濱特爾 (PNR) 2011 Q3 法說會逐字稿

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

At this time, I would like to welcome everyone to the Pentair third quarter, 2011 earnings conference call.

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

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

It is now my pleasure to turn the call over to Ms.

Sara Zawoyski to begin.

Please go ahead, ma'am.

Thank you and welcome to Pentair Q3 2011 earnings conference call.

We are glad you could join us.

I'm Sara Zawoyski, 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 Q3 2011 performance as well as our updated full-year outlook as outlined in this morning's release.

Before we begin, let me remind you that any statements made about the Company's anticipated financial results are forward-looking statements subject to future risks and uncertainties, such as the risks outlined in Pentair's 10-K as of December 31, 2010, and today's release.

Forward-looking statements included herein are made as of today and the Company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances.

Actual results could differ materially from anticipated results.

Today's webcast is accompanied by a presentation, which can be found in the Financial Information section of Pentair's website at www.Pentair.com.

We will reference these slides throughout our prepared remarks.

Any references to non-GAAP financials are reconciled in the appendix of the presentation.

I would also like to point out that all financial results and references to year-over-year numbers in today's call and presentation are on a continuing operations basis and comparative with the adjusted figures, unless otherwise noted or highlighted.

Third quarter 2011 adjustments include acquisition-related costs and restructuring charges, totaling.

$0.07 of EPS, again, as outlined the release this morning.

We will have time for Q&A with investors and analysts after our prepared remarks.

With that, I will hand the call over to Randy.

Let me begin with Q3 results as shown as slide 2 of the deck.

Pentair delivered a solid quarter with sales up 15%, adjusted-operating profits up 11%, and adjusted EPS of $0.58, up 5% from the prior year.

We posted good sales growth in both segments, with Water up 20% and Technical Products up 6%.

A good indication that innovation continues to pay off, fast-growth region sales remain strong, and CPT is off to a great start.

We continue to drive demand for our products with innovation focused on sustainability, energy efficiency, automation and safety, together with strong focus on quality and delivery.

US residential sales, for example, grew 8% in the quarter and 6% year-to-date; even without a notable end-market recovery.

In fast-growth regions, we continue to see good growth, with sales up 22% in the quarter before including CPT.

Latin America, India, and southeast Asia results stood out in the quarter.

Fast-growth regions are approaching 20% of our total sales in 2011, compared to less than 15% just 1 year ago.

And finally, CPT sales grew nearly 25% from their prior year in local currency.

With CPT now in the fold, we are excited about the many growth opportunities ahead.

Turning to margins, we said we would get pricing and we did, 2% in both Water and Technical Products.

Pricing combined with the relentless focus on productivity more than offset inflation in the quarter.

As we anticipated, CPT temporarily pressured overall margins, but did show sequential improvements on its own from Q2.

The below line items, taxes and interest, were in line with expectations.

On earnings, we delivered adjusted EPS at $0.58 at the high end of the guidance we provided in July.

And we now have the most difficult GIWW comparison behind us.

We enter Q4 with many things working for us and in our control including pricing, innovation, and increasing scale in fast-growth regions.

The end markets we serve, however, continue to be mixed.

Our updated full-year outlook range of $2.44 to $2.47 reflects both of these realities.

Simply put, we are raising the bottom end of the range reflecting our solid performance, and taking $0.03 off the top end of the range to reflect less of a market contribution from mainly Europe.

On free cash flow, we generated $70 million in the quarter, keeping us on track to deliver more than 100% conversion of net income for the full year.

Overall, we had a solid quarter.

And we're well-positioned to deliver greater than 20% earnings growth for 2011.

Now let's turn to slide 3 for review of our Water business.

Water revenues grew 20% in the quarter reflecting good growth across most of our businesses.

The CPT acquisition contributed 17 points of this growth adding roughly $90 million in sales in the quarter.

Volume was down 1% year-over-year reflecting the tough comparisons with the large GIWW project.

Recurring volume growth actually accelerated to 5% in the quarter from 4% in Q2, reflecting continued momentum in fast-growth regions, innovation, and distribution gains.

By global business unit or GBU, residential flow continues its strong performance with sales up 15% in the quarter, including 3 points of FX benefit.

US residential pump sales grew double digits in the quarter, helped by a strong flood season.

Excellent operating performance by the team enabled us to service customers' flood demand in an efficient and profitable way.

Pump sales in Europe moderated from first half, but still grew in the third quarter.

Our agricultural lines including irrigation pumps and crop-spray products, continue their double-digit growth trends, growing 18% in the quarter and showing some nice added traction in Brazil.

Residential filtration sales grew 5% in the quarter with FX contributing roughly 2 points.

We continue to transform this business into one that is more global, with more point-of-use filtration, and higher efficiency product offerings.

In the developed markets, our move toward more salt and energy efficient products and channel partner expansion, helped to partially offset channel and discretionary spend pressures in the US and Europe.

Fast-growth regions grew over 20% in this business.

India and Latin American sales virtually doubled in the quarter with more in-country, for-country innovation and increased distribution coverage.

To further support growth in India, we recently extended our partnership with Eureka Forbes, a leading consumer company in India with a 7,500 strong direct-sales force.

Strengthening our foothold in the reverse osmosis market in India, at the same time leveraging our goal of production capabilities.

Pool sales were up a robust 14% in the quarter as we continue to add dealers, innovate, and grow outside the US Q3 marked another good quarter of strong net dealer gains for pools, adding 75 in the quarter, bringing our net dealer gains for the year to over 300.

We continue to lead in innovation around energy efficiency and sustainability as evidenced by a strong Eco Select performance in the quarter, with sales up 35%.

And Eco Select now represents over 35% of pools total sales mix, compared to 32% last year.

Strong demand for our IntelliFlo variable speed pump platform was a big driver.

The compelling payback for the consumer, along with dealer training and incentives, helped extend the selling opportunity beyond traditional replacement and new pool sales.

With less than a 10% penetration for variable speeds, meaningful growth opportunity for Pentair IntelliFlo remains.

We also launched 7 new products in the quarter.

Including a new generation of LED lights and enhanced monitoring and control equipment that interface with consumer devices like the iPad.

Engineered flow sales decreased 32% in the quarter with $31 million in GIWW comparison driving 28% percentage points of that decline.

The remaining 4% decline reflect a continued softness in the large US municipal project sales, only partially offset by higher commercial and industrial sales.

Within industrial, demand remains strong for reciprocating and centrifugal pumps in the oil and gas sector, which for us, was up over 30% in the quarter.

US municipal remains sluggish based on funding concerns, but we believe that the US municipal market has reached bottom, and we are beginning to see some bid activity resume.

In filtration solutions, sales were up 8% ex-CPT led by food service and desalination and including and including 2 points of currency.

We continue to successfully expand distribution in our small project business in desalination, and remain encouraged by some of the larger project wins, including a $3 million benefit in the quarter from a project in the Middle East.

Food service share gains continued in the quarter, due in part to the continued global rollout with Starbucks.

The filtration solution opportunities are vast in markets like China, and extend beyond the large global food company.

And so we are focused on those smaller companies, too.

Continue to make good progress in energy, which is expected to be up 10% this year, as we apply our existing technology and systems know-how to a broader set of customer needs in the oil and gas market.

Recent wins include several natural gas liquids separation systems for gas and shale developments in Texas and North Dakota.

Let me provide an update on CPT.

With just a quarter in, we are off to a great start.

Even as Europe softened a bit, CPT sales grew an impressive 24% in the quarter in the local currency when compared to their pre-acquisition 2010 sales last year.

Growth was broad-based across both water and beverage.

Innovation remains robust.

And the installed systems base is growing, helping support compelling ongoing revenue going forward for replacement components and services.

As we move forward, we will move more deliberately, but swiftly pursue synergies and improve margins.

Globally, we begun sharing our CodeLine vessel and X-Flow membrane opportunities.

Cross-selling opportunities extends to pumps as well.

Recently, we won $1 million pump project in the Middle East, leveraging Pentair's customer relationships and sales teams with the CPT Nijhaus Flow technologies superiority.

On the cost side, sourcing opportunities are plenty.

Clean driven initiatives are just starting in structural cost takeouts have begun with the consolidation of some regional sales offices.

The right half of the page shows Q3 Water operating profits and margins.

Water operating margins were 11% in the quarter.

While this is a 40 basis point year-over-year decline, it reflects an improved base margin performance of roughly 12% or a 60 basis point expansion offset by a 100 basis point negative impact from the lower CPT margins.

Price realization was solid in the quarter, up 2% from prior year, helping to offset inflation.

We are making meaningful progress on Lean Enterprise globally in the water.

While the CPT margin impact was expected, we are not complacent on it.

As I just said, we expect to drive sequential improvement in CPT margins through a combination of volume leverage, lean driven efficiencies, as well as, synergistic cost takeout.

Overall, I'm pleased with our Water performance this quarter.

I'm excited about its future with CPT in the fold, and see leverage from the global investments we seeded over the last several years.

Now let's move to slide 4 for review of Technical Products.

Technical product sales were up 6%, and operating profits were up 14%.

The top line results reflect solid pricing and continued strength in most end markets.

Industrial, general electronics, and energy all posted double digit growth, a continuation from the strong first-half performance.

Notably, the oil and gas opportunity extends beyond water.

Energy, which is over 10% of Technical Product sales, was up 30% in the quarter, as we provide the control and automation [cabinets] intrinsic to the industry's capital spending.

Communications, which accounts for roughly 20% of technical product sales, was down 18% in the quarter.

Consistent with what we said in Q2, this largely reflects the lumpiness of some of the telecom programs, along with some underlying softness in the general electronics market.

Technical Products posted another quarter of nearly 30% growth in fast-growth regional sales, led by China and Latin America.

We continue to leverage our global manufacturing capabilities and strong brands to build our position in key-growth markets and expand distribution.

In China, for example, we expanded our distribution coverage, increasing our distribution comp by 20% in the quarter.

Highlighting our in-region, for-region focus, we launched several new cooling solutions in the quarter, designed specifically for the China market.

Latin American sales were up 34%, reflecting broad-based strength across key verticals including energy.

While there is clearly more work to be done, Technical Products has improved fast-growth region sales mix to 13% up from 11% a year ago.

And at the same time, improved overall margin by impressive 210 basis points year-to-date.

I'm pleased with Technical Products operating margin performance posting another quarter of 17% plus margins while investing and growth initiatives.

Now let's turn to slide 5.

For our standard work, details of free cash flow are on the left of the slide, and a summary of our debt levels are on the right.

We generated free cash flow with $70 million in the quarter, reflecting the solid Q3 performance.

Year to date, we generated $188 million of free cash flow and believe we are on track to deliver roughly $250 million for the year.

We returned approximately $20 million to share holders through dividends in the quarter, with an annual dividend rate of $0.80 per share.

In addition, we repurchased $12 million in shares under the $25 million share buyback authorization program.

We continue to show progress on ROIC, which is shown on the bottom right section of the slide.

For a return on invested capital of 8.8%, an increase of 60 basis points.

Our goal continues to be to drive ROIC into double digits as we outlined for you on Investor Day in September.

Now please turn to slide 6.

All year, our execution has been sound, and we enter Q4 strong, with year-to-date revenues up 14%, segment margin expansion of 110 basis points and 23% earnings growth.

Pentair continues to perform well.

Even if a few end markets have not.

On the top line we expect CPT to add roughly $100 million in sales in the quarter.

We expect those things that helped us in Q3 to continue, including sustained global industrial capital spending.

We do expect Technical Products growth rates to moderate, reflecting more difficult comparisons as well as more a challenging global electronics market.

In Water we expect no near-term improvements in US residential markets.

Still, we expect to grow mid-single digits in US residential markets as we continue to capitalize on the secular trends around energy efficiency and sustainability.

US municipal spending remains under pressure, negatively impacting our large-pump project business and as a result, engineer flow is expected to be down roughly 30% in Q4, reflecting another difficult GIWW lap and down more than 10% ex- GIWW.

Across both segments, we entered the back-half of the year with a mixed Europe view.

Today it's probably a bit more mixed, with some moderating growth rates in Germany and pockets of weakness in southern parts of Western Europe.

For reference, Western Europe is roughly 14% of our total sales, of which Germany is roughly half.

In fast-growth regions, sales were up over 45% year-to-date.

And we anticipate continued robust growth in key regions like China, Brazil, and India.

We are just beginning, we believe, to see the benefits of our investments in these markets, including CPT.

With higher volume in fast-growth regions comes scale to drive better operating leverage, helping to advance margins.

We are committed to driving growth investments, productivity initiatives, and continuous cost structure improvements.

In addition, we anticipate price alone to offset inflation in Q4, with productivity coming on top of that.

For CPT, we expect sequential improvements in margins.

We are rapidly moving forward in the application of Lean Enterprise and rolling out the PIMS tool kit across CPT now.

We are also developing plans for a more optimal combined go-to-market approach in key regions with the goal of selling more together.

We anticipate this will result in a charge in Q4 that is not reflected in the current guidance.

So despite all of the headlines, our view of opportunities remains relatively unchanged.

We believe we are well on track to deliver greater than 20% earnings growth on record sales of nearly $3.5 billion.

Before I turn it over to John to review the Q4 outlook in greater detail, I know that many of you are interested in hearing our outlook for 2012.

We are working on those plans now, and once finalized, we intend to review our outlook with you on December 14.

To be sure, our focus for next year continues to be growth.

We believe the progress in 2011 to advance our strategy in technology and innovation, fast-growth regions and PIMS positions as well as for sustainable profitability growth in 2012 and beyond.

As we said in September in our Analyst Day, what really enables and supports Pentair's future are the mega trends that are driving the world.

The biggest mega trend driving the world is the population and wealth growth of what I will call the new, new world.

And the demands this puts on food, energy and infrastructure.

We believe the 2 businesses that we are in, Water and Technical Products, both have great opportunities here around efficiency, sustainability, health, and safety.

These mega trends informal the way we're focusing our growth initiatives and investments in Pentair.

We continue to control our own destiny through focused execution of our consistent strategy, finding new ways to grow, advancing Lean Enterprise globally, and accelerating our productivity and repositioning efforts.

With that, I will hand it over to John.

Let me begin on slide 8, titled Q3 Pentair Performance Assessment.

We thought it would be helpful to share with you our growth in Q3, absent the GIWW project that existed in 2010, but not in 2011, and the CPT acquisition, which is driving a more favorable year-over-year growth comparison.

When excluding these 2 items, you can see our revenue growth was up 8% on a recurring organic basis.

While modestly below our year-to-date performance, this is in line with our estimates and positions as well to finish the year strong.

When we make the same adjustments for Water for Q3, you can see the recurring organic growth in Water was 9%, slightly above our year-to-date average, driven by mid-single digit growth in developed markets, including 2 points of realized price and 20-plus growth in fast-growth markets.

This means Technical Products growth moderated in Q3.

Largely reflecting more difficult comparisons, industrial growth remains strong, with some headwinds in global communications affecting growth.

Overall, our revenue for Q3 was about as expected and still strong compared to our year-to-date performance in longer-term growth targets.

When excluding the impact of GIWW and CPT year-over-year on earnings per share, you can see that for Q3, our year-over-year growth was 18%.

A solid performance led by revenue growth, a price cost relationship that was almost neutral, and moderating year-over-year FX translation benefits.

The Q3 performance sets us up nicely for solid finish in 2011.

Please turn to slide number 9, labeled, Q4 versus Q3 Business Expectations.

In light of the solid Q3 revenue and operating performance, as well as some day-to-day market uncertainty or volatility, we wanted to share with you how we are thinking about Q4 and what we have included in our guidance.

We are expecting recurring organic growth to moderate a bit from 8% percent in Q3 to around 7% in Q4.

This is driven by slightly less foreign exchange tailwind, about 1 point less, continued strong price realization, moderating Western Europe contribution, and a decline in communications revenue within Technical Products, but with other developed markets tracking sequentially in line and continued robust growth from fast-growth markets.

This expected revenue growth, along with the seasonally strong CPT performance, will contribute nicely to the bottom line, generating expected EPS growth of greater than 20% in Q4 2011.

Please turn to slide number 10.

We wanted to provide some richer color around our Q4 2011 EPS guidance.

We delivered $0.49 per share of EPS in Q4 of 2010 with about $0.02 of that performance coming from the GIWW project that was concluded in the fourth quarter of 2010, which means it is the last quarter in which we will have a year-over-year comparison with the project.

We are expecting net CPT contribution, operating income less interest less taxes, to be greater than a $0.05 in Q4 2011 as its peak performance quarter of the year generates solid margins.

Our base businesses are expected to generate between $0.07 and $0.09 per share, which is up about 14% to18% year-over-year on the expected 7 points of recurring organic growth I mentioned earlier.

Embedded in this performance is our expectation that we turn modestly positive on net pricing versus material inflation.

And would, therefore, expect that material productivity should yield even more upside in Q4 and future quarters as net price plus net productivity should be greater than material inflation.

I would like to emphasize in the last bullet that our CPT integration efforts remain on track, and we expect that we will see continued improvement in the operating margin of CPT as well as strong double-digit top line growth in both the beverage and Water businesses.

Please turn to slide number 11, titled Q4 '11 Pentair Forecast.

For Q4, we expect revenue to be between $880 million to $900 million.

Operating income is expected to be between $100 million to $104 million.

Operating margins should be around 11.5% and EPS should be between $0.59 to $0.62 on an adjusted basis, or up between 20% and 27% for the quarter.

We expect Water revenue to be up greater than 25%, inclusive of the CPT acquisition and the year-over-year GIWW comparison, and we expect mid-single digit growth in Technical Products.

Water margins are expected to be around 11.5%, and Technical Products margins should be delivered near 17%.

We expect our Q4 tax rate will be slightly less than 29%.

Which will include some modest adjustments to bring our full year run rate to around 30%, consistent with our go-forward rate assumptions heading into next year.

We are expecting a strong finish in the year in cash flow for about $60 million, which should get us to our target of $250 million for the year.

Please turn to my next slide, slide 12, Full Year 2011 Outlook.

For the full year 2011, we are expecting revenue of around $3.5 billion, consistent with our previous forecast, and EPS around $2.44 to $2.47 on an adjusted basis.

These results will have Water up 16% to 18% for the year, or up 7% to 9% on recurring organic basis, and Technical Products should achieve double-digit organic growth for the year.

Overall, we expect our growth margins to expand greater than 100 basis points, with price plus productivity offsetting inflation, and we are maintaining our operating expenses to the 20% targeted level.

Overall EPS is forecasted to be up 22% to 24% versus 2010, demonstrating both our growth and operating productivity leadership discipline.

As I mentioned earlier we are still expecting $250 million of cash flow for the strong finish to 2011.

Please turn to my last slide labeled Adjusted EPS Forecast.

Detailed on slide 13 is the quarterly breakout of reported to adjusted EPS performance.

Similar to last time we have divided these into 4 main categories -- deal costs, which were completed as of Q2; customer backlog, which will conclude in Q4; inventory step up, which was completed in Q3; and repositioning actions, which includes $0.02 restructuring in Q3 related to global staffing and manufacturing inductions following the acquisition of CPT.

The CPT acquisition now in the fold, we have looked at our go-to-market strategy and fast-growth in developed region, our GBU structure around key product platforms, as well as our manufacturing footprint and logistics optimization opportunity.

We expect to announce some further actions in Q4 that will strengthen our capabilities in all of these areas, as well as reduce our overall cost structure.

We will be prepared to detail those during the Q4 earnings call scheduled for late January.

I will now turn it back to Randy, who will give us a quick summary before we turn it over to you for questions.

2011 is shaping up to be a good year for Pentair, and meaningfully better than where we thought we would be at the beginning of the year.

As you recall, we began the year with EPS expectations in the range of $2.20 to $2.35 a share, compared to $2.00 a share in 2010.

Today we believe we are well on track to deliver EPS in the range of $2.44 to $2.47, up 22 % to 24% from prior year.

This performance reflects roughly $0.05 from CPT with the remaining $0.40 or so driven largely by strong execution.

We weren't counting on a market snap back in 2011 for several critical markets and we didn't get it.

Despite this, we grew sales and earnings better than we initially expected.

As we move into 2012, we have more scale in fast-growth regions, good price material momentum, and the added technology and application know-how of CPT, positioning us well, for continued success.

Thanks for your time and listening.

We will now turn it over to questions.

Operator?

(Operator Instructions)

Jeff Hammond, Keybank Capital Market.

Getting at tech products a little differently.

It seems like that the slowing is isolated to Europe and the electronics piece.

Can you talk about what you are seeing in your developed markets traditional electrical business?

Just the general electronics business still grew.

You know the [Schroff] type business still grew in the third quarter.

It was really the communication, the larger communication projects that saw that big decline I talked about.

That said, we do see softening in Europe, which is largely general electronics, and we see as we seen a moderating, if you will, on the growth rate on the industrial side.

We haven't seen a decline.

We just sort of seen it leveling out.

Which is what we are reflecting in the fourth quarter guidance.

What happens to communications in 4Q?

Communications is down again in 4Q.

Communications is down, general electronics is down a little bit.

The industrial side is flattening.

We aren't getting the double-digit growth; just single-digit growth.

That's sort of how the mix works.

Jeff, just to quantify it.

Communications for us is about 20% of the total technical products, and you can think of those being down mid or high teens as generally the growth decline.

That compares to what was growth in Q2.

We saw that slide throughout Q3, and we are not expecting that to get better.

As Randy mentioned, in the industrial side, we are still seeing double-digit growth in Q3, and we expect that to be more like mid-single digits growth in Q4.

And then just quick on RES flow, what do you think you benefited from the opportunistic weather, flooding activity?

I would quantify it somewhere between $7 million and $8 million, Jeff.

We have floods every year.

I think the difference this year, as Randy mentioned, we were much better prepared for it, the operating team was there to deliver it and made it more profitably this year.

We made a couple cents this year in the third quarter.

The floods last year were in the beginning of the year.

We didn't make any money because it was all expedited and just didn't turn a lot of productivity.

The business did a great job this year.

So it was probably worth a couple of cents, but Europe was probably weaker by a couple cents in the quarter is how I analyzed it.

James Lucas, Janney Capital Market.

John, at the end there you gave a little bit more color on the restructuring in the quarter and where you are looking to do some other activities.

As you are looking across the portfolio and putting in place these actions.

What kind of paybacks are driving the decision-making process?

I can put it in 2 buckets.

Obviously the staffing decisions are very quick paybacks and certainly less than a year.

And there is, obviously, opportunities as we look across the businesses both in the channels and how we serve our customers better.

And so we are really focused market back, customer back, how do we optimize Pentair's portfolio.

And I think that will be the majority of the restructuring changes we make, which are designed to make us more seamless in doing business.

On the plant side, 2-year paybacks are normal.

And we look at the benefit we are going to get on the logistics and supply chain, and do we make ourselves easier to do business with?

That's really how we are gearing our manufacturing analysis.

If I could add one thing.

And just sort of less about payback and more about philosophy.

We continue to need to move our center gravity to the new, new world, the fast regions.

We have made good progress, but we have so much more to do in terms of getting our best talent and our best capability to the face of the best opportunities.

That informs our thinking.

With regards to the CPT integration, one of the areas that you talked about is go-to-market strategies and you gave a good example of the one in the Middle East.

When you are looking at the timing, in terms of how quickly -- the being able to go to market.

Maybe expand a little bit more of what you are seeing in putting the sales opportunities together?

The one we talked about in the Middle East was a great example.

We have good coverage on the ground in a number of countries that CPT didn't in the Middle East and we had an opportunity.

CPT had the ready-technical solution.

And so the 2 groups, who are working very well together, by the way, the 2 groups that are large-pump area with Nyhouse and CPT, pulled that together and were able to secure that one and actually deliver it.

And it's pretty impressive.

The simpler ones are things like we make CodeLine vessels.

Any kind of high-tech membrane goes in a CodeLine vessel.

CPT wasn't buying those for their own system, so they are now.

As well as sharing lead opportunities.

So there are those.

And then the next step will be to get what I would call more integrative designs of, for instance, in our systems we had a set of standard systems.

We haven't fully incorporated the technical thinking we have from CPT.

I would say that there are the shared opportunities, like our contact selling their product -- their contact selling our products is one type.

And then there is the cross selling opportunities, and then the integrated designs.

Those are the 3 buckets.

And finally, just was hoping you could flesh out a little bit more on engineered flow.

Obviously, that market remains very mixed, to say the least.

Could you talk about what you are seeing on the quoting side, not just the quoting, but are these just people getting the quotes?

Are they potential shipments as well as -- One of the things in the past you talked about is it's been a North American muni-centric business.

As you look are there opportunities globally on the MUNI side for engineered flow?

That actually -- the Middle East one -- we have been investing to put people on the ground to sell larger more sophisticated pump systems.

And the example of the one in the Middle East was just that.

We didn't have a ready solution based in our US design; CPT did.

I think there will be more opportunities as we get our sales force better trained globally to sell those, if you will, the 50-cycle European base design.

Which is what Nyhouse has versus our very well-accepted designs in the US, which aren't as well-known and sometimes 60 cycles versus 50 cycles.

That's a big opportunity for us.

We do have to get to be more global in that business.

We suffer because we are primarily in the large municipal business.

We are in the break-and-fix world of the US municipalities.

We think we will make more progress as a result of CPT technology and our investment.

And then with regards to the quoting activity in the US --

Oh, quoting activity has stabilized to going up a little bit.

I'm always -- I'm looking forward to seeing orders going up.

And then I will be more encouraged.

Deane Dray, Citi Investment Research.

Just a follow-up on the flood contribution.

My guess is that $7 million to $8 million does not come high margins since it's going through big box; if you just comment on the profitability And expand on the point about you said that it was done efficiently and profitable.

What went right in being in a position to benefit from that?

Let me talk about the position and then I will let John talk more about the specifics on the numbers.

Basically, when we had the big floods in the beginning of 2010, we were not in the inventory position.

We were focused on being efficient on inventories, but we didn't have a lot of surge inventories.

But when those floods hit in the spring of 2010, they were pretty enormous.

Not necessarily where you were, but in the midsection of the country.

What happens is we end up expediting things out of Mexico.

What happens is we end up expediting things out of Mexico, expediting things out of China, expediting things -- We are running a lot of overtime.

We have a lot of negative variances against that product.

And because it is a thinner margin business, because it's largely sold to retail, we actually didn't make money doing that.

The residential flow business is a learning organization.

They said, if in fact, we are going to see more of these kind of larger events, which some would predict we will, and, in fact, we have since then; they've changed their profile.

They actually invested more in inventory.

They've focused through Lean Enterprise to be much more flexible in terms of their production.

And so we were ready for this one.

So we had the inventory.

We had the processes in place to ship efficiently and actually made money this time.

And served customers very, very well.

We got kudos from our channel partners there.

It's roughly about a 20% contribution.

So call it about $1.6 million, $1.5 million on the operating income side, which converts to roughly $0.015 to $0.02.

It's hard to exactly quantify because there will be returns and all kinds of netting costs.

Overall, I think it positions us well to secure the accounts and the way we respond means that we secure our position.

It gives us a better negotiating position for 2012 and beyond.

We are very proud of the team and the fact that they were able to do it.

How did the months play out in the quarter especially for water, July, August, September?

I think July and August are always hard reads.

September came in as we expected.

July and August was mixed, as Randy mentioned.

And we saw the lumpiness and the volatility across different product lines.

So I think overall the quarter was more of a usual quarter -- water.

On the technical product side, industrial remained strong throughout the quarter.

And the communications orders and sales started to slide throughout the quarter.

Which is why we are predicting lower revenue for Q4 in the communications side.

It will be helpful to hear from you what the thinking was when you reaffirmed guidance for the year but not necessarily for the quarter.

The quarter seemed to play out fine; the months played out uneventfully.

Just looking ahead when we see a development like that --

We did not want our analyst meeting to turn into a quarter session.

I did not want to do that.

We felt like we needed to do something to affirm the year just to get it out of the way.

We really wanted to talk about where we are going for the next 3 or 4 years.

Deane, it's just standard practice.

Full-year was required to give a launch point for where we were on the 4- to 5-year vision.

That's our standard practice to confirm the year.

At the time in Q3 there was nothing unusual to update on, which is standard procedure.

Maybe you can expand on the point where you commented that the MUNI demand may have reached bottom?

We have seen an increased level of activity in discussions and estimation bids and the like in the US.

That usually portends an uptick in activity.

Right now we are not counting on that helping us in the fourth quarter or even if I could reach out that far in the beginning of next year.

We have pretty good visibility on that business.

I think we sort of reached a new normal.

The water utilities are adjusting.

The most recent mix or the run rate mix for the MUNI business, if you separate the break-and-fix, which we recognize is the biggest component, but how much is break-and-fix versus project related sales?

We were probably around 85% to 90% break-and-fix at the moment.

And the rest is project on the North American side.

Clearly, if you look at the CPT side, as Randy mentioned, on a global, there are a lot more project focused and the global bids are still fairly strong.

The Non-US, I mean.

Christopher Glynn, Oppenheimer.

Wondering if you could elaborate what you are seeing in Europe, if there are pockets that had some jarring developments or just gradual softening pretty much?

I wouldn't say it's jarring.

It's no surprise to anybody that Southern Europe is weak, and that we get most of our sales out of Northern Europe, the Benelux countries and Germany.

And France is an important country for us as well.

I would say that the third quarter, August, is slow anyway.

And September was probably a little weaker than I would have liked to have seen coming back.

Residential market has been soft all year.

And it's more in the general electronics area where we are beginning to see some more softening.

That's an important market for us in Germany, in particular.

So I would say nothing precipitous; just a softening.

Just to provide more color to that, Chris, and probably are seeing this across your landscape, but Q1 for Europe was a very nice recovery, especially in Germany.

But to put it in perspective, if you look at volume growth absent foreign exchange contribution in Q2, volumes were up 3% to 5% so it wasn't like it was a substantial contribution.

You are still up to some small contribution in Q3.

But I would say, the drop-off in Europe happened between Q1 and Q2.

On the communications side, you viewing this as volatility in the spend that actually has favorable comparisons next year?

How you viewing what's going on there?

Communications for us is our lumpiest business, and technical products.

That's the place where we have the largest projects.

We have a one big project going end-of-life.

That has a bigger impact on us than just the general level.

However, when we do look at the general level of electronics, it's more challenging than the industrial side right now.

So we are cautious about that.

It's early to do our plans, but I don't think we are expecting it to be an upside next year.

I think we think that area throughout 2012 is a tough environment and we will plan for it accordingly.

Hamza Mazari, Credit Suisse.

Good morning, this is Chris Parkinson on behalf of Hamzah.

You mentioned that you gave us additional color in the cross initiatives with CPT.

Can you give us more color on the cost synergies and then how the ramp up -- how that should occur in the fourth quarter as well as into 2012?

If you recall, we weren't looking at significant cost synergies when we put the deal together.

As a matter of fact, the number we looked at was about $4 million.

What you are seeing, progressing forward, is a little of the seasonality of CPT and the leveraging of the amortization costs.

As we take a look and we spent more time at the business, there is certainly things that a $3.5 billion company can bring to a $300 million business that drives efficiency especially in the back office.

And that's where we are expecting to bring some good synergies to them across the year within 2012.

I would look at steady improvement.

Continuous improvement every quarter is the way I would look at it.

And we would take a look at any channel opportunities I mentioned.

Restructuring as opportunities to change the business model of CPT going forward.

Brian Drab, William Blair.

With respect to a fast-growth regions or what you are calling the new, new world.

How are the margins in those regions in the quarter relative to what you see in the developed world and what do you expect going forward?

Obviously, in the developed world we have capacity.

We are absolutely a lot higher, and I don't want to give you the exact numbers, but they are pretty high in the developed world.

We are north of 10% in the developing world now, which we think is showing and demonstrating what Randy mentioned on scale.

And I think we expect that to continually to improve.

We've now got localized product and localized manufacturing for the regions that we are serving.

And we are bringing to it lean and disciplines around cost management.

We expect the growth to continue.

As we mentioned at analyst day, you are actually hearing price discussions in China for the first time.

With inflation there, I think people are starting to realize that value products can still be on price a little bit.

I think most businesses are in these regions to make money, and we are one of those businesses, and we expect the margins to continually improve.

You had a lot of questions around Europe, and may [technical difficulties] I ask a slightly different way?

If you look at the water business and tech products business separately, specifically within Europe and look at how things progress, July, August, September, October.

How do you characterize each of those segments overall?

And given that we are almost through October now, maybe you can make a comment on that month as well.

I will give you some quick color on the numbers, and then I will have Randy make a comment.

Consistent with the theme that we brought to the investor day and consistent with the way we have been developing our operating projects, these are developed regions.

GDP and the amount of population growth is not robust in the regions we are talking about.

Europe is less than 20% of our total sales; we don't look at it as a significant or substantial growth environment.

It grew, ultimately for the year, greater than our expectation.

Q1 was a significant contribution and started to see low-single digit growth in Q2 and Q3.

That's in line with where we think it is going to be long-term.

And that's consistent with both water and technical products.

It's hard to be globally competitive at a euro at a rate that it's at today.

You are really relying on growth within those regions.

And while there is still growth in Germany, it's not of the growth that's equal to China, Brazil, or India.

And the growth from Germany is really their export growth, except we support particularly in the technical product side, the German export machine, and then that is really what helps.

Our Western Europe team also has 2 of our growth regions, which is eastern Europe and the Middle East.

We want to invest there, and when I talk about moving our center of gravity, it would be moving from western Europe to eastern Europe and the Middle East.

It's from the United States to Latin America.

It's from both of those regions to Asia.

Because our base case has been the same since 2009.

When we said that we expect Europe isn't going to grow much at all for the next 5 years market.

The US is going to grow like Europe used to, which means at half of the rate the US used to.

But the fast-growth markets are going to grow like they are doing now.

Because the wealth of that population demands it.

That's really what informs the way we think about Western Europe and the US right now.

It's not new thinking.

The quarters are noise around that.

I think it's important to separate the foreign exchange impact in Western Europe from the actual volume impact.

There was no contribution really from foreign exchange in Q1, and yet you had substantial volume.

When you look at Q2 volume is mid-single digits and there is a substantial foreign exchange contribution.

Now you look at volume and your foreign exchange contribution is tailing off and your volume is moderating slightly.

Ajay Kejriwal, FBR Capital Markets.

Just wanted to maybe first follow up on the US municipal discussion.

Would be curious to hear your thoughts on what driving that pickup and bid activity?

Because from everything that we are seeing and reading does not look like finances of municipalities are improving.

Any thoughts what's driving that?

Is that any break-fix that have not done and they are trying to catch up?

Or is it something else?

I call it a [dead-cap] bounce.

I think it's more of the -- it's more what you are talking about there.

We have different shares and different positions depending on the area.

I won't go into which areas.

We feel better the more activity there is in the municipalities where we have high share.

Because our share varies by region within the United States.

I would just say that the areas that we are particularly strong in have got some larger projects that they have to get going.

And so they will figure out how to pay for them.

When I say that the pick up in bidding activity, that doesn't portend 20% or 30% growth.

It just portends filling in some blanks.

I don't want anyone to over-read my comments on these.

They still have funding challenges.

But most water utilities do have some other sources of funds.

They can raise their rates.

And they can do some bonding.

Now if they parts of cities and the like -- There are some independents.

On pricing you are getting good pricing across water and technical products.

I guess as materials start to roll over, and you are seeing some potential demand issues and invest in Europe, maybe any sense on what -- you think you could be given pricing a little bit or could customers be asking for some roll backs?

I would say that competitive dynamics and the customer relationship dynamics haven't changed much.

Just to roll back history a little bit.

One of our beliefs is that ability to get prices is a good marker for being an attractive business.

And we are generally able to get prices in these 2 segments, water and technical products.

We actually constrain.

We decided not to raise prices back after -- when the recovery began.

We weren't confident enough to raise prices; we didn't want to risk losing any volume because we raised prices.

We rectified that and got back in -- I would say the 2% is more of our structural practice.

It's normal; we are returning to normal.

Materials help support that, but it's really structure that supported our ability to get price more than the materials.

If anything, we are still catching up on materials.

The materials inflation that we suffered without raising prices before.

I don't view them as closely coupled materials and prices.

And to Randy's point, the 2% is an average net, so there are certain areas where we are able to get more price, and there are areas where we get a lot less or much more competitive.

As you mentioned on a global project side, a lot of times it's not counted as price, but bid activity on the global projects is more competitive because of material pricing is coming down.

And then maybe one more from me on CPT.

My rough estimates suggest margins post-all of those intangibles in the high-single digits and you are getting a nice growth here.

Help us think about the trajectory from here as intangibles come down and as you continue to grow.

At what point CPT margins come to near segment average?

Remember, intangibles are flat per quarter because those are over a long period of time.

And what we are seeing is more contribution over that intangible.

Q4 will be a nice quarter for CPT, and be definitely high-single digits or double-digit growth reflecting where they can be.

It's a project business.

And so Q4 tends to be their strongest season.

Listen, I think we mentioned we are in high-single or mid- to high-single digit range in ROS ending 2011.

We expect 100-, 100.5- to 200-basis point expansion next year and continue to grow in base, and we expect to make steady progress.

That's kind of the way we think about it.

Intangibles are flat on a dollar term but as sales increase -- the percent of sales that go down.

Correct.

Terry Darling, Goldman Sachs.

I'm just trying to think through the end-market breakdown there for technical products on the organic growth side.

Organic growth up 3%, fast-growth up 29%.

So I guess developed markets are down very significantly?

Is that the right way to read it?

And then if you look at the individual segments there, only COMS is down with a lot of big growth numbers in the other segments.

What else is down from an end-market perspective to get you all buttoned up to only 3% for the segment?

I think it's an optical illusion on that chart, because we show our high verticals.

Fast growth definitely up nicely.

The only market that was down, and it was down strong, was communications, which was down mid-teens.

Everything else was up.

Industrial was up strong; commercial was up double-digits.

Infrastructure was modest up 2% to 3%.

General electronics was still up.

Medical is the market for us that we capture that tends well.

That's a very small market for us, less than 5%.

That was down.

Security defense, which is little bit bigger than medical.

It was down as well.

You said defense was down?

Yes, security and defense was down about 15%.

Only about 5% in technical products.

How big is general electronics as a percent of segment?

As one point you had a pie chart out there at 20%, but that might be stale.

It's about 10%.

So between COMs and general electronics about 30% of total.

Would you think those 2 combined are down next year?

Or do you think you got some new products or some easier comps in the back half of the year that don't make it that tough?

Flattish to up modestly.

We haven't done the plan yet.

But that's where you are thinking now.

On incremental margins, 40% here in the third quarter for tech products, And guidance implied pretty close to that as well.

You are getting that net price.

As you move into next year is there anything you would have us think about with regards to the sustainability of incrementals at that level?

I think it's early in the planning cycle, but that would be our expectation.

What you are seeing is a more normal environment in which our pricing cost are more predictable.

And therefore, the incremental margins are in that direction.

Electrical and industrial profitability is substantially higher than communications so you get mixed pick up, too.

As good as we feel about our technical products, business, and our margins, it's not top-of-class in the electrical world; there's still higher-class

I would say 40% incrementals at least this quarter and last quarter, but top-of-class across industrial.

The 40% is, but what I mean is 7%-plus.

There's other folks that are clocking 20.

And then over to the engineered flow side of the house, trying to put all of the different commentaries together there.

You are going to actually see organic on a year-over-year basis, ex-GIWW, go from down 4 in 3Q to down 10 in 4Q.

What is driving the sequential deceleration?

Is that a comps dynamic there?

We had a few projects that were going end-of-life in 2010.

We had some other big -- not huge projects, not worth calling out, but they are bigger, that were in the fourth quarter.

That's what was really -- John's point earlier, that it's 85% and 90% sort of break-and-fix.

The smaller lovely business because it flows and it's got good margins but fewer of the big ones.

What we have to do a better job of is helping everybody understand the global platform.

And clearly, when we look at engineered flow, we are look at predominantly US business.

It's reasonable to say that down mid-single digits, it might be 0 to down negative 5, might be the run rate.

When you flip it over to the global side and take a look at Nyhouse and CPT, we are up strong double-digits because of the global opportunities are still there.

I think combining the capabilities Randy mentioned in the go-to-market on these 2 businesses, combining the engineering talent and capability, globally we still expect the global pump platform to be up high-single digits next year.

Lastly, Randy, any update on the private label strategy with CPT at this point?

Not any real update, but to make it a broader conversation so everyone knows.

We believe that there are a lot of folks who we can supply membranes to, as I call it.

We call it our Intel Inside thinking.

We don't have to be -- we don't want to be systems providers everywhere; we want to be component suppliers to a lot of [vertical margin].

So we are pursuing those opportunities more aggressively than the former owners did because strategically they didn't want to preclude their exit options.

We certainly have a different strategic thought as far as how we think about CPT.

So we are still working on them; I'm still bullish on that idea.

But nothing new to announce yet.

Garik Shmois, Longbow Research.

I have a question on pool.

You have done a good job winning share and penetrating the dealer channel.

Wondering how many more opportunities you have there and how sustainable this is?

I think you saw Pool Corp.'s announcement and you see they are doing well and the market itself is doing well.

We think the demographic of a pool owner is different than that of a broad-based consumer group.

We think that there is opportunity to continue to improve the penetration rate.

The penetration rate is variable speed and efficiency is still in the low-double digits.

And there is a lot more opportunity for that platform as people change out the pumps and go more energy efficient.

And the automation platform and the ability to tie all of the energy efficiency into control environments is also higher penetration rate.

We think there is a long runway with our current product set.

And the more the acceptance rate is across the dealer channel -- as Randy mentioned, we added a lot more dealers to our platform.

There is also energy rebates on this.

We think the momentum is building.

We think there is a long runway left.

Can you talk about perhaps the margin opportunities as you introduce the new products into the dealer channel?

Well, margin dollars is a lot better.

The margin percentage isn't necessarily better.

These products are 2X to 3X higher in price; 2 or 3 times higher in price.

So the margin dollars are high.

But the technology content is also higher.

It's a little bit lower gross margin.

I still like it because I like the dollars.

Given the time, if we could get a quick check in terms of who is on the queue or how many numbers there are?

We have 5 questions left in the queue at this time.

We will go through them really quickly.

Everyone gets one.

Robert Barry, UBS.

Whenever you gave the outlook for 3Q sales, did you contemplate FX in the revenue growth expectation?

The way to put it in Q3 it was a little lighter in the FX contribution side.

The average euro to dollar, which is our primary currency, was a little lower than what was in the forecast, a little worse.

Would you be able to break out in that walk on water operating profit, the $22 million between price and productivity?

You can see price on the right-hand side.

On the left-hand side.

Fair enough.

Scott Graham, Jefferies.

Page 10 of your handout, where you talk about high-single digit organic of the base business defined as ex-CPT, ex-GIWW.

The previous page you say recurring organic growth of 7%.

I assume that is what you mean in that sales up high single digits.

That's correct.

But then the first bullet down below says slightly moderating year-over-year growth comparisons.

I do understand that includes GIWW, or at least I think it does.

But your third-quarter organic was 2.

I think we are arguing about it is 7% organic growth, high-single digits or mid to high.

But you are looking at the same numbers.

If you look at page 9, you will see that we mentioned recurring organic is approximately 7% --

Yes

-- for Q4.

Right

That 7% is what the sales of high-single digits refers to.

Right.

And that's is -- the 7 is ex-GIWW.

That's correct.

So when you say slightly moderating year-over-year, I'm not sure what that means.

We are talking from 8% to 7%.

So moderating versus Q3 is what we are referring to.

Okay.

Year-over-year rate in Q4 is slightly or a point less than the year-over-year rate from Q3 to Q3.

And both of those numbers are ex-GIWW?

That is correct.

David Rose, Wedbush Securities.

On the engineer flow side, can you discuss the strategy to grow the replacement side of the business in the margin component?

One of your larger competitors talks about the strength in the aftermarket sales as it relates to a recurring string of replacement business in the higher margin profile.

Is there something like that we can expect in 2012?

That is a function of 2 things.

One, if you are talking about 1 particular person who is in the rental business, that's a service business, that's a pretty attractive business, which has a different demand profile we are not in the rental business.

And in terms of the service side, yes, we service our install base.

There isn't a lot of cross-service of other people's install base.

When I talk about break-and-fix, the service component is in there.

We don't have any major initiative to try to attack other people's install base at this time.

And then China residential, what do you see on a go main in terms of same-store sales, trends for your products?

They are up strong.

Same-store sales are high-double digit.

Of the 7 new products that you mentioned in the third quarter, how much of that is incremental in terms of revenues for Q4 and/or 2012 or is that just filling in existing products?

Pool is always a little bit -- I don't know off the top of my head, but there is always a little cannibilization, but one of the reasons we continued to gain share in pool is the fact that we cannibalize, we innovate over ourselves before other people do.

So I don't really have that number off-hand.

But I think they did get 14% growth, and I think a lot of that sales momentum is because of that innovation.

I don't really know how to cut it.

Hard to quantify in the quarter.

The way we look at it longer term is we drive 1 to 2 points on innovation as incremental to what the base growth rate would be.

That's what we are striving for.

That's net of cannibilization that we are driving to.

I don't have the exact number for the quarter.

John Quealy, Canaccord.

It's Chip Moore for John.

You've talked about broadening your capabilities in the energy space and called out filtration wins in gas this quarter.

Can you talk about the bigger opportunities you see there and where you --

We have a really nice energy business in terms of doing fluid separations in refineries and chemical plants.

Well, fluid separation not to be trite, but fluid separation is fluid separation.

We put a lot more effort to get into the exploration and production side, and in particular, as it relates to shale developments and some of this new natural gas area.

So there is actually 2 or 3 different things.

We can be involved in helping with some of the filtration around the production fluids, as well as some of the energy fluids.

A lot of the ones I talked about were actually natur -- liquid gases, the propane and the butane removal from the natural gas stream.

That's right in our wheel house.

So we are investing to get people on the ground to sell that more in the industry.

That's what that's about.

Brian Konigsberg, Vertical Research.

You touched on this before with municipal funding and multiple sources.

I feel like we have gotten different answers to this from different suppliers.

The funding sources between user fees and tax dollars, I had always thought it was more user fee-type driven and should be a lot more stable than the fluctuations we have seen in tax collections.

It seems that more tax collections had a bigger impact this quarter than I would have thought.

Maybe you can give us a little more color on the dynamic there, and how we should be thinking about it going into 2012.

Should we be tracking more of the tax collections, or should we think that it should kind of steady and get more steady from here?

What I would say is large scale development, additional infrastructure developments, track more to taxes.

The ability to keep the system going, the break-and-fix side, goes more to the usage fees and the fees.

That's why that money will always be there.

It's whether they are going to do a major upgrade in the system, like they did in New York.

These are major upgrades in the supply system of New York.

That was a political will, and they put the money to bear on it.

And so it's those larger-scale projects that have really fallen off.

I don't track tax receipts.

I track quotation activity and try to put a reality factor on it, as to whether the budgetary or whether, they are concepts, or whether budgetary or whether they are actually funded.

Thanks all and you do the replay, please.

Thank you for participating in today's Pentair third-quarter 2011 earnings call.

This call will be available for replay beginning at 12 PM Eastern today through 11.59 PM on Wednesday November 30, 2011.

The conference ID number for the replay is 14752542.

Again, the conference ID Number 14752542.

The number to dial for the replay is 855-859-2056.

Or 404-537-3406.

Again, thank you for your participation.

You may disconnect.