濱特爾 (PNR) 2012 Q3 法說會逐字稿

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

At this time, I would like to welcome everyone to the Pentair Q3 2012 earnings conference call.

(Operator Instructions).

I would now like to turn the call over to our host, Mr. Jim Lucas, Vice President, Investor Relations.

Sir, you may go ahead.

Thanks, Tasha, and welcome to Pentair's third-quarter 2012 earnings conference call.

We're glad you could join us.

I am Jim Lucas, Vice President 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 third-quarter 2012 performance, as well as some color on the early days of our merger with Tyco's Flow Control business that closed on September 28, 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 for the year ended December 31, 2011, 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 investors section of Pentair's website.

We will reference these slides throughout our prepared remarks.

All references today will be on an adjusted basis unless otherwise indicated, for which the non-GAAP financials are reconciled in the appendix of the presentation.

We will be sure to reserve time for questions and answers after our prepared remarks.

I will now turn the call over to Randy.

Thanks, Jim and good morning everyone.

Before we discuss our third-quarter results, I want to extend our thoughts and prayers to those who have been affected by the devastation from Hurricane Sandy.

We know that a large portion of those participating in the call have been directly impacted by Sandy and we hope for a quick recovery for each of you and everyone else affected.

On slide three, let me begin the Pentair discussion by sharing some thoughts following the successful closing at the end of the third quarter of our merger with Tyco's Flow Control business.

Four weeks ago, we successfully completed the first step in an exciting new journey for Pentair.

By combining Pentair and Tyco's Flow Control businesses, we have strengthened our leadership positions in the markets we serve.

And by all accounts, day one of the new Pentair was a great success with all businesses and functions reporting smooth transitions.

Consistent with our initial discussions around the deal, we've begun $400 million in share repurchases and have authorization for the other $800 million in place already.

We also announced an increase in our first-quarter 2013 dividend, and as a result, 2013 will mark our 37th consecutive year of increasing our dividend.

We continue to spend a significant amount of time visiting employees around the world.

We have visited over 30 of the Flow Control sites and seen approximately 25% of our new employees.

I'm extremely impressed with the tremendous talent we have in our now 30,000-person strong organization.

Together, we have even more capabilities to go after expanded growth opportunities and aggressively pursue efficiencies.

The integration activities which led to the success of day one were exciting, but they were just the beginning.

The real work has just started.

Let me share with you how we're moving forward.

First, it's imperative that our eight global business units drive strong business performance to achieve their operating and financial targets.

Additionally, each of these business units is pursuing growth and cost synergies that align with the vision and expectations inherent in our merger.

Each business unit is developing robust project funnels to ensure we realize strong synergy capture, not only over the next 100 days, but through 2013, 2014, and 2015.

The Integration and Standardization Team, or IST for short, will continue to drive Pentair-wide program management of synergy capture and the rollout of our standardization initiative.

The IST was designed and built to be an ongoing organization, not just a team to get us through day one.

The IST will drive critical standardization programs, which involve taking the best practices from both organizations to create one enterprise-wide standard.

One example is the Pentair Integrated Management System, and, of course, rolling out the lean enterprise element of PIMS throughout the entire organization.

Nearly 10% of the Flow Control employees have taken part in lean enterprise training already.

In addition, functions in finance, HR, legal, compliance, marketing, and communications will be implementing standardization programs as well.

With the eight business units working in close connection with the IST, we are gaining even more confidence in the synergy targets we communicated over six months ago when the transaction was first announced.

And by driving PIMS and functional standardization through our organization, we will have the operating processes to ensure consistent and strong performance.

While we're in the early stages of looking at revenue synergies, we have seen some examples that we're very excited about.

Whether it is leveraging Flow Control's strong relationships and energy or Pentair's reach into the global food and beverage channel, we look forward to sharing more about these opportunities as our teams come together and identify how to leverage the new combined Company for growth.

We have a tremendous Company with extremely talented people.

I've seen in my many visits around the Company that our Win Right culture is being exhibited every day.

With the successful day one behind us, we now have a significant work to do to ensure we meet and exceed the commitments we've made to our employees, our customers, and our shareholders.

Now let's turn to slide four to discuss legacy Pentair's third-quarter results.

The third quarter marks the last quarter for legacy Pentair as the transaction closed on the final day of the quarter.

The key point that I want to make about our core business is that the third quarter once again demonstrated our strong operating performance, as seen by a 7% improvement in adjusted operating income and adjusted operating margin expansion of 110 basis points to 12.4%, driven by strong price and productivity.

Sales declined 3% on a reported basis, owing to FX translation headwinds, as volume and price grew 1% in the quarter.

We delivered adjusted EPS of $0.64, up 10% from $0.58 and at the top of our range before including $0.01 benefit from a favorable tax rate.

Unfavorable foreign currency translation continues to mask our strong pricing and we continue to see volume gains in many verticals such as industrial, agriculture, pool, and energy.

There are headwinds that remain, including in telecom, Western Europe, and China, but overall fast-growth region sales were up low double digits in local currencies as the Middle East, Latin America, and India are seeing strength, showing our investments continue to pay off in these regions.

Despite constrained volume gains due to the market headwinds, we continue to see strong productivity.

Further, our pricing is gaining momentum and lower material inflation is allowing those pricing actions to flow more quickly to the bottom line.

We delivered $62 million in free cash flow during the third quarter, bringing the year-to-date total to $203 million and putting us well on our way to convert more than 100% of net income to free cash flow once again, something we've done consistently over the last 12 years.

All in, we delivered another quarter of solid operating performance with well-executed productivity initiatives, good price realization, and continued growth investments.

This great execution comes on top of the momentous effort expended in finalizing this transformational merger, while delivering on our legacy business targets.

Now let's turn to slide five for a review of our Water & Fluid Solutions segment performance.

Water & Fluid Solutions sales declined 1% on a reported basis, increasing 2% when excluding the negative impact of FX.

Despite flat volume, we delivered two points of price in the quarter, consistent with what we have seen in the past few quarters.

Excluding FX, Aquatic Systems delivered 7% sales growth, Treatment/Process grew 6%, and Flow Technologies declined modestly, owing to tough year-over-year comparisons.

Let me begin with Aquatic Systems where once again we saw another great performance.

Sales were up 7% in the quarter, reflecting continued share gains and good pricing.

Aquatic Systems ended their pool season with inventories in good shape and continued pricing momentum.

Building off good secular trends around sustainability, efficiency, and automation, we continue to see strong gains in sales of our IntelliFlo pumps, up 7% in the quarter and nearly 30% year to date, as well as in Heat Pumps, which grew 41% in the quarter and are up a comparable amount year to date.

The gains are not just coming on the Residential side of Pool as we saw almost 20% growth in our Commercial business in the quarter.

We continue to expand coverage and penetration, growing our dealer base over 10% year to date.

Within Treatment/Process, Water Purification sales grew 6% year over year in local currency, comparable to the growth rate experienced last quarter.

Fast-growth region sales continue to grow at double-digit rates with India up 60% on expanded coverage and added new products.

In contrast, sales in the US were up only modestly and Europe was relatively flat, largely in line with our expectations and continuing the trend we saw in the first half of the year.

We discussed the pending launch of our industry-changing innovation, Hybrid DI, which combines the benefits of reverse osmosis filtration with those of a water softener, using capacitive electrodes to remove hardness and total dissolved solids from water without employing salt.

The Hybrid DI is shipping for field trials, and there continues to be growing interest in this new technology, particularly with commercial customers.

We continue to see signs of strength among our filtration and purification systems businesses, while our water treatment valves and tanks business is showing signs of bouncing off the bottom in North America and stabilizing in western Europe.

Within North America, we're seeing share gains due to improved delivery performance and more feet on the street.

Last quarter, we discussed the USA builder Alpha Test as part of our Rapid Growth Process.

This program targets a select group of home builders that are growing in areas such as Denver, Houston, San Antonio, and Tampa.

We've seen great success early on, with 75% close rates versus 30% with our traditional programs.

As we look forward, we expect to triple the size of this initiative by the end of next year.

Water Purification continues to make progress towards our next proof of concept as this business has driven PIMS throughout the entire GBU.

And despite the ongoing challenges resulting from a depressed residential market these past six years, the team has continued to improve operationally, driving gains in delivery and productivity that resulted in dramatic improvement in operating margins and ROIC, and equally important, supported investments in innovation and global expansion.

In the other part of Treatment/Process, which is Process Technologies, that business grew topline 5% on an organic basis as continued gains in energy were partially offset by delayed projects in both water and beverage.

We are now past the one-year anniversary of our acquisition of CPT and we continue to focus on the integration and standardization efforts within Process Technologies.

The Beverage business, while experiencing some project delays during the quarter, is setting up nicely to end the year with several expected shipments.

As we've brought together Pentair and Flow Control, we've already experienced an early win in the food and beverage space.

A major beverage company has combined its purchase of hygienic valves from Pentair and food process valves from our new valves and control business.

While this is just one example, it illustrates the breadth of the combined product portfolio and strength of our brands.

Finally, let me discuss our Flow Technologies business, where sales declined 3% in local currencies during the quarter.

While our Residential pump business had a tough comp in the third quarter with the absence of any major weather-related activities, we continue to see strength in our Agriculture business and growth in our Municipal and Industrial backlogs.

Agriculture saw its growth moderate to high single digits as there was some impact to buying patterns in September from the drought experienced in much of the country over the summer.

The outlook for our Agriculture business remains strong entering next year.

We highlighted last quarter that our Municipal business experienced an uptick in orders and backlog, and the third quarter saw that trend continue.

We've seen our Municipal backlog grow for the last five quarters, and our year-to-date backlog is up 14% and at levels last seen in 2010.

The growth of our Municipal backlog is signaling some increase in sales in this vertical starting in the fourth quarter and into the first half of 2013.

Based on what we've seen, it does not appear that the Municipal market itself has bottomed, but we're seeing signs of activity in the traditional break-and-fix category and it appears that our investments in customer service the past couple of years may be contributing to our order success.

The right half of the page shows second-quarter Water & Fluid operating profits and margins.

Water & Fluid adjusted operating margins increased 60 basis points to 11.6% in the quarter.

Successful pricing actions and strong productivity helped to offset inflation and foreign exchange headwinds, and we continue to make progress at CPT as the adoption of PIMS has contributed to improvements in quality, delivery, and cost.

In summary, the Water & Fluid Solutions segment has experienced a number of headwinds in 2012, but we have continued making investment and we're seeing improvements in key markets, such as North American Residential, which bodes well for 2013.

Now let's move to slide six for a review of Technical Solutions.

Technical Solutions, by the way, is the new name of the segment, so we've gone to that now.

This is still the Technical Products business you know.

Technical Solutions remains a bifurcated story with the topline once again showing a modest decline, down 2.5% in local currencies, while robust price and productivity contributed to operating margins exceeding 20% for the second consecutive quarter.

While the Datacomm and Telecom market experienced over 20% sales declines each, industrial continues to grow, albeit at a moderating pace.

General electronics showed gains in the quarter, and other markets, such as security and defense and medical, are also experiencing some growth.

Enclosures and Cabinets, which represents nearly 60% of Technical Solutions, grew sales 2% in the quarter as strong pricing helped mitigate small volume declines.

As mentioned previously, growth in Industrial continues to be a beacon of light for the topline in Technical Solutions, as the group continues to identify opportunities to expand in the catalog channels where new distributors continue to be added.

We continue to make good progress in building out our stainless steel water shed enclosures, particularly within the Food and Beverage vertical.

For example, a major food producer has spec'd in these enclosures into all equipment in washdown areas in an effort to reduce the risk of contamination.

Cooling, approximately 10% of Technical Solutions' sales, was flat this quarter following mid single-digit growth last quarter.

The sequential decrease in the growth rate was due to the slower communications markets.

While Cooling is a smaller piece of Technical Solutions today, we continue to see attractive long-term growth characteristics for this business and are investing accordingly as we tailor product design to meet local needs, localized production, and trained fast-growth region sales teams to expand globally.

In North America, we continue to build out our MRO strategy and have launched a couple of Alpha Tests as part of our Rapid-Growth Process to test ideas there.

Systems and Solutions, approximately 20% of Technical Solutions sales, has seen the sharpest declines this year, and that trend continued in the third quarter as a result of the greater than 20% declines experienced in the Datacomm and Telecom markets.

While we expect the topline to remain challenged for Technical Solutions exiting 2012, we continue to invest in new products and global expansion, while driving price and productivity, to grow operating income.

Let's now turn to slide seven.

Before we look at the new Pentair, we want to assure you that the legacy Pentair business remains on track towards our previously communicated expectation for the full year.

In the fourth quarter, we will continue to see the topline challenges and headwinds that we've experienced this year, such as challenging western Europe markets and the shrinkage in Datacomm and Telecom markets.

Counterbalancing these challenges, however, we are seeing growing backlogs in our municipal business and beverage, and beverage is entering its typically strongest season for shipments.

In local currencies, we have seen ongoing strength in fast-growth regions, with the exception of China, and we expect this trend to continue.

As demonstrated by our strong price contribution in the first three quarters of the year, pricing is a discipline at Pentair and a trend we expect to continue.

Operating margins have benefited from price and productivity, two elements within our control.

We've seen some moderation on the inflation front, which has helped, and we continue to drive productivity.

For legacy Pentair, we are on track to deliver adjusted operating margin expansion of 80 basis points for the year and low double-digit adjusted EPS growth.

Now let's turn to slide eight.

In summary, our legacy business performed in line with our expectations, and we successfully closed our transformational merger with Tyco's Flow Control business.

This year has not been without challenges, and we continue to demonstrate our ability to drive strong operating performance through elements within our control.

We are doing this while still investing in the long term, as evidenced by our continued expansion into new areas such as energy and agriculture and a strong new product pipeline, like Hybrid DI.

In addition, we're starting to see some tailwinds emerge as we begin to look ahead to next year.

Energy and Agriculture remain areas of growth for us, but at long last we're seeing signs of a long-awaited improvement in the North American Residential market.

As mentioned previously, Municipal is seeing good growth in its backlog, which is a sign that another long-beleaguered market is showing some signs of bouncing off the bottom.

We've seen great execution, led by PIMS, as evidenced by our strong margin performance.

The integration of Flow Control is well underway as we have our corporate structure in place, we've identified projects for over half of our sourcing targets, and we have quickly identified revenue synergy opportunities in Energy and Food and Beverage.

With that, I'll turn the call over to John.

Thank you, Randy.

Please turn to slide number nine, labeled Q4 2012 legacy Pentair outlook.

We want to share with you what we anticipate our fourth-quarter results are going to be in the base Pentair business so that you have an indication of how we feel we'll be exiting 2012 and how we are setting ourselves up in the base to deliver within our legacy portfolio.

We expect sales of approximately $890 million, or up about 2% to 3% versus 2011, inclusive of currency, and up 4% to 5%, excluding the impact of currency.

Water and Food sales are expected to be up around 3% to 4%, driven by accelerating CPT performance and easier year-over-year comparisons regarding foreign exchange and distributor stocking in our Water Purification business.

Excluding the impact of FX, sales are expected to be up 5% to 6%.

Trends in Technical Solutions are expected to remain consistent with third-quarter results, reflecting lower capital spending and cautiousness in the channels regarding uncertainties related to the fiscal cliff and the overall economy.

Sales in Technical Solutions are expected to be down 3% with FX having less of a headwind year over year versus Q3 results.

Excluding FX, Technical Solutions revenue is expected to be roughly flat with last year in the fourth quarter.

Legacy operating income is expected to be around $106 million, or up around 11% to 13% versus the fourth quarter of last year.

Adjusted operating margins are expected to be around 12% for all of legacy Pentair, up 90 basis points year over year.

Operating margins for Water & Fluid Solutions should approximate 12.5% and Technical Solutions' margin should be around 17%.

Price and productivity continue to be the theme, and execution utilizing our Pentair Integrated Management System continues to build momentum and deliver consistent operating results.

Adjusted EPS for legacy Pentair is anticipated to be up double digit year over year, with the estimated adjusted tax rate in line with previous expectations of around 28% to 29%, interest of around $16 million, and a share count of around 102 million.

Legacy Pentair adjusted EPS would be expected at roughly $0.62 for the fourth quarter, putting us in the middle of our full-year adjusted EPS guidance of $2.70 to $2.76.

Cash flow once again would've exceeded 100% of net income.

While the overall economy has clearly softened, solid productivity and disciplined investments have allowed us to continue to meet expectations for Pentair.

Please turn to slide number 10, labeled full-year 2012 legacy Pentair outlook.

Again, we thought it would be helpful to share with you the projected legacy Pentair results for the full year.

We are expecting revenue of around $3.6 billion, or up about 3% versus 2011.

We expect operating income to be around $445 million, or up greater than 10% year over year, and operating margins to be around 12.5%, or up about 80 basis points versus full-year 2011 margins.

We anticipate achieving 12.5% margins in Water & Fluid Solutions even as we continue to integrate last year's acquisition of CPT, demonstrating the power of the PIMS operating model and the commitment to functional excellence and standardization throughout all of our Water and Fluid businesses.

The commitment to lean enterprise is paying dividends and giving us a lot of confidence in further margin expansion, as well as utilizing these same tools across all of the new Flow Control entities.

We expect Technical Solutions margins will be just north of 19% as we continue to benefit from price, productivity, and PIMS.

Legacy Pentair adjusted EPS, as I previously mentioned, is expected to come in at the midpoint of the previous guidance range of $2.70 to $2.76, or up 13% versus full-year 2011.

Again, excluding the impact of deal costs, we expect cash flow to easily exceed more than 100% of net income.

Please turn to slide number 11, labeled balance sheet and cash flow.

Cash flow for legacy Pentair this year remains strong, and our recent debt and revolver offerings are in place, giving us a healthy capital structure heading into 2013.

The current debt levels in Q3 do not reflect the previously announced and completed redemption of the private placement debt funded by borrowings under the revolver capacity, which will yield an even better overall interest rate and give us a better balance between fixed and variable debt.

We have worked hard at improving our number one metric, ROIC, and at the end of the third quarter we knocked on the door of double-digit ROIC again, and under the legacy Pentair would have easily cleared it on the way to our longer-term goal of 15%.

Obviously, the inclusion of the Flow Control entities will give us a lower short-term result, but we expect it will provide ample opportunity for us to expand ROIC rapidly to achieve our goals.

Please turn to my last slide, labeled Q4 2012 Pentair outlook.

This slide is an attempt to give you an initial snapshot of the combined new Pentair fourth-quarter outlook.

We expect the Flow Control acquisition to add nearly $900 million of revenue to the fourth quarter, driving our revenue to nearly $1.8 billion.

This would be up, obviously, greater than 100% versus our $866 million of revenue in the fourth quarter of 2011.

We anticipate the Flow Control businesses will add about $100 million of operating income to the fourth quarter, prior to the expected incremental amortization of $23 million related to the deal.

Also, we anticipate roughly $5 million per quarter of incremental corporate costs and roughly $5 million per quarter related to the investment in the Integration and Standardization Team, which consists of roughly 40 full-time members ensuring that we realize the expected GBU-based operating synergies.

Also included in the fourth-quarter projection are roughly $25 million of expected one-time transition costs.

These costs relate to the acceleration of sign changes, painting of service trucks, brand migration, getting the single images in standard software and PCs, ensuring that we are leveraging global contracts related to indirect spend, and finally, lean training in the businesses.

We are inheriting a new record backlog in the Valves and Controls business and coming off a record performance in the Thermal business.

We are integrating these businesses at a very good time for Pentair.

The Australian Water business has undergone significant restructuring throughout 2011 and continues to improve its performance, despite a challenged economy related to its primary market, mining.

We are confident that these businesses understand the respective strategies and are aligned on their expectations regarding standardization opportunities.

We feel good, as Randy mentioned, about how we have started, the people that are coming with the businesses, and their excitement about the value that standardization and PIMS can have on their businesses.

As we comment in the bottom right-hand corner around the EPS assumptions, currently there are many moving pieces.

A few of those will be the outstanding shares, currently at approximately 215 million shares on a fully diluted basis, and the tax rate, which is estimated at around 30%.

Both of these will improve as we head into 2013.

The shares will be reduced by the already-in-motion $400 million buyback program and the tax rate will improve when we implement the tax strategies related to our new Swiss-based structure.

We are initiating guidance for adjusted EPS in the fourth quarter at $0.40 to $0.45.

However, this result is not reflective of the earning power we expect in 2013 and beyond.

We are excited to share with you our outlook for 2013 on November 27 and we will be prepared to provide you the appropriate pro forma information, including segment, vertical, and geographical revenue, and respective growth outlooks.

We will also provide you with a detailed update around our cost synergies, detailed cost out plans, how we plan to implement PIMS across the enterprise, our actions for fast-growth markets, and an early look at revenue synergies, and finally, all of the details related to capital structure assumptions and why we are confident in our goal of $5.00 per share for 2015.

I would now like to turn the call back to Randy for some closing comments before we take your questions.

Randy?

Thank you, John.

Please turn to slide number 13, labeled summary.

To close, it was a very busy quarter for Pentair.

But just as important, it is a quarter that marked the beginning of the latest chapter in our Company's history.

Our third-quarter base performance met our expectations as we continue to navigate through a challenging topline environment and highlighted that price and productivity are truly hallmarks of Pentair's operational discipline.

Day one execution went smoother than expected, and that has allowed us to accelerate some of the Integration and Standardization efforts.

We've already completed our corporate staffing, we've identified over half of our sourcing targets, and our teams are making progress in changing signs, websites, brand transitions, to name just a few.

We continue to get more excited about the potential for revenue synergies, based on some early reads we have seen.

Pentair has been on a journey with PIMS for well over a decade, and we're excited about expanding PIMS to the new Flow Control GBUs.

We've already trained 10% of the Flow Control employees in Lean Enterprise, and that is a good beginning.

We remain on track to deliver legacy Pentair 2012 results.

We're also starting to see some market tailwinds emerge, particularly in the North American residential market where it appears we are no longer just bouncing along the bottom, but are now rebounding, albeit at a moderate pace.

We've began to see signs of a similar rebound in Commercial markets.

Municipal has grown its backlog, and we continue to see strength in Energy and Agriculture.

We'll be hosting our 2012 Investor and Analyst day on November 27 in New York, at which time we'll look forward to sharing our optimism regarding synergies, in addition to providing more detailed guidance for 2013 for the new Pentair.

Operator, we can take questions now.

(Operator Instructions).

Steven Winoker.

I actually want to start on behalf of everybody, all the families that were affected by Sandy, including my own, and thank you guys for postponing the earnings call for a couple of days.

It definitely helps and appreciate it.

Let's see, the first question, just if you guys could give us some color on, again, on the Tyco Flow Control portion in terms of your thoughts for fourth quarter.

You're talking about $900 million and I think you were referring to the fourth quarter, and if that is true, it's certainly a little bit lower than I thought orders -- the last time I was looking at orders were leading us to believe for the fourth quarter.

So could you talk a little bit about the front log and the backlog, which I know the backlog is up a bit and I'm not sure if that's order driven or just shipment deferral or what?

Maybe a little more color around that would be really helpful.

Steve, a couple things.

This is John.

First of all, yes, I think that revenue guidance is our view of kind of where the businesses are going.

You know, we haven't had the opportunity, but we will be in the next 30 days, of scrubbing the backlog, understanding all the order takes, and be able to be very confident of what we see.

Relying on what was provided, though, and this was a company responsible for providing the same types of guidelines and same types of systems we do, it is a new record backlog in valves and controls.

It continues to build orders at probably the mid single-digit rate growth, and we're very optimistic that we're getting this at a pretty good time in the energy cycle.

Also in the Q4 numbers, we put in, as I mentioned in my script, about $25 million of transition costs associated with the things that Randy and I were mentioning.

We want to accelerate and start on January 1 with great momentum on what we're going to do with the new Pentair.

And there's also about $8 million to $10 million of costs in the base numbers of Flow Control related to the segment costs, which will go into the GBU, come into corporate, or be eliminated.

So I think when you take that out, and you put the share count and tax rate back to where we had -- where we think they'll be at the start of next year, you get close to basically neutral to what would've been the Pentair guidance.

There's a lot of moving pieces in Q4.

We don't know what purchase accounting final is.

We don't know what the amortization is and we've got a lot of things and a lot of work left in the next 30 days.

But we will soon.

But we will soon.

The other thing that's going on, they were on a September fiscal, and we're shifting the Flow Control over to the calendar fiscal that Pentair has been on traditionally, so this is kind of a stub quarter.

So I don't think that there's -- there's certainly nothing in the outlook that shows any kind of discontinuous change in their sales rate.

Okay, and so the op income comments on page 12 that talk about the new DNA Corp IST, those are all showing up in reported op income, but you'll back them out of adjusted, correct?

Well, those are actually all in adjusted, Steve.

Yes, those are in adjusted.

But some of those reflect what the full-year run rates would be on an ongoing basis, and obviously we're ramping up to those numbers.

Yes, and I think, just to be clear, the things that were in the script, John's script, those are ongoing, the $5 million of corporate add, the $5 million of IST, but what isn't is the $35 million or so, right, of additional costs that is just sort of transitional related, you know, taking down, changing all the signs, and some of this one-off intense training that's going on around lean, et cetera.

That is not sustaining.

Steve, those are hitting adjusted results.

So the fourth-quarter impact of those items, can you tell us what that is, then?

Roughly $35 million in aggregate.

Okay, great.

And maybe just a quick comment, I'll leave it to others for the other things, but just Sandy.

What's the sort of net -- what are you expecting for an impact on the Company?

Well, you know, our focus right now is to ship everything that everyone asks for, and it impacts our residential pump business.

That's where we see the impact the most.

And as we said, through the first three quarters we had no weather-related sales, so we will see what it is.

But our focus is on shipping right now, with expediting and all.

We haven't really tried to quantify a financial impact yet.

But Randy, could you talk about -- it's part of a business that's X percent of the Company?

Well, you know, there's probably $10 million of extra sales that are going to happen, and maybe more.

I just don't know what the profit will be on that because we're expediting.

We spooled up our plants and we're shipping all the inventory we have, so our focus is on getting the pumps there and we're in a position to do it.

Great, that's great.

The good news, Steve, is we do ramp up for the anticipated weather seasons.

We had a lot of inventory to be able to ship, and the downside is it's 20%-ish margin and you're dividing it by 200 million shares, so you're looking (multiple speakers)

And we're expediting the shipment because we're trying to get them there.

Right, got it.

Thanks, guys.

I'll hand it off.

Hamzah Mazari.

Good morning, thank you.

The first question is just on pricing.

You guys are doing a good job pushing that through.

Maybe speak about your confidence level in continuing to push price, given the demand environment you're seeing out there.

You spoke of pricing discipline; maybe also speak to how much of your product is less commoditized where you can really get pricing through.

Well, you know, one of the reasons that we have good pricing discipline is we sell a lot.

On the Pentair side, about 80% of what we sell, we sell through distribution, and most distribution views price in a virtuous way.

And so, we would expect that to continue.

There's some of that on the Flow Control side, but there's also a lot of premium products and a lot of specification activity on that side.

So, we'd like to bring some of those pricing disciplines over to Flow Control.

It's one of the training activities that we have going on, but the ability to get price to stick is a function of market discipline.

So we think we're in good businesses, so those are the kinds of businesses where you can get price.

I don't know, John, if you want to add anything.

No, I agree with Randy.

I think we've got to remember there is $1.5 billion installed base on the Flow Control side with, as Randy mentioned, premium products.

That's where the biggest opportunity in the short run would be is making sure that we're pricing those effectively and we're not entering into discussions with customers packaged between the installed base and the new opportunities.

And I think we break that out and think about it as an installed base and treating that more like what we do in the Pentair (multiple speakers)

Parts and service.

Right, parts and service.

Yes.

And then, looking at the original equipment or the brand new orders differently.

I think that's the biggest opportunity.

Got you.

And then, just a question on the water business.

How much of that business right now for you, just that segment, is replacement or consumables?

And then, maybe just speak about your leverage to the US housing market recovery.

It seems like you're beginning to see that in your numbers.

Do you think there's a lag that needs to happen, or we're just coming off of a small base here and you're already seeing some of that?

For the whole new Pentair, Residential is still 20% of our sales, and the US is probably 12% out of the total, right, so it's over 50% of the -- a little higher -- 15%.

Okay, 15% of -- between 12% and 15% of total new Pentair sales, so we still have a substantial exposure to that market.

There is always a lag, and where we're seeing the Residential improvement is things -- you know, for instance, we talked about the flood-related SKUs that are getting shipped now.

Those, we didn't see anything.

The place we saw them was in the pumps that are related to building out subdivisions and those -- or in the water softener area we mentioned.

Those are the places we're beginning to see the signs of stabilization or a return to normal.

But we do see a lag on that, particularly -- well, really on the Pump side and on the Filtration side.

It is -- it can be six months to a year.

Got you.

And just last question from me.

On the Tyco merger, you talked about some of the revenue synergies that you're beginning to see already.

When do you think you'll be in a position to sort of give an order of magnitude of what you think that number could look like or maybe more detail?

Is that on the analyst day or is that more next year?

Yes, our intent is to talk in more detail not just about the idea of synergies, but give you some specific examples of ones that are being worked.

What we did in the pre -- what we have done prior to close was we had a clean team looking at revenue, we had a clean team looking at sourcing.

And so, we've been able -- we've hit the ground running as we look at some of those, and we have to get permission to use as a case study the one I referenced in my -- we don't have permission from the customer yet to talk about it, so.

But we intend to, by the 27th, and so we'll give you specific examples and then also how we'll go after it.

Great, thank you.

I appreciate the time.

Robert Barry.

Rob?

Rob?

Hello?

Can you hear me?

(Multiple speakers).

Okay, great.

Sorry.

I actually wanted to circle back to the discussion about the Q4 EBIT for the Flow business.

If you start in your build-up with what I think is about $105 million, even before considering amortization or corporate costs, IFC, et cetera, the $105 million on the $910 million that I think you're expected for revenue is about 11.5% operating margin, which seems kind of low versus where the business has been tracking.

I think Tyco was even guiding to a 14% margin in this current quarter, and so I'm just wondering is that conservatism, some seasonality, or (multiple speakers) stronger quarter.

Yes, I think if you take a look at the $900 million and you average somewhere around a 13%-ish margin, that's where we see it coming in prior.

And as Randy mentioned, we are doing a lot of things in those businesses to accelerate getting to January 1 in a very clean position as the new Pentair.

So I think you're seeing some of that hit early on in those businesses.

The other thing is we're shifting it to talk about it on the basis that we talk about it, and there's probably about a 100 basis-point difference between corporate costs, and we push more costs down, I think, than Tyco did.

I'm not sure about that.

Did that answer your question, Rob?

Got you.

Yes, okay, so the $105 million where you started your build-up is your segment disclosure basis, which is different from the way Tyco was disclosing at the segment level and maybe that delta is worth about 100 basis points on margin (multiple speakers)

That is correct, yes.

Okay, yes, perfect.

No, that's very helpful.

I was wondering also if you could just dig a little bit into the Flow business and give a little color on -- I think the two main pieces in there are your legacy Resi Flow and Engineered Flow.

So is the Engineered Flow business kind of down a fair amount this quarter and the Resi Flow up?

Any color directionally there would be helpful.

Well, you know, the Resi Flow is actually down because there was no weather-related activities in the third quarter, but there's good trends in the Residential Flow and there's actually good trends in the Engineered Flow side.

I referenced in my script that customer service has improved, and that's why we think we're getting higher wins.

Frankly, I'm not sure it's the market.

I think we're correcting some -- now that we've combined them, we frankly have a better focus on execution, and our deliveries have improved, our overdue backlog is down, and as a result I think we're winning more.

So, that's what's helping the Engineered Flow side.

Got you.

So in the quarter, though, both were down maybe a little bit?

Is that fair?

Yes, yes.

And when you talk about the Muni backlog building, I mean, we've been having very easy comps here for a while.

It's off a low base.

Would you expect to see some pretty substantial growth, then, when that backlog starts converting to revenue, just given the kind of base off of which we're starting?

Yes.

I mean, I think we're feeling good about plus 15% to 19%-ish growth in backlog, and as we start to ship that, as you mention, we've got some pretty easy comparisons.

So I think the tailwinds for Flow are set up nicely as we head into 2013.

Yes.

Is that what your expectation would be for that slice, kind of mid to high teens growth off those easy comps?

I don't think it's (multiple speakers)

In that section of the business, I think you (multiple speakers) mid single digits' growth for Flow is the way we'd probably look at it next year.

Got you.

And then, just finally, on the Technical Products business or Technical Solutions business.

I know you talked a little bit about mix.

I assume that's in that product price bar.

I was wondering, are you actually, kind of on an apples-to-apples basis, raising price or is a lot of that kind of productivity price tailwind coming from the mix?

I know I think the Telecom stuff is lower margin.

We are getting price increases.

That's one big piece of the component that Randy mentioned, and the other one is as we're challenged on the Datacomm and Telecom, that was fairly low-margin business, and where we're still growing is in the North American industrial segment, which is very high margins.

So we're getting a margin lift from losing the revenue in the areas that are low and gaining it in the areas that are high.

Got you.

Okay, great.

Thanks very much.

Mike Wherley.

Could you talk a little bit about the sourcing that where you've said you already found half of the targets, and I was just wondering if that's on track with what you were thinking you'd see already or if that's ahead of pace?

It's ahead.

You know, I think -- we felt that we gave a reasonable estimate out there with about $60 million, and just to remind everyone, that was about $40 million of indirect and $20 million in direct.

Just from experiences previously, it takes a while to get to direct because you've got to turn the existing inventory levels, you've got to requote everything and redesign some things.

So when we take a look at where we're at now, we're slightly ahead of schedule and feeling good about the incremental pipeline that we have.

I think if you think about the nature of these businesses, there are some natural purchasing points where -- if you think about what Valve purchases overall and the benefit that that can have to Pentair, and you think what we do on the Pentair side, the benefit it can have over the Valves and Controls and the Thermal side.

So we feel really good about where we're at and now we're building the commodity organizations to make sure we go after it and get it.

Okay.

And then on the North American rebound, I mean, obviously you're being pretty cautious about that rebound, but how do you feel differently about that versus three months ago, like what have you seen to sort of reinforce your thinking there?

We love the data.

I think all the indications of the data mirror up to what we're feeling and hearing as optimism in the channel.

I think each of our thirds of the business that we planned in North American Residential, and as Randy mentioned, we have a Flow component, we have Water Purification component, and we have a Pool component, all three planned in the industry different.

Now I'm going to have Randy add some color, but I think what we need is -- in each of those elements, obviously, warm weather builds certainly helps the Pool business.

Urban sales are delayed, and when we see the Water Purifications go in, and that's where a lot of the new housing starts have been in more of the urban centers, and when we get more rural bills, we get both Flow products, which are bringing the water to the homes, and we also get the Purification plays.

But Randy, I don't know --

The more rural, the greater the flow intensity.

A rural home would have five pumps in it; a multifamily would have less than one per unit.

So it really depends on how it comes forward.

As John said, the data is very promising.

The orders are slow in coming.

But we look at housing sales because as money goes into houses, that's when people fix their water softeners, that's when people add filtration systems.

That's really good for the Filtration business.

And then on the Pump side, it's either break or fix or it's new homes.

That's basically what drives that.

And then, Pool is -- well, you know, Pool has been growing despite the fact that new pools aren't being built.

So there, as Sunbelt housing picks up again, the Pool business will pick up again.

And we don't think that that will diminish at all the greater content and the sustainable trend going to variable speed and higher levels of control and elimination of chlorine, et cetera, all these trends that we're -- that our business are leaders in.

But we clearly think that this is a high single-digit grower over the next several years.

We believe that if you take the drought-related SKUs out of 2012, and obviously some of that will level off with the shipments that Randy mentioned in Q4, we're going to be at that level this year.

All right, that's very helpful.

If you could just give a little bit of commentary on what you're seeing in China, that would be -- that's my last question.

Thanks.

It's interesting.

In China, that hurt both Tech Products and our Water Purification business the most.

Water Purification, we're -- we've enjoyed a lot of growth in our Residential Filtration business as we serve China.

As you know what's happening with China housing, that's slowed down.

So that's pretty much flat.

And some of the Telecom and Datacomm downturn is actually in China.

We did grow high single digits in Q3 in China, which is the first quarter this year that we saw that type of growth.

But that's not -- but that's coming from process and industry as opposed to (inaudible).

Okay.

Christopher Glynn.

Just as it pertains to the legacy Pentair, what is the level of restructuring you're anticipating in the fourth quarter?

Legacy Pentair?

You know, I think -- I don't have the exact number.

Chris, I can tell you that we're looking at taking a fairly sizable cost out action as we head into 2013, and we're looking at somewhere around $60 million to $75 million of cost out that we want.

And as consistent with what we said, we're looking at those actions about 50% on the Pentair side and 50% on the new Flow Control businesses.

So that's our targets right now.

We're working through the actual details, but that kind of helps quantify it.

And we look at $0.50 on the dollar from a cost perspective as a reasonable estimate at the moment.

Okay, and what you do on each side kind of takes into consideration the other side and how they fit together, I take it?

Yes, there's obviously areas that will come together, like fast-growth markets, where we'll look to have one common face to the market under Pentair, and there's obviously some back-office consolidation opportunities there.

That would be a kind of cross-company view.

Clearly, some of the systems that we put in across the entire enterprise would be a cross-company view.

And then, it's really about the standardization opportunity of each GBU or each business.

And those are just as abundant on the Water & Fluid side of Pentair as it is on the Valves and Control side of Flow Control.

And obviously, we're looking to maximize payback here, Chris, so.

Right, right, and then, just on the food and -- or the beverage sales' synergy that you already got, maybe as an anecdotal it could be used so we could get a complexion on the revenue synergy opportunity.

Do you look at that as a life of program type of win because the customer, it's a long-term relationship, or annualized?

Could you just add some complexion on this particular one?

Well, I mean, in this particular case, we were talking about a $2 million win becoming a $4 million win.

It was double that, and it's a relationship that should go beyond the project.

But it'll still be as they build out, it will become a standard approach, we would hope, not that they won't compete big projects every time but (multiple speakers)

It was a great face to the customer as far as going forward and offering the different valves between the two different units, which would allow to capture more share, right?

So we make on the CPT side some very high-end valves, but we're sometimes passing up some of the other (multiple speakers)

Yes, we don't even make some of them.

Right, we don't even make the rest.

And vice versa.

The valves and controls valve, they don't -- they didn't qualify with this customer.

Right, so it was a nice complementary product set we were able to offer the customer.

The equivalent ones, for the equivalents or the Pentair half.

Sounds good.

Thank you.

Deane Dray,

Hey, Deane.

How are you?

Doing real well, thanks, considering I'm being powered by a generator.

So no power and lots of trees down, but saw some good news coming from Pentair this morning here.

And it takes me to the first question is, you set some ambitious goals back in March about cost synergies, revenue synergies, the $5.00 earnings power in 2015, $0.40 of accretion in 2013.

And here we are today, you've got the deal closed and you're reaffirming what a lot of people thought were very ambitious targets, especially considering the macro has worsened.

So maybe Randy, I know we're going to wait until November 27 to get some more details, but just if you could take some broadbrush commentary.

Macro topline is weaker, but it sounds like you're a lot more enthusiastic about your cost synergies.

But if you could just help us through those issues, that would be helpful.

Deane, I'm glad you and yours are safe.

You know, as we -- and it's a great question because the reason we affirmed what we said is because we -- the macro is worse, and we'll talk about this in a lot more detail, but you can expect us to come back with a more moderate outlook for what the markets are going to do for us, but we feel better about the synergies that we can drive and bring home.

And it's really that.

It's really the fact that we believe more strongly that the synergies are going to read out.

We have more insights into them, so even though the topline is going to be lower, the bottom line should be still a reasonable goal for us to deliver to shareholders.

And it's the revenue synergies are becoming more real as we get belly to belly.

I mean, this job we talked about not just impresses that the client sought this out, but the fact that these two teams came together the first time they met and made it happen was pretty -- it was something that we're very proud of.

And so, it's really those things.

Remember when we set those goals, it was basically top-to-top dialogue between six people on their side and six people on our side.

So there was a, I would say, proper scaling of how it would all come together then, and now, while the pieces will be different, we still think the objectives are good.

One of the surprises from us was, and we heard John speak about this at our Citi industrial conference is the complexity that Tyco arrived with, and maybe just a comment about the ERP systems.

Originally, I thought the number was 37.

Yes, you know, actually, as I mentioned, we've been out to see 30 -- we've been out to 30 facilities, the Flow Control facilities, and these are high-quality facilities.

These are operating people, and we're having a really good time getting to know the businesses.

But the investments, Tyco knew this, a lot of the investments, if you will, hadn't been gotten to a lot of the investments required to illuminate some of the complexity.

When I go around the Valves and Controls, it feels that walking around Enclosures 14 years ago to me.

All this promise and too much complexity.

They have 43 factories, 37 ERPs, incredibly strong brands, great quality.

People that are embracing PIMS faster than -- not just in Valves and controls, but I was in Redwood City last week and touring that.

It's a Raychem facility that's in Thermal Management, and there were folks from our Pool -- their lean ranges from our Moorpark Pool facility, we're up there working with them doing 5-S Kaizens.

It's just really exciting to see these kind of -- the way the team is coming together.

Yes, it's honeymoon and I'm a CEO, and CEOs are optimists.

But nevertheless, I look at Valves and Controls and I say they're at whatever they are at, 12%, 13%, and enclosures was at 9% in 1998.

Profitability of 9%.

And now, it's 20%, and it won't take us 14 years because we know how to do it now.

So that's kind of why I'm optimistic.

Not kind of.

That's why I'm optimistic.

That's good to hear and we'll hear more color on the 27th.

And I know we're running to the top of the hour here, just a couple of other questions.

On the hurricane cleanup, with -- you commented that it was mostly or you're shipping the sump pumps.

That's the Residential side, and this is obviously not a Katrina event with New Orleans and a lot of the bigger pumps that were involved there, but is there anything beyond, on the dewatering side, beyond the Residential Pumps (multiple speakers)

Yes, we have (multiple speakers) -- they have combined sewer and rainwater systems over there, and I think we're in about -- of the main 18 or 19 stations in New York City, I think we have the pumps in 16 or 17 of them.

So we expect those pumps are working away right now to help pump out the city, and ultimately what that will mean in terms of follow-on service or parts, I don't know.

But I'm sure we have other pumps that are funneled through our distribution center, larger pumps, you know, split case pumps, whatever, going into service right now.

I don't have as good a window on that right now.

And then, just last one on the buybacks.

John, could you just give us color about the amount?

I know that was the as-planned, but just in terms of how active you expect to be in the market?

Yes, the first $400 million was placed in and we obviously, subject to rules around average trading volumes and whatever, so you can assume that that's being done on some type of average basis over the first four months, which would be October through January.

As it pertains to the remaining $800 million under approval, obviously we'll be in a position to share more of that with you later, but obviously we would like to get the capital structure in line as rapidly as our debt levels allow us to.

Great.

See you on the 27th.

Okay, I think we have seven more, so we'll do our best to be brief with the answers, but I'd like to get through all seven questions, if we could.

Brian Konigsberg.

Hi, just kind of follow up on the first question from Deane, this might be a small nuance, but you were saying that you're still confident in $5.00 by 2015.

Before you were saying $5.00-plus.

Is there anything to read into that or is that really just kind of (multiple speakers)

No.

That's a nuance beyond my intent, so no.

The goal is to hit $5.00, and hopefully things will allow us to do better.

Okay, great.

And just -- most of my questions have been answered, but just on the Municipal side, so it sounds like the break-and-fix component is really kind of driving the opportunity going forward.

But maybe just talk about the capital projects side.

It sounds like that might still be pretty weak in the near term, but I'm just curious your expectation as far as some bigger projects that may be (multiple speakers) the pipeline (multiple speakers)

We continue to invest in gaining position in the Infrastructure space outside the United States, and we have a decent position in Process Technologies in that.

We've seen some slowdowns in projects there.

But we would like to grow our share in pumps.

We think one of the opportunities, synergistically, between -- in the new Pentair is larger pumps in Australia, which is a nice market; large Pumps in the Middle East, which is a nice market.

So that's one of the synergies that we are exploring right now.

But the US still remains -- you know, I submit until the US government and local governments are able to put more money into water, it's a break-and-fix world.

And it's been that way for 40 years and it's going to be that way until something changes, and I don't think that is going to happen anytime soon.

Okay (multiple speakers).

I know we have a lot of more questions here.

I just wanted -- if I could sneak one last one in.

Just on the North American Resi, is it your expectation that the Pool business will be the last to benefit from an increase in Residential activity and maybe changing buying patterns from consumers?

Maybe just a quick comment on that would be good.

No, actually I think that's the one we're probably the most confident in because we've done a lot to put new product content in there, drive energy efficiency, and what we've said constantly is the pool builder or the pool owner today tends to be on the higher end or a more affluent buyer, and most of those pools are purchased more cash base.

And you're looking at about 10% new pool permits to the housing starts number because just the way the patterns get built, so I actually think that's the one we're most confident in.

The ones that we have to do a little bit more work with, which we're still confident in, are the rural versus urban builds and how that impacts our particular sales into those housing.

Great, thank you very much.

Josh Pokrzywinski.

Hello, Josh.

Just -- I don't know if you guys went over this already, but I wanted to make sure what you guys were specifically looking for on an organic basis, so inclusive -- I'm sorry, exclusive of currency for Tyco in the fourth quarter, just so we're on the same page.

You know, Josh, I did everything not to give you that number and I don't feel comfortable giving you that number right now, and I will give you that on November 27 because there are things like acquisitions, divestitures, those types of components that I would need to do a full reconciliation on to share that with you.

I think you can look at organic order trend rates and sort of where we were in prior quarters and get a pretty good indication that we don't see things are slowing.

Got you.

Okay, fair enough.

Thanks, guys.

Brian Drab.

This is Brian Drab.

Am I on?

Yes, you are.

Sorry, I'm doing two conference calls at the same time.

Sorry about the run over here.

Just one question for you.

You raised the guidance for the operating margin for 2012 and you talk about some of these issues, but can you kind of rank order the things that are impacting that?

Obviously better performance than expected in the third quarter on margins, but product mix, steel costs and other commodities coming down, productivity initiatives, which is most important to (multiple speakers)

Yes, you're talking about legacy Pentair (multiple speakers)

In the legacy Pentair business, thanks, yes.

We really have a seasonality that's fairly predictable and normal, and it kind of falls around the fact that you take a look at Equipment Protection or Technical Solutions.

There's a couple of less weeks of buying due to the Christmas holiday and kind of how the season unfolds.

So it's just a little bit less contribution on top of the fact it was the only reason that that margin really turns downward.

In the legacy Water & Fluid businesses, it's more of just where the contribution is coming from in terms of the seasonality.

We do really well in the North American Residential side, and that season begins to end throughout Q3.

It's a (multiple speakers) trend, so I think you see in the margin expansion year over year, it's generally in line.

Okay.

And then, your forecast for revenue growth, you gave the overall number.

Can you give me what you're expecting for organic in the fourth quarter for the legacy Pentair business?

The legacy Pentair business, I think we shared that, but I'll reiterate it here.

It's --

I just see on the slides you have 3% for legacy Pentair.

Correct.

And I may have missed it if you gave the breakdown between FX and organic.

Oh, I'm sorry.

FX is a couple points.

Next question, please.

Scott Graham.

This is a really well-done earnings presentation, the handout, so everything is very clear.

A couple things, though, I just have -- just a couple of these little items here in the operating income on page 12.

Could you tell us what the incremental amortization of intangibles is for the fourth quarter?

For the deal?

Yes, it's that $23 million that you see in the -- under the op income, the majority of that is the incremental amortization.

Okay, so like $18 million to $20 million or?

No, no, no, definitely $22 million to $23 million.

Really?

Okay.

Yes.

Well, the depreciation remains in the business because most of those -- most of the depreciation isn't really adjusted because of the timing, and what happens is all of the other --

And it was in their base.

That's the incremental (multiple speakers)

This is the incremental, yes.

All the other assets get revalued and that's becomes the incremental amortization.

That makes sense, okay.

And then, the $10 million of New Corp and IST, are you saying that that's Tyco Flow corporate expenditures that we should expect in the fourth quarter?

No, we would expect to add -- yes, in an ongoing rate next year, we would expect $20 million of incremental IST costs and roughly $20 million of incremental Corp costs that would come into Pentair primarily around tax, treasury, and the addition of other functions to support the new Swiss structure.

So that's a full run rate is what that's expecting, and then there is some segment cost which I mentioned is still in that contribution from Flow Control, which would be part of the business unit operational synergies over time.

Right, but that's going to be rolled up into the segments, right?

That's correct.

Yes, I'm talking about just the corporate piece of Tyco Flow, that's what this number is, right, the 10?

Yes, yes.

The other way to think of it, it's incremental to Pentair corporate.

Yes, exactly.

Okay, so last question is this, if you were to take a step back and look at the Pentair legacy business with the talk that you have on the Muni, the Resi, and how well the Technical Products business is holding up, plus your typical margin expansion initiatives, it seems to suggest that 2013 Pentair legacy earnings would rise, based on where we stand today.

Would you agree with that statement?

I agree it would rise.

I know where you're going with this, Scott.

I don't know what the legacy EPS guidance for next year would be, but I think we would expect some growth, absolutely.

That's all I had.

Thanks a lot.

Brett Linzey.

Could you just touch on the Q4 tax rate of 30%?

You suggested in the release it doesn't reflect some of the tax-savings synergies and the strategies.

I mean, is this just more timing or have expectations changed from your initial expectations there?

It's totally timing right now.

The biggest piece of the reduction will come in the form of a debt pushdown structure, and once we choose that interest rate to push down at, we are locking in for a long term on that interest rate.

Obviously, we want to choose that carefully, so we will have it in place.

We'll be ready to fully go, but we're trying to get to the right answer for the ongoing Pentair.

Okay, and we should expect by Q1 that it should be pushed down and it should normalize to the kind of 25% rate?

That's correct.

By January 1, by January 1, yes.

January 1, okay.

And then, I guess, last question just on the cost synergies.

You pointed to $40 million you've been able to achieve thus far.

Are you able to parse that out into different buckets?

And then, I guess, how does that compare to your initial expectations?

Just to remind you, the corporate costs that we were receiving in Tyco Flow was more of a to be --

Stand-alone.

-- stand-alone, and we were able to do this deal before most of those people were put in place, which is good news for the people and good news for us.

So we're really adding to the Pentair corporate costs, and you'll see those there as about $40 million of incremental costs that we expect to put in.

Versus the $85 million to $100 million that they were going to add.

so we've really realized the entire corporate synergy, if you will, already.

Yes.

Okay, so that's the corporate synergy.

Okay, great.

Thanks a lot.

David Rose.

I have the last two questions, if you don't mind, but maybe we can clarify a little bit.

On the $40 million integration corporate investments, we're talking about $5 million each per quarter for corporate and ITS.

You also have the $25 million piece, so the $10 million per quarter accounts for the $40 million, but was the $25 million one-time branding costs part of your $40 million integration corporate investment that you've outlined in the earlier presentations?

Or is that something relatively new?

I wouldn't say it's new.

I think it was something that normally would have been done over time.

We're trying to get as much as possible behind us before we hit the ground on January 1. So we're taking a look at every single one of those decisions in the context of the IST, and saying, how do we feel about this brand?

How do we feel about the investments?

How do we feel about the marketing and what we're doing?

And accelerating those decisions as quickly as possible.

Now part of the $40 million includes the ITS, and over time I would imagine that declines after the first year or two.

Is that fair?

Yes, the way we've thought about it is sort of it'll fall off after maybe a couple of years, start falling off.

By the end of 2015, it should be pretty much integrated into other things, I would think.

Okay, fair, and then, lastly, on the tax issue.

You put out in the slide presentation day one savings 24% to 26%.

I understand that there's some debt pushdown that you have to do.

Is there anything else that could potentially change the tax rate guidance that might delay things a bit?

Or increase the taxes?

The tax is based upon what is the ongoing rate of Tyco Flow, and the rate that we are experiencing is slightly higher than what we would've anticipated.

At the same time, the tax synergies that we're going after at this point exceed what we originally thought.

So at this particular point in time, I'm pretty confident with the 25% and we're also confident that long term we can get closer to 20% or below 20%, like most Swiss-based companies.

And those things will require from the 25% on down incremental strategic action beyond the debt pushdown, and we're prioritizing those right now because a lot of those align perfectly with what the business wants to do anyway around driving functional excellence or headquartering in certain locations.

So I feel right now we're on pace to do what we said.

Okay.

And the debt pushdown, are we talking about additional legal costs associated with this?

No, no, no.

It's just choose and go.

Yes, the interest rate is lower than what we would've anticipated, and we want to make sure whatever interest rate we choose to put in, we can live with for the next 10 years.

Okay, great.

Thank you very much.

Last question.

Garik Shmois.

Just my question is on western Europe, just real quick.

It's been soft here for quite some time, but I believe you said that it's stabilizing.

I know that you started to see declines on a year-over-year basis last year, so are we -- should we think about western Europe as stabilizing off of this lower base or is it truly stabilizing?

I think it's stabilizing off our lower base.

Yes, it's not recovering.

We on a volume basis were down low single digits in Q3, and that compares to being down double digits in Q1 and Q2, so we're starting to anniversary some of the easier comparisons, and we're not expecting it to get much better.

We were flattish in Q4, but we saw a pretty steady correction or a pretty sharp correction, I should say, last Q4, primarily the Water Purification.

And right now, we're not feeling that level of distributor destocking that we saw last year, and that's why we feel fairly comfortable to say it's stabilizing.

I don't think it's recovering.

I don't think we're trying to --

And the things we really saw a decline in this was Germany.

In our Technical Products and our flow technologies business, Germany is a really important market.

And so, Germany went late into this decline, but they're in it.

And I'm not sure Germany has bottomed yet.

Okay, and you've done a good job getting pricing.

Can you talk about pricing in western Europe, Germany, if you saw incremental pressure here over the last quarter?

Nothing material.

I mean, I think -- keep in mind that these are fairly local purchases with pretty steady channels, and I don't think people are chasing volume right now.

So I think we were seeing the pricing in line with what we've seen prior and in line with expectations.

Okay, and then just the last question on that, just as you look at the new Pentair, what does western Europe make up as a total?

20% to 25% of the new Pentair.

Thanks so much.

Thank you.

All right, thank you all, and Operator, you can begin the replay.

Thanks for your attention.

Thanks (multiple speakers)

Ladies and gentlemen, this does conclude today's conference call.

You may now disconnect.