock buy back.

And as you start to think about acquisitions (inaudible) more of tuck in types, filling in the portfolio technology, could you give us a little bit of background how you think about acquisition.

Well, our focus on acquisitions is it remains consistent with -- the strategy we had before the that is we're looking at things that will raise our confidence owe and capability or our geographic reach.

We as you see we built a factory in Poland, we in the a factory in India we dealt with the capacity incline a so just to get capacity we don't see any reason to do that.

So capabilities.

The kind of capabilities we're talking about there is systems or technology based.

Any water or tech -- well systems and water particularly we talked about how we launched the standard -- some standard RO systems, we've got the water reuse system that we're -- we have a number of installations in China right now.

So things and systems the technology would be around controls, energy efficiency, infiltration or cooling on the technical product side and then the -- geographic focus is consistent with where we want to go with that in Latin America, Middle East, China and India.

Okay.

Mostly build ons but we -- you know, we would consider anything within our strategic fit.

Appreciate it.

Thank you.

Yes.

Thanks, Jim.

Your next question comes from the line of with credit Suisse.

Hamzah Mazari: Thank you.

Could you just comment on how cautious you are being in your guidance.

How much is your visibility ups reads versus a couple of months ago and could you talk about sequential trends in your business lines as you exit the quarter and what you're seeing early in 2003?

Yes.

I mean as we look we feel -- we feel very good about our execution.

We feel very good about the things we control.

You know, when we set about to adjust ourselves in the financial crisis and downside we took a very strategic approach to.

Not changing our structural costs and we maintained our investments in our innovation and market expansion and we believe that's why we believe able to a half 15% real organic growth this quarter which I think is (inaudible).

The -- as we look going forward though we aren't not through the grave yard.

We're hearing all of the other concerns other people are saying so we're basically -- we based our outlook on the thing start of planning considerations we had when we built the year, which was the second half was one not two, some very solid business that we knew would be there like GIWW and we thought a recovering residential market.

As we look at it new residential in the US isn't recovering as much but the fast growth markets are better for us so it's -- I would say it's kind of the way we saw it.

So I wouldn't say -- I don't use the word caution.

I would say that we're realistic in how we thought about the second half and I want to continue to execute and show our -- show our stuff on the field.

Not in the game plan.

Fair enough.

And then looking at your operating margins how much of the 330 was mixed and you know given your operating margin pull through of 40% which is showing up in your results when does that normalize?

How should we think about how much volume you need to see before we think of that number coming down?

I'll lay for that one.

A couple -- quite frankly didn't have very much impact on the quarter at all.

You know, it was basically 10 basis points and then 10 basis points more to the negative.

If we take a look at the converse going forward I wanted to highlight in my comments that the employee reinstatement costs which was productivity last year because we set most of the targets for the entire Pentair population to prior year levels so we didn't pay out a lot of the site bonuses or sales bonuses as a 2009 market particular down.

Now we're now paying those out at full levels in 2010 and that's the right thing to do for the employees, but that's a unique approximately $45 million to $50 million headwind this year.

That's not a headwind next rear, right?

So as we grow we would expect to see the conversion be strong he were in 2011 and beyond than it is here in 2010 with mitigating some of the continue the investments we're making in sales and market innovation, and some of the low cost country plant moves.

While we would like to keep that level up it's going to be hard to continually find $20 million of new investments every year and as Randy mentioned in his point I think one of the reasons we're continuing to take share and grow is we continue to invest through the downturn and so we feel committed to the geographic expansion and the energy reuse platforms we have and as our business is better priority to us we'll continue to funds them.

Fair enough.

Thank you.

Thank you.

Your next question comes from Michael Cox of Piper Jaffray.

Michael Cox: Nice quarter, guys.

Thank you.

I wanted to I guess follow up on the last question on the revenue guidance just piecing out what the fourth quarter would look would look like would be a pretty sharp deceleration.

I just wonder what sort of fabling stores lead to that guidance for Q4 what's embedded in the Q4 foundation.

Yes I think if you kind of take a look at the way we're seeing the market and Randy mentioned this in miss comment you know Q2 was clearly our peak quarter and it's really because we do have seasonality around the residential side in Q2.

That helps our residential expose the about is.

Wave got industrial continuing.

I mean industrial strength has been there both in developed and developing areas and we see that continuing throughout the year.

We see commercial stabilizing although it's down it's not getting worse.

We are seeing some slowing in municipal at least on basis and our fast growth markets are accelerating so I would he can line that what Q4 represents is that there's sun certainty in the forecast.

We butt that uncertainty in the Q4 and it's really around what will cash availability do to any distributors we have both in their ability to take on inventory as they like to do at the end of the year or will they be positions their inventory differently.

We won't know any more on that Q3 and we'll certainly update full year guidance as we deliver on Q4.

Okay.

So I guess would it be fair to say if the general tone of business seasonal factors continues that -- number could proof to be conservative?

Is that a fair assessment?

Have you embedded some deterioration in market trends into that fourth quarter number?

Yes, that's where our uncertainty is in Q4.

And yes, I would agree with you.

Okay.

Okay.

And then in terms of the indicated less than a point to revenue.

What sort of EPS impact is embedded in your guidance for the back half?

Is there any.

Yes.

For the back half you are looking at maybe a couple pennies.

Okay.

Of negative impact that we have included in that 186 to 196.

Okay.

Thanks and then on Europe in particular was I would say surprisingly strong for the quarter.

What are your thoughts on how that business is shaping up as you look at the back half of the year at the debt issues and broader concerns started to impact your out look for Europe invest in product particular?

Yeah.

Actually Europe -- really did well and you can see the.

The -- and Mike Schrock and I spent a good bit of time over there this quarter to get a sense of whether we were about to see something slowdown or not and I tell you based on where we do business and the kind of business we do I don't think so.

You know our market or strongest in Germany and France and the countries and Italy.

We don't have that much exposure in Spain, we don't have any to speak of in Greece.

Eastern Europe has been slow and it's picking up slowly.

So I would tell you that -- in terms of the mix of countries we're in No.

1 and No.

2 take a look at Technical Products for instance I mentioned energy we really have a very forward leading team will so it's a very creative thing to -- bring their solutions to -- the full set of -- both telecom, data come and industrial companies in Europe.

I feel -- I'm very encourage end what I saw and also pump and pumps and infiltration so I -- -- think that we're not going to see any major -- we have seen by the way in the Middle East our largest business in water in the Middle East is commerce construction related so we have seen the Middle East actually go down like a point or two and that's in the of course, but we also have a lot of good growth initiatives on the residential side and on what I would call the large side we add distribution quite promising so that's -- -- I was very pleased with our trip to Europe.

Thanks a lot, guys.

Thank you.

Your next question comes from the line of Christopher Glynn from OppenheimerChristopher Glynn: Thanks.

Good morning.

Hey, Chris.

Just following up on tech products there you -- I guess it's tough to tell what's share or global growth versus cyclical but how would you compare your market reach now to compared to prior peak as maybe if you could bracket a proportion there.

I think it's really improved in the Middle East -- excuse me-- in Europe and in Asia.

I think it's improved somewhat in Latin America.

I think our reach is about the same in -- the US.

I think -- I think the fact is that because Hoffman in the US is ubiquitous basically any infrastructure spending we also got a new lift for energy.

Energy has slowed down at the end of last year and energy capital spending has picked up again and the fact is that any -- time you touch a factory you -- issue are doing something you control which means you are doing something with the housing controls and -- what we really saw in 2009 was everybody from homeowners to CEOs basically went into a tuck position and cut everything in soft spending and we have seen a return to normalized maintenance level.

Whether that's someone's pool or whether that's someone's factory and so I believe confidence is well positioned for -- that.

So I think probably more gain than that and I'll provide it to you next week.

(inaudible).

I am sure.

And on the tech products operating margin I know you had some inflation but it came in at similar levels to when you had a similar sales range in '06 '07 given that you've had some significant production consolidation can you speak to that pair tee point?

If yes.

I would say clearly we struggled a little bit in Q2 with that debt son some contamination.

We got caught moving a lot of the product into the factories at the same time we were handling 20% volume growth meant so our efficiency in our fabling trees especially where we were moving to wasn't there throughout the quarter.

They're all over and I expect that to improve significantly Q3 and Q4.

Yes.

The good news is we have got more volume than we were planning.

The less good news is the fact that we did not Technical Products (inaudible).

Well said.

And on the.

Chris, could I add.

If you look at water I mentioned in the environment you can see in the third quarter -- in the second quarter the water structural cost change.

I mentioned that we hits the same margins.

We had those 35% drop through we would have had a 15.5% margin in water for the quarter.

So I mean that really demonstration of that (inaudible).

Right.

Yes.

That was noted.

And the -- you had a point of price in tech products in the quarter.

Was that half realization of recent actions or what are we doing there going forward?

Meaning I think we tend to do our is price increases on and annualized basis and those are reflective of what we did based upon our view of the prices when we entered into January.

So we would expect those pricing actions to continue for the year and then we'll re-evaluate extra million dollars pea prices are at the end of the year and adjust accordingly for 2011.

Okay.

So the second quarter did reflect the full run rate of actions?

Yeah, it does.

Okay.

Great.

Last one.

Any -- this might be a prelude to September but any on what sort of sales levels would support the 15% ROIC target?

For the whole company?

Yes.

Well, one thing that John and I had done with the second quarter was we -- when we set -- when we set our goal on the restructuring we said one of our markers was going to be $3.4 million of sales which is what we had in 2008 we made $3 per share and actually the second quarter when we not he would the second quarter actual we're within $0.5 of 3 bucks a share.

So -- that would be what.

Yes.

(inaudible).

$0.80 incremental.

Earns power and consistent with what we shared with you guys and you got the numbers I laid out for you and put in the $ 2.4 billion dollars and you could come up with the same number.

Got it.

Okay.

Thanks very much.

Thank you.

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

Garik Shmois: Hi.

Thank you.

I was wondering if you could talk a little bit more about what you're seeing in the channel if threes' any -- you can see maybe an increase in inventory further downstream or anywhere inventories might be light.

Yes.

I think under one of the things if you take just talk about geographies if you talk a look at Residential Flow and filtration in the US we believe there was and inventory built in the second quarter that both of those businesses in the US were flattish and that's because distributors were thus(inaudible) so we don't believe that over built inventory.

No.

I agree.

I think what we saw is we had a little bit of inventory in Q1 and businesses and they actual de stocked in Q2 as the -- as ran December point.

Slobs Randy engine it was more de-stocking last year in the pool business than it was actual inventory for this year.

So we feel like and inventory levels as modest and certainly in balance to what the marks that our customers are seeing.

Okay.

And just expand on what you are seeing in pools.

You talked a little bit about specifically how it the dig trends were throughout the quarter.

Obviously very strong and your expectations in the third quarter.

I mean we still expect double digit growth in pool for Q3.

You know it's going to be down significantly from the 30% but 30% would be their season but I think the 10% is still indicative of all the things that handy light height product the new products, the new dealers, new distributors that we have turned on clearly we feel good that we're taking share.

Okay.

Great.

Thank you very much.

Your next question comes in the line of Brian (inaudible) with Vertical Research Partners.

Michael: Good morning, gentlemen.

Hey, Brian.

Just coming back to touch on the guidance discussion it's a little puzzling.

I mean if I look at the second half I back out to incremental margin of less than 20%.

I understand you've got a lot of these employee benefit costs coming back on you're investing in R&D and other items.

) But maybe give us a cents of what you're assuming on incrementals on volume purely just on volume.

Yes.

I mean one of the big difference it's that GIWW will play a bigger Gulf Intercoastal Water Way project and it's very attractive we've got a lot of pass through business that lowers the margin.

We have 11 caterpillar (inaudible) share so that's -- a lot of dollars with no margin and so I mean that's one of the impacts on the lower drop through.

Bigger part of our growth (inaudible).

Yes and then the other issue is as I mentioned in my comments material.

I think we had normally low last year and we will have negative material productivity in Q3 and Q4.

We're trying to mitigate that the best we could with pricing action but it's kind of hard to price off of an inflationary environment that's not historically high.

So we will have a little bit of headwind in those two issues and as we mentioned earlier we put in Q4 and we'll update that as we get further throughout the year but right now we're reading the same head lines you are as Randy mention and that's it we've got to look out 90 days and we can see visibility incompetent Q3.

It's harder to look out 180 days.

Yes.

On that if I could just reflect earlier why question we only have two businesses that really are long enough cycle for us to have a window on the fourth quarter and that is -- that's our large municipal pump business and our Code Line (inaudible).

Most of our other businesses is book shipment (inaudible) so hence the caution for the fourth quarter.

Got it.

And simply on the balance sheet I see your days inventory spiked a little bit can you tell us what trend is going on there?

No.

Mean I think we're managing the overall days and we have normal (inaudible) what you're seeing in the days is that's probably the GI WW project.

I mean we're taking on inventory for that project and we're shipping the majority of those pumps in Q3.

Got it.

Thank you very much.

Thank you.

Your next question comes from the line of Terry Darling of Goldman Sachs.

Terry Darling: Thanks.

Just a couple follow-ups.

You know, first on the -- on the second half material inflation can you tell us what the assumption is for just the water business time a trying to understand that increment amount Q3 than Q4 a little bet better.

Yes.

We'll talk about material (inaudible).

The biggest sequential margin the fact that the pool business is -- is a big part of our business in Q2 and then their margin falls off when the volume falls off so still good margins but the not what it was.

Right.

As Randy mentioned, our $20 million shipment to GIWW in Q3 carry about a 75% material content.

You know, the project overall is north of 20% for us on the operating margin line but each quarter is going to have a little bit more varied contents depending on what we're shipping through.

Think about that $12 million negative inflation number in the Q2 bridge on margins that you provide.

Mm-hmm.

Can you help us with what that offers is in the second half?

Sure we haven't got -- you know, if you really think about it we've got topper is roughly holding flat and that's a component going into more of the motor side.

Carbon steel relatively flat between Q1 and Q2 meant where we're seeing large incease is stainless steel which is would affect our products business and we're seeing a fairly large sizeable gain in residence.

You know, those are kind of embedded in our commodity levels.

It's really, though, as I mentioned that we don't see it getting substantially worse.

We see the year owe year impact between Q3 and four being worse.

So as we head out of Q2 headed into Q3 and Q4 it's relatively flat.

It's the year-over-year impact that's demonstrating the challenge.

Okay.

And then the implied increase in the increments for water in the fourth quarter is that just request just secure' get GIWW or is there something else there?

Correct.

The content is not as many ship that crew as Randy said we are shipping the December through in the 2009.

Okay and organic de sell assumed in Q3 municipal is that just pool or are will some seasonality or just coming off some restock going on in some of the other engineered industrial commercial markets?

I missed -- are you talking about the.

So you know.

12.5% organic in Q2 going to eight to ten in guide and you talked about pool desell.

That's really pool.

31% of in pool in the second quarter and still good double digit growth in pool.

We're not super intent we aren't going to get 31% again.

By the way, I hope they do it but we're not counting on it.

Okay.

And then just lastly on water Randy you mentioned in your opening remarks some delays on some big desalination projects can you talk about what's driving that?

Is that just the.

Well, you know, with the financial crisis a lot of the big Middle Eastern projects got slowed down and we would have hoped to have been shipping some of those in the first half here.

Now they have started back up again and shipment in the second half look better and that's our CodeLine -- our CodeLine we make in India.

We just by the way are starting up CodeLine live (inaudible) in our -- in China.

So we're -- expecting some good results from that as well.

But it was largely just delays of those projects because of the financial crisis and they're behind us now but they would be shipping.

Okay and then just one quickly on tech products.

I thought in your opening remarks you said that you thought that tech products could be similar in 3Q to 2Q.

Maybe I misheard that and that's the issue, but the guidance is implying kind of organic is up very slightly and a comment that revenues be flat sequentially would be much greater than that.

Maybe that's the plus next to the 15% or maybe just clarify the range of there.

The run rate year-over-year.

I mean so the run rate.

Okay.

We think industrial is going to remain strong, we think Europe will remain as Europe is always a little weaker third quarter.

That's the expectation.

This is second quarter.

But in terms of -- I object in terms of its underlying drivers and stuff.

That's what I was really referring to was that sales -- driver will be about the same.

Got it thanks.

Europe is a little slow.

A little smaller and we still are expecting double digit growth in the third quarter.

15% plus.

We think the plus (inaudible).

Okay.

Good.

Thanks so much.

How many other questions are there.

You have two in the queue.

Okay.

Let's do those.

Okay your next line from Scott Graham of Landenburg.

Good morning.

Hi Scott.

Yes.

I just have two questions a lot of them have been answered.

If you look at the residential business during the quarter, was that fairly steady organic growth because obvious soil of the economic suggested that this was a slowdown within the quarter.

Did you see that?

Yes.

Yes.

Yes I mean earlier in the quarter was -- I wouldn't say it fell but it certainly was softer at the end of the quarter than it was (inaudible).

It was.

Okay.

And then you talked about.

By the way, in the US.

Right.

Sure.

Not in Europe, not in -- not in Asia.

Has that changed in the first part of July?

We will say that the June -- the June quarter accelerate is what's continuing into July but the strong March April May shipments we're not at those levels that's where you're mentioning the softening.

Okay.

Fair.

You mentioned in one of the slides in the decline a, India, Latin America.

I was wondering with some of the things that you're doing where are you expect to see that -- those markets as a% of your total sales by year end?

By year end -- year-to-date to they're --.

Yes.

These are still relatively small.

You know, China for us I mean overall is about 3% to 4% of our total shims.

We have a 2014 goal to have that be $500 billion by itself.

We're making progress but if you think about it we grew 15% in the quarter and our US business grew 15%.

So although we're making significant progress and fast growth, the developed markets of Europe and the United States both grew the same amount of rate at Pentair so it's hard to make progress that way.

So that's.

Yes.

Okay.

Last question is this.

This is sort of more you know 30, 40,000-foot.

You know you've got this parking meter business development initiative going on in technical.

I'm just wondering that's a business at that looks like you guys are look at it a lot differently today than you did me or four years ago in terms of where you want to take it.

Could you talk about other initiatives that kind of might be in the hopper there?

Well, yes.

There's always been a lot more questions about water but the Technical Products strategy has been for some time actually defined customers protecting their critical electronic equipment and as we got closer to OEMs we got into a lot more of that.

I mentioned the rail way.

You know, there is a lot more rail investments going on so we're more intimate with the rail onlies both the car builds and the systems builders so that we actually can design our to meet theirself.

One I talked about some years ago was our water shed line of products which we designed for the food and beverage industries specifically to help them with -- the cleanliness requirements and the sanitation requirements.

So I wouldn't say it's a new element of our strategy.

I would say it's one that we're finding more purchase in the soil with and in particular with -- the change in infrastructure around two key trends.

One is towards electric vehicles which I think are going to play some part of (inaudible) and then secondly just in terms of the distributed computing capability that we're increasingly relying on.

Those are the two big trippeds that our teams are focus on how to play.

Very good.

Thank you.

All right.

Thank you.

All right.

Was that the last one?

Last question?

Is it.

You have one more.

Okay.

(inaudible) David Rose from Wedbush Morgan Securties.

Good morning.

Morning.

Three quick questions.

The first is on SG&A affidavits on the if you could please help me understand the differs at levels of Q1 versus Q2 as a% of sales and what expectations are going forward into Q3 and four and then secondly as de sell to get a better idea how much do you expect it from CodeLine to come into Q4 in 2011 and then, lastly, if you can briefly touch upon projects or initiatives for water re saws that would be great.

Thank you.

I'll hit the first one and lets Randy take the others.

I mean we as a dollar basis selling and marketing in R&D grew sequentially from Q1 to Q2, but the percentage of sales because that's our peak sales is lower but if you think about it from a full year basis we're expecting to add about 20 to 30 basis point in R&D in the forecast and we're looking at about 20 to 30 basis points in the selling market.

Will that come at fourth quarter or third quarter?

It's coming through Q1, Q2, Q3 and Q4 but the percentages of sales on those dollars will vary depending on what the sales levels are.

All right.

The water reuse we -- did a demonstration project here at the Minnesota Twins stadium and actually it was a project that got them the highest LEED certification of any sports facility in the world.

And we did it not just -- not because the Twins wanted a cheap LEED certification but as a demonstration of what's possible.

Particularly for the hospitality industry.

You know, because of our Food Service position we have a very strong position in hospitality and so we're the right partner for them to look to manage their water differently.

So as -- new -- as new resorts, new hotels get -- used we -- or get built we believe that water reuse onsite is going to be a growing -- a growing business opportunity.

We had a very recent win for example on this very subject not just in rainwater reuse like the stadium but actually full water reuse project with the Ritz Carleton hotels in China for one of their new projects that's coming.

We are quite encouraged about that under and not only at that commercial end we also make what I call advanced treatment units everyone calls them that we have something called the Eco product end which is a -- product that you can use at your home and do nitrogen reduction at the highest level required by any state and use much smaller leach fields ultimately in some states you don't need a leach field at all you can do surface water discharge and we believe that has -- that's something we make here in the US and sell here in the US.

We're actually now working on making those to sell in India.

You may not know this but 70% of the buildings in India are not hooked up to a sewage treatment plant.

They have to treat their water onsite.

The technology being used to do that can be improved.

We have the technology to improve it.

We believe, when you think about the megatrends in water since most population growth and most industrial development is having in places you don't have water, using the water you have more effectively and using it more often and reusing it isn't just nice thing to do but is going to be required.

And in terms of CodeLine we expect about $30 million sales in this second half which is up (inaudible).

And how much is that from (inaudible).

They're pretty much all large de sell.

These are eight inch 30-foot long tubes sold in -- there's a few that you sell on small application but they're largely I mean basically they go to large deceleration.

I mean are we talking about something over -- I mean are there particular projects that you have highlighted for Q4 that could move into 2011 as far as benchmarking the risk?

Yes if you think about the first half it was pretty much all after March distribution probably used for smaller jobs or replacements happen and the second half that same distribution level that's assumed recalled but big projects that we today (inaudible).

Okay.

Great.

Thank you very much.

Thank you.

All right.

Thank you all.

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