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Pall Corporation (NYSE:PLL)

F3Q09 Earnings Call

June 9, 2009 5:00 pm ET

Executives

Eric Krasnoff - Chairman of the Board, Chief Executive Officer

Lisa McDermott - Chief Financial Officer, Treasurer

Donald B. Stevens - President, President - Industrial

Analysts

Anaylst for Jeff Zekauskas - JPMorgan

Hamzah Mazari - Credit Suisse

Brian Drap - William Blair

Richard Eastman - Robert W. Baird

Adam Brooks - Sidoti & Company

Operator

Welcome to Pall Corporation’s conference call and webcast for the third quarter of fiscal 2009. (Operator Instructions)

Management’s remarks this morning will include forward-looking statements. Please refer to slide two or request a copy of the specific wording of this qualification of the company’s remarks.

Management also uses certain non-GAAP measures to assess the company’s performance. Reconciliations of these measures to their GAAP counterpart are included in slides at the end of the presentation.

At this time, I will turn the call over to Mr. Eric Krasnoff, Pall Corporation’s Chairman and CEO. Please go ahead, sir.

Eric Krasnoff

Good morning. Thank you for joining us for our third quarter conference call. I am here today with Lisa McDermott, Pall's Chief Financial Officer; and Frank [Michella], our Corporate Controller.

I will address our overall business and Lisa will provide a financial review of the quarter. The economy continues to present challenges yet even in this time there are markets and geographic regions of strength and opportunity so it’s not surprising that Pall's ’09 third quarter results reflect this yin-yang.

This quarter last year, as reported sales were up over 18% and earnings increased 26%. Foreign exchange added almost 9% to the top line. What a difference a year makes. Sales decreased 16% in this quarter with FX accounting for 10% of the decline. Life science sales increased a little over 4% in local currency and sales in industrial decreased about 12% in LC.

On a sequential basis, we saw that the rate of sales deceleration has been lessening from the second to the third quarter. Strong cost control measures, well-established business improvement initiatives, and our price in excellence program are helping to attenuate the impact of this prolonged recession.

Some industrial markets, particularly micro-electronics and industrial manufacturing, remain a challenge to forecast. We continue to take out cost, even as we position the company for an eventual rebound.

For the second quarter in a row, we began to see benefit from our pricing excellence program. We achieved a 1.5% price increase in Q3. That’s a real achievement, particularly in this environment. This new program is helping us demonstrate the full value of Pall's total fluid management technologies to our customers.

Sequentially, gross margin and SG&A are improving. Through the first nine months of this fiscal year, gross margins are up 47.7% compared to 47.2% in ’08. This 50 basis point improvement is despite the pressure of the top line. From the second to the third quarter, gross margins are up 30 basis points, moving us a little closer to our 2013 mid-point goal of 50%.

These results are a tribute to our ongoing manufacturing and strategic sourcing initiatives and improving price negotiations. Collectively, these programs are mitigating the loss of volume even with the high margin markets being impacted.

SG&A reduced about $27 million in the quarter from Q3 of last year. As with our top line, FX is also having a reducing effect on costs. This is on top of Q2’s $11 million reduction in expenses. As a percentage of sales, SG&A is down sequentially. We started the year at 31.2%, worked SG&A down to 30.8 and to 30.4 in this quarter. Our goal is 26.5 to 27.5 by 2013.

Major process improvement initiatives we have been speaking about for quite some time, [Euro Pall] and [Ameri Pall], are helping control SG&A. We’ve also taken added measures to align operating costs to the current business environment. These include a year-over-year headcount reduction of about 4% and strict belt tightening.

Importantly, while continuing to tackle SG&A, we are still investing in the business, building up our capabilities in Asia, the Middle East, and Latin America. Key corporate initiatives such as pricing and risk management are also important areas of investment. Our many initiatives are also accompanied by tax efficient strategies. This should lead to reduced income taxes and lower our effective tax rate from about 33% last year to 31% in this year and to 25% to 27% by 2013. One of the biggest single drivers of this anticipated rate reduction is the consolidation of our European management into [Friborg], Switzerland. The transition is well underway. Similarly, we are evaluating consolidating certain Asian management into Singapore. This could provide operating efficiencies and also result in tax benefits. We expect these strategies to generate significant operational and financial benefits to the company.

The bottom line of all this -- we are actively managing to current conditions while remaining sharply focused on our long-term vision and strategy.

We are going to hear from Lisa in a minute but before we do, I will provide a brief look at how our major markets performed in the quarter. Sales numbers will all be in local currency.

Life sciences remains healthy overall with sales up 4%. I am very pleased to see medical’s return to growth at over 5%. This was driven by more than 10% increase in blood filter sales and strong sales of Pall products that prevent hospital acquired infections. Western Hemisphere blood filtration sales growing over 8% were a real bright spot. Another high point was Asian blood filter sales, which increased 18%, as Australia moves closer to its goal of universal [LUCA] reduction.

[Final] pharmaceutical sales increased 3.2%. Pharmaceuticals grew by 6% while laboratory sales reflecting end user market softness were down. Sales to pharmaceutical customers in Europe and Asia were up over 7% and 27% respectively while sales in the Western Hemisphere were off on very tough comps from last year.

Overall the pharmaceutical base business was up a healthy 6% and system sales increased 6.5% on top of Q308’s 70% increase -- that’s 70. System sales grew substantially in Asia due to new investment and biological manufacturing in Singapore.

We continue to see strong growth in key markets such as plasma derivatives, vaccines, and in single-use technologies. There are also encouraging signs that the customer-specific issues that impacted our Western Hemisphere business over the last several quarters are largely behind us.

Overall, moving to Pall Industrial, sales were down 12.4% with a real mixed bag of results by market and region. Aerospace and transportation sales increased a little more than 3%. Sales to the military and commercial aerospace markets increased 11% and 25% respectively. Commercial aerospace sales were up over 57% in Europe, primarily reflecting increased sales of spares, as inventories start to come back to their normal levels.

Some of this is timing as well. Military sales were primarily driven by the sale of sophisticated air cleaners for CH47 helicopters and increased OEM platform builds. Sales in the transportation market were off sharply.

Micro-electronics and industrial manufacturing, two markets that are strongly influenced by discretionary spending, are being battered. Micro-electronic sales were down almost 46% in the quarter on continued weakness in the semiconductor and consumer electronics markets in all regions. We are using this time to work with customers on their next generation developments.

Turning to energy, water, and process technologies, overall sales were down a little more than 7%. Some of this is timing and much is the economy. Sales in industrial manufacturing, which includes industries at the center of the economic problem, such as mining, steel, automotive production, were down almost 29%. Food and beverage had a disappointing quarter with revenues down 12% and consumers reigned in their discretionary spending. Customers in this market, as in others, are holding on to their cash by working down inventories.

Sales in the energy related markets, power generation and fuels and chemicals, were off about 1%. The comps for these energy related markets again were double-digit increases last year.

Municipal water was a bright spot, with sales up over 26%. We remain upbeat about this market, which is largely driven by regulation and water quality, as well as availability. Just yesterday we announced a $14.7 million order for a new water treatment plant in the Philippines. The plant will produce over $100 million liters of water per day and help to establish Pall as a regional leader in membrane filtration for drinking water.

Government stimulus is a new driver and we are just beginning to see the impact of this in our quoting activity.

So all in all, we believe Pall is holding up reasonably well in this unprecedented environment. We remain confident in our longer term prospects for our essential and enabling technologies and in our ongoing strategies to generate sustainable, profitable growth.

Now with that, I will turn the call over to our CFO, Lisa McDermott, who continues to do a terrific job positioning the company to weather this economic downturn.

Lisa McDermott

Thank you, Eric and good morning, everyone. I will now provide a brief review of the financial results for the quarter and the nine months. The net earnings in the quarter were $44.2 million, or $0.37 per share, compared to $63.3 million, or $0.51 per share last year. Earnings per share on a pro forma basis, as defined on slide 13, were $0.42 per share compared to $0.54 per share a year ago.

The $0.42 per share includes the negative impact of foreign currency translation of approximately $0.07 in the quarter, and net earnings in the nine months were almost $126.1 million or $1.05 per share, compared to $147.4 million, or $1.19 per share last year. Earnings per share on a pro forma basis, as defined on the same slide, were $1.20 compared to $1.36 a year ago, and the estimated impact of foreign currency translation reduced earnings per share by $0.10 in the nine months.

Turning now to the details of our income statements, which are on slides 14 and 15, I will start with the top of the income statement. As you heard, sales decreased 16% in the quarter and 9% in the nine months. With the dollar strengthening substantially against the Euro, the British Pound, and various Asian currencies compared to the same periods a year ago, foreign currency translation also reduced our top line by about $65 million, or 10% in the quarter, and about $110 million or 6% in the nine months. Excluding the impact of exchange rates, sales were down about 6% in the quarter and about 3% in the nine months.

Overall in the quarter, consumable sales were down 7.5%, while system sales increased 2%. The mix of system sales to total sales was about 13% in the quarter compared to about 12% last year. Consumable sales were particularly weak in industrial manufacturing and micro-electronics, two markets that have been adversely affected by the economy. So excluding these two markets, consumable sales increased about 2%. And at the nine-month mark, consumable sales were down about 4% and system sales were up 1%, and the mix of system sales to total sales was about 12%, on par with last year.

Segment operating margins in the quarter were 16.7% compared to 18.5% last year. Overall, gross margins declined 130 basis points to 47.5% and segment SG&A as a percentage of sales was 27.9% compared to 27.6%. In the quarter, we continued to align SG&A spend to the current business climate. I will discuss this more in a moment but first let’s look at gross margin.

In Pall life sciences, gross margins declined slightly. The gross margins reflect the impact of a change in market mix to a higher percentage of medical sales which carry lower gross margin than bio-pharmaceutical sales. It also reflects some inflation and manufacturing costs being offset by manufacturing efficiencies. And improved pricing contributed approximately 90 basis points in life sciences gross margins.

In Pall Industrial, gross margins decreased by 260 basis points. The decrease reflects a number of factors. First, a shift in product mix to a higher percentage of systems versus consumable sales; second, a change in market mix resulting from decreased sales in higher margin markets such as micro-electronics and industrial manufacturing; and third, reduced volumes negatively impacting absorption of manufacturing overheads, even at now reduced levels.

These negative impacts were partly offset by improved pricing, which contributed 100 basis points in Pall Industrial’s margins, and the effect of ongoing cost reduction and lean manufacturing initiatives, which offset inflation of manufacturing costs.

Overall, SG&A including corporate expenses, decreased about 14%. Excluding the estimated impact of foreign exchange, which reduced SG&A by about $18 million, SG&A decreased almost 5%. In addition to the longer term cost reduction initiatives we have been executing, we continue to ratchet down employment levels and other spending globally in response to economic conditions. Our restructuring and other costs in the quarter substantially reflect severance charges recorded for actions taken thus far.

The savings related to these plans have begun to show through and will increasingly be felt in the fourth quarter and we continue to take further measures to contain expenditures.

Turning to income taxes, on a full-year basis, we expect the effective tax rate, or as reported rate for fiscal year 2009 to be about 31.2% compared to 33.3% last year. The company’s effective tax rate was 31.3 in the quarter compared to 32.3 in the third quarter of ’08. We are restructuring our headquarter strategies -- we are structuring our headquarter strategies which Eric alluded to previously in a tax efficient manner in Europe and Asia and we’ll keep you apprised of our progress.

We continue to focus on margin expansion via pricing improvement initiatives, systems gross margin improvement, the adoption of lean and continuous improvement principles, and we continue to be very focused on the generation of cash flow and financial strategies to reduce interest and tax costs.

So turning now to cash flows and liquidity, operating cash flow in the quarter was approximately $93 million, about on par with last year’s third quarter. Operating cash flow was about $155 million in the nine months, compared to about $16 million in the nine months of the prior year, so despite the reduction in earnings, this is on par with last year after factoring out last year’s tax payment, and this reflects our fiscal discipline.

Improving working capital management continued to be a challenge and a top priority, and we’re attacking it along many fronts. Among efforts on the receivables side, we’re centralizing the collection function and linking compensation for senior sales and finance personnel to day sales outstanding improvement. From the second quarter to the third quarter, day sales outstanding improved by six days.

And on the inventory side, we’re renegotiating shorter lead times with suppliers and leaning out our supply chain. Our longer term goal is to increase inventory turns to four times by 2013 from its 2.6 times today. We believe we have substantial opportunity to convert working capital to cash.

Our balance sheet and liquidity continue to be solid and at quarter end, our cash was $320 million, and our debt positions are substantially long-term. Our net debt to net debt plus equity stands at 27%. And during this fiscal year, we have used our global cash position to acquire Gene Systems in France and to buy back about 2 million shares at a cost of about $65 million. Capital expenditures were about $92 million in the nine months and this is compared to $76 million last year. The increase in capital expenditures primarily relates to our facilities rationalization program. We are preparing to close our [Eastfield] headquarters and combine our operations into an existing Pall facility in nearby Port Washington. This move will cut the square footage associated with these facilities almost in half.

We have paid dividends of about $48 million in the nine months, an increase of about 8% compared to fiscal year 2008. The company increased its quarterly dividend by 11.5% from $0.13 to $0.145 per share effective with the dividend declared on January 22, 2009.

We also used cash overseas, which was earning very low interest rates, to pay off a more expensive outstandings overseas. This, combined with reduced interest rates, has resulted in a reduction of our interest expense in the quarter by $3 million compared to the third quarter of last year and by $10 million year-to-date.

Our strong cost control measures, business improvement initiatives, and our pricing excellence program have helped to mitigate the full impact of this recession. This economic environment certainly presents a challenge; however, we are positioned for a rebound. Our balance sheet is solid and our liquidity is solid as well. We expect our cash flow to be solid for the year and as Eric said, we continue to manage the current conditions while remaining sharply focused on our long-term vision and strategy.

And with that, I will hand this back to Eric.

Eric Krasnoff

Thank you, Lisa. I am quite proud of the way Pall employees have responded to this year’s challenges. Our market diversity and [in-grained] cost reduction culture are helping to cushion the impact. Pall's financial strength, as you’ve heard, is both a bedrock and should feel resiliency as and when economic conditions moderate.

The key takeaway from this call is that Pall is not just weathering the storm but continuing to execute strategies for sustainable, profitable growth.

And now with the help of the conference operator, we look forward to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jeff Zekauskas with JPMorgan.

Anaylst for Jeff Zekauskas - JPMorgan

Good morning. This is [Silka] for Jeff. How are you? A couple of questions -- in the aerospace and transportation side, are the rates of growth in commercial airlines, which was up 25% and military, which was up 11%, are those sustainable and can you talk about the rate of volume and order growth you’ve seen in May and June?

Eric Krasnoff

We think the commercial aerospace was a restocking, primarily, of inventories as companies are a little bit more secure with their cash around the world, so we would expect commercial to drop back into a traditional range, which is mid-single-digit.

Military I think will continue to be healthier than commercial but again, we’ll start to move back towards the mid-single-digits. There are an unusual number of development programs going ahead and if those continue to be funded, then we can be much more towards the top of that range.

Anaylst for Jeff Zekauskas - JPMorgan

Can you remind me --

Eric Krasnoff

Nothing in particular for orders.

Anaylst for Jeff Zekauskas - JPMorgan

Can you remind me how large individual pieces are? How big is commercial, how big is military, how big is transportation?

Eric Krasnoff

Now it’s more 60-40 on the military side. Traditionally it’s been about even. And the transportation segment, which was really hit, is about $80 million, from memory.

Lisa McDermott

On an annual basis.

Eric Krasnoff

Annualized, yes.

Anaylst for Jeff Zekauskas - JPMorgan

Okay, and if I could --

Eric Krasnoff

You’re restricted to nine questions, Silka.

Anaylst for Jeff Zekauskas - JPMorgan

So one more question and I’ll get back into queue -- in terms of the, you know, movement on the SG&A line, how far are you with the goal of like the 4% employee reduction and what is sort of the run-rate of cost savings through the third quarter?

Lisa McDermott

Well, the 4% of employee reduction is done. That was completed, so our headcount -- by the way, that 4% also includes some indirects in manufacturing. Not just SG&A but overall, our headcount has been reduced year-over-year by 4%. In terms of SG&A, we saw a good portion in Q3 and we should continue to see in Q4 elevated, you know, reductions from spending controls.

Anaylst for Jeff Zekauskas - JPMorgan

Can you quantify them in any way?

Lisa McDermott

I can’t quantify them individually. I would say that it would be reasonable to assume that you should continue to see the types of cost savings that you have seen in both Q2 and Q3, if not better.

Anaylst for Jeff Zekauskas - JPMorgan

Okay. I’ll get back in the queue. Thanks very much.

Operator

Your next question comes from the line of Hamzah Mazari with Credit Suisse.

Hamzah Mazari - Credit Suisse

Good morning. Thank you. Just a couple of questions -- the first question is again related to the cost side. You know, you guys seem to be doing a pretty good job there versus expectations. I’m just curious -- I know you said you can get to 27% SG&A as a percent of sales over the long-term. I’m curious to see what bucket is that coming from, mostly. And then when end markets do come back, how much of the work that you are doing on the cost side is structural versus temporary? If you can just comment a little on that.

Lisa McDermott

I’ll start with some comments. In terms of what we are doing in the current environment, we are looking at costs in every which way, so some of it is some reduction in sales personnel and some of it is reduction in G&A, just as the volumes reduce. So in terms of sales personnel, I would consider that to be more short-term and not sustainable as the sales level starts to go back up, we’ll return that spend back to where it was.

In terms of our longer goal, which is about 26.5% SG&A as a percentage of sales, a lot of that cost is really coming from structural change and that has very much to do with the way we conduct business globally. You know, some of that Eric alluded to earlier, which is the centralization and rationalization of processes, whether that be the centralization of our headquarters in Europe or in Asia, the centralization of financial centers -- just a revamping of the way we conduct business and a lot of what I’ll call our back office function, so that would be permanent. And some of it has occurred already and it is permanent and that’s how we’ve managed to get the SG&A down from the 33% to its -- where it is today.

Hamzah Mazari - Credit Suisse

Okay, thank you and then just one follow-up -- is it fair to say that by you not providing guidance, that’s a function of you not having visibility into industrial manufacturing and micro-electronics, and the other markets you do have visibility into? Is that fair?

Eric Krasnoff

I think those are the two, plus a little transportation sector where we believe our visibility is -- not that we don’t have visibility but our visibility is no better than your visibility that we are really -- we’re with the industry itself and with analysts and trying to puzzle over what’s happening next.

Hamzah Mazari - Credit Suisse

Okay. Thank you very much. Appreciate it.

Operator

Your next question comes from the line of Brian [Drap] with William Blair.

Brian Drap - William Blair

Good morning. You mentioned the rebuild of customer inventory in the aerospace market and I’m just wondering -- are you seeing this trend in any of your other markets?

Eric Krasnoff

On the industrial side, not particularly, no, not yet. We would expect to see, particularly in food and beverage, where a big part of that reduction is related to lower inventories.

Brian Drap - William Blair

Okay, and if you look at life sciences, was inventory destocking a major issue there and are you seeing a correction at this point in that market?

Eric Krasnoff

A bit in pharmaceutical and we are seeing some inventory levels returning to normal. That business is getting back where it should be.

Brian Drap - William Blair

Okay, and then one last question --

Eric Krasnoff

It wasn’t an issue on the medical side.

Brian Drap - William Blair

Okay, thanks. And one last question -- can you talk a little bit about future potential acquisition activity and any areas that you think look attractive today, and are you seeing -- if you are looking at potential acquisitions, what type of prices are you seeing and are they attractive?

Eric Krasnoff

Well, we’re not able to discuss specifically M&A. We certainly are opportunistic and if there’s opportunities out there that are going to benefit the shareholders and the things we would be interested in are products that -- or markets that would assist us with our total fluid management strategy to provide more integrated filtration separate purification and related pieces that the customer would like in a single package.

Whether the prices are favorable or not really depends on the industry and the product.

Brian Drap - William Blair

Okay. Thank you.

Operator

Your next question comes from the line of Richard Eastman with Robert W. Baird.

Richard Eastman - Robert W. Baird

Good morning. Just two questions, first being on the system side -- how did orders look in the quarter? Was the book-to-bill better than one in the quarter?

Eric Krasnoff

No, systems orders looked poor in the quarter.

Richard Eastman - Robert W. Baird

Okay, and that presumably is weighted towards the industrial side being weak?

Eric Krasnoff

Yes, over 90% of our system sales are in industrial to begin with and it was mostly in industrial.

Richard Eastman - Robert W. Baird

Okay, all right. And then just secondly, Eric, on the lab piece of the business, tucked-in biopharm, that was I think the math suggests down pretty hard. Is that an inventory destocking issue? I presume that’s kind of what’s going through VWR and distributors or is that --

Eric Krasnoff

It’s both inventory destocking and a -- I think it’s a lower rate of spend in key customer areas.

Richard Eastman - Robert W. Baird

So that maybe trails into the fourth quarter some?

Eric Krasnoff

I think it could, yes.

Richard Eastman - Robert W. Baird

Yeah. And then, I’m sorry, just one last thing -- in the fourth quarter, as we progress into your July quarter, we are hearing some really positive things about kind of a sharp up-tick in utilization rates for the semiconductor companies and it seems to be more seasonal. Maybe it runs through into the fall but is there -- I know you don’t -- you lack visibility there but is there a reason why you wouldn’t see some of that short-term benefit if utilization rates tick up in micro-e?

Eric Krasnoff

No, we would see it definitely and we are reading the same reports you are. I was looking at the fab tech numbers showing the first calendar quarter being at about 49% utilization. They are projecting 60% for April through June and then jumping up to 75% for the third quarter of calendar ’09. If those numbers happen, we will have a -- some very happy quarters ahead of us.

Richard Eastman - Robert W. Baird

Because that’s really a -- that micro-e business is heavily weighted towards consumables, right?

Eric Krasnoff

Yes.

Richard Eastman - Robert W. Baird

Yeah, so that would --

Eric Krasnoff

Yes, it’s almost entirely consumables.

Richard Eastman - Robert W. Baird

Yeah, understand. Okay, well, thank you.

Operator

Your next question comes from the line of Adam Brooks with Sidoti.

Adam Brooks - Sidoti & Company

Good morning, guys. Folks in the life sciences side, you know, listening to what [Millipore] said in 1Q, they had a great quarter but then expect a little bit of a slowdown, particularly with their Asian customers going forward. I mean, are you seeing something similar? Because usually your sales have tracked relatively closely, or are you seeing something different?

Eric Krasnoff

We’re seeing something different. I think their first quarter they said was related to one very large sale in the U.S. But our Asian business was up 20%-plus in this quarter and we see it continuing to grow at a very high rate. It’s a major area of focus for us.

And not to pick on you, but our sales have not been tracking [Millipore] for the last six quarters. It’s the first one they beat us.

Adam Brooks - Sidoti & Company

Right. No, no, I know you guys generally outperform but there’s --

Eric Krasnoff

Okay.

Adam Brooks - Sidoti & Company

And I guess kind of a follow-up there, I guess as far as with CapEx, I mean, are we looking at similar to last year where you had a nice up-tick in Q4 versus the first three quarters of the year?

Eric Krasnoff

I wouldn’t call it a nice up-tick but --

Lisa McDermott

Generally speaking, our thoughts are that our CapEx for the year will be about $125 million to $130 million.

Adam Brooks - Sidoti & Company

Okay. All right. Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Jeff Zekauskas of JPMorgan.

Anaylst for Jeff Zekauskas - JPMorgan

Good morning. Just a couple of follow-ups -- so if I understood some of the questioning right, so you expect the micro-electronics business to have bottomed this quarter and the rate of volume decline to lessen? Is that correct?

Eric Krasnoff

No. What I was saying is that we don’t believe we have the -- any superior ability to forecast that market right now but others, as was pointed out in the industry, are forecasting that we are at the bottom and we’ll start seeing a recovery. If that is true, then Pall will definitely benefit on pace with that recovery.

Anaylst for Jeff Zekauskas - JPMorgan

Okay. But at this point from where you stand, like, you can’t tell whether things have bottomed -- have things gotten better or worse in May or June versus I guess the -- like the March or April quarters?

Eric Krasnoff

It’s about the same.

Anaylst for Jeff Zekauskas - JPMorgan

About the same -- okay.

Eric Krasnoff

Which could be a bottom thing or it could be a ledge -- hopefully it’s a bottoming.

Anaylst for Jeff Zekauskas - JPMorgan

In terms of the 1.5% in price improvement for the company as a whole, which areas have seen some of the price and which areas have gotten more pricing, and which have gotten less?

Eric Krasnoff

Life science.

Lisa McDermott

Certainly pharmaceutical, bio-pharmaceutical and life sciences. We’ve seen some pricing in food and -- good pricing in food and beverage within industrial. Some pockets of strong pricing in aerospace and transportation, and that’s around the world.

Eric Krasnoff

I think it’s important to remember that this pricing program is being rolled out over the next 12 months, so we started it early in the calendar year and we are -- or middle calendar year and we are just now rolling out the full program.

Anaylst for Jeff Zekauskas - JPMorgan

Okay. So you would expect prices to continue to move up going forward for the next few quarters?

Lisa McDermott

Yes.

Eric Krasnoff

That’s our expectation, because as contracts annualize with our customers, it gives us opportunity to work with them.

Anaylst for Jeff Zekauskas - JPMorgan

And if I could ask one question on the cash flow statement, in terms of CapEx, once Pall is done with the various planned consolidations and maybe some expansions elsewhere, what’s the level of [inaudible] sustainable CapEx going forward?

Lisa McDermott

We typically think of CapEx in terms of a percentage of sales, other than this particular year. But somewhere around 4% to 5% of sales, and I would estimate next year that we may likely drop somewhere down into the $100 million range from this year’s level.

Anaylst for Jeff Zekauskas - JPMorgan

Okay, and in terms of working capital, for the nine months working capital, and so what is like the goal for fiscal ’10, 2010?

Lisa McDermott

Well, in terms of working -- you know, we have longer term goals that we have stated and through the end of fiscal ’10, we’re looking to make significant progress. We are looking to, for fiscal year ’09, have a couple of day improvement in DSO and we are looking to take down our inventory, particularly in the fourth quarter of this year and bring the turns up somewhere to the 2.7, 2.8 range for ’09. And up to 4 by 2013.

Anaylst for Jeff Zekauskas - JPMorgan

For the full year, do you expect to be working capital neutral or do you think it will be a benefit to your cash flow, or will it still be negative?

Lisa McDermott

Actually, for the nine months, it has been a benefit to our cash flow and we would expect it to be a benefit for the full year, because year over year, although inventories are up against year-end, year over year in terms of investment of inventory, inventory is down and the reduced spend has brought about the change in working capital and our payables and our accruals.

Anaylst for Jeff Zekauskas - JPMorgan

That’s all I have. Thanks very much.

Operator

At this time, there are not further questions. I would now like to turn the call back to Mr. Krasnoff.

Eric Krasnoff

I would like to thank you all for participating this morning and hope you’ll put September 14th and 15th on your calendars. We’ll release our Q4 results on the 14th and then on the 15th at 8:30, we’ll have our next conference call. Thank you.

Operator

Ladies and gentlemen, this concludes today’s Pall Corporation conference call and webcast for the third quarter of fiscal 2009. You may now disconnect.

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Source: Pall Corporation F3Q09 (Qtr End 4/30/09) Earnings Call Transcript

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