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Pentair, Inc. (NYSE:PNR)

Q2 2009 Earnings Call

July 21, 2009 12:00 pm ET

Executives

Todd Gleason – Vice President Strategic Planning & Investor Relations

Randall J. Hogan, III – Chairman of the Board & Chief Executive Officer

John L. Stauch – Chief Financial Officer & Executive Vice President

Analysts

James Lucas – Janney Montgomery Scott

Hamzah Mazari – Credit Suisse

Shannon O’Callaghan – Barclays Capital

Michael Schneider – R. W. Baird

Deane Dray – FBR

Michael Cox – Piper Jaffray & Co.

[Mark Zepp]

Christopher Glynn – Oppenheimer & Company

Analyst for John Quealy – Canaccord Adams

Brian Drab – William Blair & Co.

Scott Graham – Landenburg Thalmann

Operator

My name is Patrick and I will be your conference operator today. At this time I would like to welcome everyone to the Pentair Q2 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. (Operator Instructions) Todd Gleason, you may begin your conference.

Todd Gleason

Welcome to Pentair’s second quarter earnings release conference call. We’re glad you could join us. I’m Todd Gleason, Head of Investor Relations and with me today is Randy Hogan, our Chairman and Chief Executive Officer and John Stauch, our Chief Financial Officer. On today’s calls we will provide details on our second quarter results as well as update you on Pentair’s outlook for 2009.

Before we begin, let me remind you that any statements made about the company’s anticipated financial results are forward-looking statements subject to future risks and uncertainties such as the risks outlined in Pentair’s 10K as of December 31, 2008 and Pentair news releases. Forward-looking statements included herein are made as of today and the company undertakes no obligation to update publically such statements to reflect subsequent events or circumstances. Actual results could differ materially from anticipated results.

Today’s webcast is accompanied by a presentation which can be found in the financial information section of Pentair’s website at www.Pentair.com. We will reference these slides throughout our prepared remarks. Any reference to non-GAAP financials are reconciled in the appendix of the presentation. I would also like to point out that all financial results and references to year-over-year numbers in today’s call and presentation are on a continuing operations basis unless otherwise noted or highlighted.

As is our custom, we will reserve time for questions and answers after our prepared remarks. I will now hand the call over to Randy who will take you through Pentair’s second quarter 2009 results, provide his perspective on the results of our businesses and the markets they serve and provide an overview on how we are driving to deliver for the rest of 2009. Then, John will conclude our formal comments with additional information regarding second quarter financials and provide more detail on our outlook.

Randall J. Hogan, III

Let’s begin by reviewing our second quarter results shown on Slide Two. Sales of $694 million were essentially at the low end of the guidance we provided in April. We had some pluses and minuses with respect to sales but the headline is North American residential market showed signs of sequential improvement while Europe and many commercial and industrial end markets continued to bump along the muddy bottom.

Sales in our water business were down 18%, essentially in line with our expectations. Our largest market, North American residential remains down year-over-year but we have seen steady sequential improvement since March. The seasonal uptick we forecasted for our pool equipment business occurred at or above the pace we expected so that was a positive. Our European water business was weaker than expected especially in April and May which offset any upside on North American residential market sales may have been able to deliver in the quarter.

Technical product sales declined 32% which was about 500 basis points below our expectations. Similar to water Europe, volumes in April and May were worse than forecast but orders and sales picked up from there in June. All of our major vertical markets and technical products experienced double digit declines in the quarter.

Also in the quarter we delivered reported earnings per share from continuing operations of $0.33 which includes $0.05 of non-recurring items associated with new restructuring actions and our early redemption of high interest rate notes, neither of which were in our Q2 guidance. We will discuss these items in more detail later in the call. If you remove those items, we delivered $0.38 of adjusted EPS which was down 46% when compared to adjusted EPS in the second quarter of 2008 which excluded the onetime gain on the formation of Pentair Residential Filtration, our combination with GE.

While down significantly year-over-year, adjusted Q2 EPS almost double sequentially as the benefits from cost actions, material savings and some seasonal volumes provided a strong lift over Q1 2009 adjusted EPS. We remain on or ahead of schedule with regard to our major cost actions and have already closed 15 of or 17 targeted facilities. Furthermore, headcount is down 18% year-over-year. While difficult actions, these are necessary to ensure we remain competitive and are positioned appropriately for the long term

Despite our well executed aggressive costs actions, the dramatic volume declines in the quarter resulted in our margins contracting 370 basis points for the total company as positive benefits from productivity and price did not offset the negative impact from volume declines and foreign exchange. Another way to consider our productivity results is by looking at sequential margins. Second quarter operating margins expanded 330 basis points when compared to the first quarter of this year. Q2 sales grew about $60 million when compared to the first quarter while income grew by about $27 million. If you do the math, the operating income conversion from the additional sales was almost a 45% conversion rate so that’s another indicator that productivity is yielding strong results.

Relative to our adjusted EPS, our second quarter effective tax rate was 33%, up three points versus the first quarter but in line with our guidance. We continue to expect our full year tax rate will be between 32% and 33%. Finally, we produced $131 million of free cash flow in Q2. Year-to-date, we’ve generated approximately $40 million more free cash flow than in the first half of 2008.

Now, let’s turn to Slide Three which provides an overview of our Q2 water results. Here are the details, on the top of the slide we provide our standard sales and operating income walks. I’ll refer to these as we describe the performance of the water group. Overall, water sales declined $107 million to $487 million, down 18% versus second quarter 2008 sales or down 17% organically in local currencies. As I mentioned earlier this was at the positive end of our sales guidance we provided in April.

Let’s review our water business unit performance individually; our global flow technology sales declined 175. Growth in our municipal markets did not overcome continued declines in residential and commercial and softness in agricultural markets. Global filtration was down 14% in the second quarter versus last year as the benefits from the formation of Pentair Residential Filtration did not overcome the general economic decline’s impact on residential and commercial markets. Our global pool equipment business did benefit from a nice seasonally uptick versus the first quarter but sales were still down 16% year-over-year as pool permits and the overall pool equipment market remained depressed.

Internationally, sales in Europe, the Middle East and Africa or EMEA were down approximately 24% in local currencies which was below our expectations when we introduced guidance. Worse than expected sales in April and May were not overcome by June volumes which were more in line with our original expectations. In Asia, water sales were down slightly in local currencies as sales growth in China did not compensate for weakness in other parts of the region.

Now, let’s discuss operating profits and margins for our water group. On the top right you can see our year-over-year operating income walk for water. Adjusted margins were 10.5% down 330 basis points year-over-year. Margins came in essentially in line with our guidance as productivity actions delivered meaningful results but did not offset the impact volume declines had on our margins year-over-year.

In the quarter we instituted new restructuring actions. The charge associated with this is shown on the walk as a $1 million negative impact to op income which is how you get to our reported operating income of $50 million. So in sum, this is a very challenging environment where we continue to take the right steps to position our water business for better days.

Now, please turn to Slide Four and we’ll review technical products. Year-over-year, second quarter sales in technical products were down 32%. As I mentioned earlier, sales declines of about five percentage points worse than we had anticipated. April and May were very weak as we did not see any improvement from the depressed Q1 levels. However, June sales more closely tracked the volumes we had expected and proved to be the strongest month year-to-date. Sales declines were experienced across the board in technical products as all our major vertical markets contracted with several dropping more than 30% led by datacom which was down over 50%.

Looking at the businesses within technical products, our global electrical business declined 28% while our global electronics business declined 32%. Technical product margins were 12%, a decline of 440 basis points year-over-year. Aggressive cost actions and solid execution on our restructuring efforts did not make up for the dramatic decline in sales. That said, margins improved sequentially almost 200 basis points despite slightly lower sales volumes than in the first quarter. So, we’re delivering the sequential margin improvements we expected. As in water, we took new restructuring actions in the quarter. The $1 million charge associated with those charges is shown in the walk and reconciles to our reported operating income of $24 million.

Now, please turn to Slide Five and let’s review some of the key takeaways from Q2. Starting with some of the pluses or positives, we mentioned earlier that we are seeing sequential improvement in the North American residential market. In the second quarter, this market performed slightly better than we had originally forecast. Since residential markets represent about 50% of our water sales, this is an encouraging trend.

Next on the list is the sequential volume conversion. We anticipated that our cost actions would produce strong margin conversions from higher sales and as we shared earlier we did generate nice sequential margins. We expect to continue to deliver solid productivity results which will continue to position us for sequential margin expansions going forward.

Moving to the next positive item, you may have seen our press release last week announcing the largest contract in Pentair history, a $65 million municipal pump order with the Army Corps of Engineers to help improve flood controls for the City of New Orleans. The pump station is expected to be the largest in the world and deliveries are scheduled to commence in 2010 and cumulate in 2011. The record order demonstrates our position in the municipal markets. Another plus coming out of the second quarter was free cash flow which as mentioned earlier was about $40 million higher than our cash generation in bin point of 2008.

The next few items are essentially neutral. We expected commercial and industrial markets to experience strong double digit declines and certainly we saw that in the second quarter of 2009 so no blood really versus our guidance. While Asia and Middle East markets generally have slowed, we continue to see solid growth prospects in both water and technical products. We’re being cautious on our sales forecasts for these markets and therefore not overly dependent on the growth rate we previously had generated until we see the recession’s impact on these regions.

We’ve already mentioned the two negatives, or minuses listed on this slide. Q2 sales in Europe were negatively impacted by the extremely soft April and May; technical products experienced a similar trend as the first months of Q2 remained at or below Q1 levels. Sales in June improved in both but were not enough to bring either business up to the expectation we had when we started the quarter. Overall, Q2 produced a balance of positive, neutral and negative items which, is not uncommon, of course. We’re encouraged the positives are beginning to outweigh the negative.

Let’s take a look at our total company productivity for the second quarter. Please turn to Slide Six. We showed this slide during our Q1 earnings review so this is just an update on our major productivity actions. The walk at the top of the slide shows the major components impacting our year-over-year operating income. The first bucket labeled net material and price is a positive $1 million. Since you can see on the previous slide that we generated $16 million of price, you’d be correct in calculating that material inflation was still a -$15 million.

We continue to work off higher priced inventory which has been a drag on earnings in the first half of 2009. Sequentially we did improve materials by approximately $10 million so we’re gaining traction. Some of our material benefits from lower priced commodities is trapped in inventories in our balance sheet so that should provide a lift in the second half as cost of goods sold increases in line with those lower raw material costs already in inventory.

The next three buckets in the walk totaled $65 million in positive productivity associated with wage and headcount reductions and the result of our aggressive actions with regard to discretionary items. Bottom line, our costs actions are yielding results. The final component is labeled growth which reflected a decline. With total company sales down 23% or approximately $200 million, the -$119 million is simply the amount of non-material drop through that occurs if we had not taken the action we did to adjust our cost structure.

The bottom half of the slide detailed the year-to-date results of our headcount reduction actions year-over-year. Hourly headcount is down 21%, similar to our sales decline. Salaried headcount is down 13%, another significant drop. But, what’s most critical is that wages shown on the bottom right of the slide are down 20%. That means our actions are yielding solid cost reductions and since we continue to maintain our investments in R&D, global expansion and organic growth initiatives, we have not sacrificed future growth for short term benefits. There have been significant progress on our cost actions which lays a nice foundation for the remainder of 2009 and 2010.

Please go to Slide Seven and let’s review full year 2009 productivity. Three sections of this slide represent the three largest components of cost to our company: materials; hourly labor; and salaried labor. We’re driving actions in each to provide meaningful bottom line productivity in 2009 and to ensure we are positioning the company for 2010 and beyond. Here’s the major takeaways from each component: first, in materials we expect $30 million of net benefit from actions we’ve taken to secure lower price commodities and components for the balance of 2009 when we’ll start to see solid improvement in materials and we expect to lower our materials as a percent of sales by 1% or the $30 million.

Next is hourly labor, previously we had targeted about $70 million of savings from this cost bucket. Our current view is that we should get between $75 and $80 million of cost takeout here so while these actions are difficult they are necessary with the sales drop we and lots of other companies have seen during 2009. The third section salaried labor, is expected to be down another $70 million. We remain on track to achieve those savings having already reduced our salaried headcount by 13%.

These top three productivity actions drive a significant portion of the cost savings we expect to achieve in 2009. In total we current expect to drive productivity savings of $250 million, up about $10 million versus our previous view. This is critical to delivering on our commitment as our end markets remain soft and difficult to predict.

Now, please turn to Slide Eight. This slide is also one of our standard update slides and it is divided in to four quadrants: cost out; driving free cash flow; position for growth; and our perspective going forward. As I previously detailed, we continue to execute against our cost actions. We knew 2009 would be a very difficult year and so far it’s been worse than that. Only through solid execution will we deliver on our targeted results. The items highlighted in this section demonstrate our progress. These are items we’ve already covered so I won’t repeat them. We’ll continue to keep you posted on our progress as taking out costs is clearly critical in this environment.

Moving down the left side of the slide, our ability to generate significant free cash flow remains a focus for the company. We have a tremendous opportunity with working capital and we’re already making progress since year-to-date we’re approximately $40 million ahead of last year. Moving to the top right of the slide, it’s important to note that we remain energized about our long term growth prospects in both water and technical products. While sales remain will remain in decline for 2009 we continue to introduce new products, win key orders and position our business favorably for significant orders in the future.

The $65 million municipal pump contract I just talked about is a great example of our strength and position and an important market for Pentair in our engineered flow business and this is in a market which is targeted for the government stimulus money. We’ve won several relatively small stimulus related programs already and we’ll keep you informed as to the level of projects getting underway.

We’re also proud to announce that our filtration solutions enviro product continues to be recognized as the leading reverse osmosis product in food service. In May, McDonalds selected enviro as the winner of the McDonalds’ innovation award. The enviro system sets new benchmarks in RRO and water efficiency and we remain very positive on its prospects in food service and hospitality end markets.

The final section of this chart is labeled going forward. We will continue to execute against our cost actions and we’re implementing additional actions to offset volume declines. As we drive working capital actions we’re confident we should deliver at least $225 million of free cash flow for 2009 which will be used to pay dividends or pay down debt. Finally, we believe that with our innovation and market investments Pentair is positioned to take advantage of market opportunities as they emerge.

As I said earlier, we look forward to sharing our progress with you. By taking out costs today, driving free cash flow so we can continue to invest in tomorrow and developing new technologies and satisfying our customers every day, we will emerge stronger for the long term. Now, I’ll hand it over to John who will provide additional details on our financials and also to discuss our full year 2009 outlook in more detail.

John L. Stauch

Please turn to Slide Nine. This slide is divided into three sections, the top section reflects the GAAP or reported earnings per share for Q2 year-to-date 2009 and our second half and full year outlook for EPS. The middle section details the adjustments from GAAP to our adjusted earnings per share for those periods. At the bottom of the slide we provide 2008 reported and adjusted EPS results for comparison purposes.

Starting with the first column labeled Q2 ’09 actual, our GAAP reported earnings per share were $0.33. Included in this result was $0.02 of EPS charge for severance costs as we took new actions in the second quarter to reduce our headcount by an additional 100 people. The next non-recurring item is the $0.03 associated with the early termination costs for our note redemption, an action we completed in April. Removing the impact of these two items, you get to the $0.38 of adjusted earnings per share for Q2. The $0.38 is down 46% versus the $0.70 earned in the second quarter of 2008.

Please shift one column to the right which provides similar detail regarding our year-to-date total. Rather than walk through the numbers, I’d simply point out that we had a $0.07 delta between our reported year-to-date EPS of $0.50 and our adjusted EPS of $0.57. The timing of certain non-recurring benefits is not easy to forecast but we continue to work on several items that would offset or eclipse the restructure and bond related charges for the year.

The following two columns represent our second half and full year 2009 outlook in the same reconciliation format. As you can see, we expect an additional $0.03 of restructuring charges in the third quarter related to the closing of a technical products facility and as I just mentioned, we are working on some positive non-recurring items that would provide about $0.10 EPS. So, guidance for both our GAAP and non-GAAP EPS remains $1.40 plus. In a few minutes we’ll discuss our outlook for Q3 in more detail.

Please turn to Slide 10; the top portion of the left hand side of the page gives the major components of cash flow for the second quarter and the year-over-year information. As you can see, we delivered $131 million in free cash flow. Working capital management drove almost $100 million of cash flow in the quarter and working capital drove over $40 million more cash flow than the second quarter of 2008.

Similar to our execution around cost takeout, we are focused on free cash flow. We continue to make nice progress leveraging our disciplined lean efforts and expect working capital will continue to generate strong free cash flow in the second half of the year. As you can on the lower left hand side of the chart, our current cash usage objective is to continue to reduce debt. We expect to lower debt to approximately $800 million by the end of 2009. With the early redemption of our outstanding 7.85% note which we completed in April, our earliest maturity on our remaining outstanding debt is 2012. Overall, our average interest rate is current 4.1%. This represents a mixture of LIBOR plus 50 variable rate debt along with fixed rate debt of approximately 5.5% so we are comfortable with our debt position and we expect to reduce it further throughout 2009.

Please turn to Slide 11 and let’s review cash and related metrics another way. The top section of the slide provides a straight forward walk on our debt balance to start the year and how we expect to pay down debt to approximately $800 million by the end of the year. We also show our dividend payments of approximately $70 million for the year which is the other use of cash in 2009. The green boxes represent the $225 million of free cash flow that we intend to generate in 2009 which is obviously how we pay down debt and fund our dividend.

The lower half of this slide shows some key cash related metrics. We continue to have a big opportunity to reduce our working capital as a percent of sales. It currently stands at 15% which is three points above 2008 levels. Our current receivables position remains good but, we have receivables days or DSOs creep up as global mix and in some cases customer terms have each had a negative impact. Conversely, we are working to manage our payables to reflect the market realities. Our DPP, or days payable has increased to 62 days from 58 days in similar portion as receivables have increased by on a smaller balance.

Finally, our rapid decline in sales and plant moves and closures, days inventory on hand or DIOH has grown to 89 days from 75 days a year ago. We expect to lower this metric by about 10 days in the second half of the year. As we complete our factory closures we’ll have a more stable inventory system and sales level look to stabilize so our planning and inventory systems will continue to improve.

Please turn to Slide 12 and let’s review our third quarter 2009 outlook. This is an overview of our Q3 2009 forecast. We expect Q3 revenue to be between $675 million and $695 million, down approximately 20% when compared against last year’s sales of $856 million. As you can see on the upper right of the slide, this revenue projection reflects a contraction in water revenue of between 15% and 17% and a contraction in technical products revenue of between 26% to 28%.

We expect Q3 operating income to be $70 to $80 million and produce double digit operating margins for Pentair. As we just covered, our outlook for Q3 EPS is between $0.35 and $0.45 per share on an adjusted basis. The benefits from our cost actions will continue to read out at substantial reductions in operating costs accelerate in Q3. Additionally, we expect year-over-year net material performance to be a larger positive than represented in Q2. We expect our Q3 tax rate to be around 33% which is essentially flat with the tax rate in Q2.

Interest expenses is expected to be reduced by approximately $4 million year-over-year as our interest rate profile has improved dramatically. Finally, we expect to generate free cash flow of about $60 million which will keep us on track to deliver $225 million of projected free cash flow for the year. So, a lot in common with the quarter we just completed. Sales are expected to be slightly lower than Q2 but income should increase as benefits from our ongoing cost actions provide additional relief.

Please turn to Slide 13 and let’s look at our Q2 to Q3 sequential sales and income in more detail. We wanted to provide this detail to address potential questions regarding our Q3 outlook which has sales dropping sequentially but income rising. Here’s how we’re delivering that dynamic. First, we are forecasting sales to decline about $10 million sequentially. We expect sales to drop $30 million from the absence of seasonal volumes that historically fall in to the second quarter. To somewhat offset that drop, we expect our European water businesses and our technical products business to each generate about $10 million of additional sales in Q3 versus Q2.

Both of these businesses will still be down year-over-year but we do not expect a dramatically slower start to the quarter that we saw in April and May. So, that walks you to the midpoint of our sales range for Q3. Now, let’s do the same thing for operating income on a sequential basis. As you can see, we estimate operating income to be up between $3 million and $13 million sequentially. Here is the walk, we expect the sequential drop in sales translates to a -$5 million in income. To offset that drop savings from sourcing materials programs should deliver about $7 million of positive income versus the second quarter.

Finally, since we started our restructuring actions several quarters ago we’ll begin to see the steady decline in pay as you go expenses and manufacturing related costs. The pay as you go costs reflect our facility closure costs such as dual leases, lower production yields, training ramp up costs, IT system migration costs and asset depreciation accelerations. So, these incremental productivity items should deliver about $6 million in operating income. The total of these three items brings you to the midpoint of our third quarter operating guidance. I hope that information was useful.

Please turn to Slide 14 and let’s review our full year outlook. We are maintaining the same full year guidance. Our total company full year sales outlook remains $2.7 billion or down about 20%. This is a drop of -$600 million in revenue year-over-year. We continue to expect our cost actions will deliver significant savings. Currently, we are forecasting $250 million in cost reductions in 2009. While that will positively position our cost structure going forward, it isn’t enough to keep operating income flat with 2008. As such, we continue to expect our operating income will be down about 30% to approximately $255 million.

Finally, we are maintaining our EPS guidance of $1.40 plus. While our end markets remain unpredictable, we continue to see signs of stabilization and even some pockets of improvement but, it’s too early to determine meaningful trends so we will continue to focus on our cost actions and cash generation which will put us in a great position for 2010 and beyond.

Let’s turn to our final slide, number 15. In summary, we executed against our major actions very well in the second quarter but markets remain challenging. We took initial actions which were necessary to provide support to our full year outlook. We have two facility closures remaining and both are on track to be completed in the third quarter. With headcount down 18% year-over-year we have taken aggressive action to ensure our cost structure reflects the market realities and with lower interest expenses and strong free cash flow generation, we are in good shape with respect to our balance sheet. Finally, we provided detail on our sequential sales and income assumptions so we expect more productivity in the coming quarter and we remain convinced that 2009 earnings while down substantially reflect improved cost position that will be leveraged when market returns to growth.

We’d now like to answer any questions you might have. Operator, please open the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from James Lucas – Janney Montgomery Scott.

James Lucas – Janney Montgomery Scott

First question, the costs taken out, the cash flow is a very good number, your controlling the controllables if you will and now with no major debt coming due for a little while now can you speak to priorities of capital allocation?

Randall J. Hogan, III

Jim, it really is the two Ds, it’s dividends and debt. I’m pleased with the cash flow that we’re generating and I’m pleased with the progress on costs and you said it aptly, we got control of the controllables but I still think there are too many uncertainties in the external markets to commit to anything bolder than that.

James Lucas – Janney Montgomery Scott

So in terms of weighing share repurchases versus acquisitions it sounds like that’s on the back burner?

John L. Stauch

It is Jim and we want to continue to control our own destiny and we think right now the best way to do that is to keep the debt at manageable levels and continue to pay it down. When we get to a comfortable level either with more predictability around EBITDA and our ability to lower that debt position then, I think we’ll look opportunistically at the ideas that you’re suggesting. But, right now it’s focus on debt reduction and keeping destiny within our control.

James Lucas – Janney Montgomery Scott

Then switching gears, on the filtration side of the business could you perhaps give us a little bit more color on both Porous and Everpure and what you’re seeing in their end markets right now?

Randall J. Hogan, III

I’ll go with the food service first, no surprise that there’s a challenge in the food service industry in terms of new placement but, I think Everpure is doing well in viral and our partnerships with Ecolab and some of the other leaders. I think our position with winners in this environment, people like McDonalds is boding well. So, we’re down slightly but I think we’re actually gaining share. We’re also looking to extend that capability more deeply in to the hospitality area, also an area that’s challenged right now. But, given the focus on sustainable water solutions, higher energy efficiency and lower water usage, we’re having some very encouraging discussions with a number of the larger hotel chains.

So, that’s the Everpure and food service discussion, in terms of Porous Media we have a number of new initiatives, really I would say deepened initiatives particularly in power and oil and gas that are very, very encouraging. So that’s more of a flat business right now with our opportunities to penetrate more deeply in to power, oil and gas. Medical is actually is probably the slowest one of the segments that Porous Media is seeing right now.

James Lucas – Janney Montgomery Scott

Finally, with regards to the muni business, you talked about a few smaller stimulus projects that you won and updates to come in the future but could you talk about just your overall municipal strategy which has been evolving here over the last couple of years?

Randall J. Hogan, III

Sure. As you’ll recall Jim, municipal was not a target for growth in Pentair 10 years ago when we were really focused on water and that admittedly may have been more of an internal view but it was a business that basically is our Kansas City focus, Fairbanks-Morris plus some of our other larger engineered flow plants that serve that. But, it wasn’t making that much money, it was sub 10% ROS but thanks to lean and thanks to leadership in that unit and in engineered flow overall, we actually drove that up in to the teens.

When they got there we said this is an area that one, given the super cycle investments expected in infrastructure and our ability to compete more effectively while making good money, we started to invest. So, we started to invest in global reach so we’ve had wins in the Middle East and we’ve had wins now in the Philippians and expect more wins in Asia and we’ve aggressively positioned to win whatever money gets spent in water from the stimulus package. We put out a white paper that you can get on our website and it shows about $15 billion of the stimulus money which will go directly in to the areas of water.

Now, we mentioned that we won a few of those. There were three projects, they are waste water projects, in sum they’re less than $1 million. But, we have six more we’re bidding right now which will probably be over a couple of million so we expect to see this build. In fact, by February of next year much of that first tranche of money in to water should be let so we should have a very clear sense as the end of the year hits as to where some of the early larger opportunities will be from the stimulus money.

So, we’re investing and working with our distributors to win more than our fair share. We actually happen to have the most by America footprint of anybody that serves this industry which we think is an advantage. This is an area, not just because of the stimulus, but because of the infrastructure super cycle we continue to want to invest in.

Operator

Your next question comes from Hamzah Mazari – Credit Suisse.

Hamzah Mazari – Credit Suisse

Just a couple of questions, the first one is last conference call you guys said that at Q4 you expect sales declines of less than 20%. Is that thinking changed or is that still accurate? Can you give us a sense of how July is looking like for some of you major business lines?

Randall J. Hogan, III

In the fourth quarter we said 10% but that’s really a lapping because if you recall we were down 14% in the fourth quarter of ’08. So, we’re really not saying the fourth quarter is a better run rate of volume, it’s just an easier comp.

John L. Stauch

If we just answer your second question around July, what we’re doing internally here is taking a look at July as it relates to April and May, year-over-year comparisons are usually the way we look at results. Right now we’re trying to take the best known period we have which is the April and May start to the quarter and all indications are that Q3 is starting out in those areas that Randy mentioned as being softer, are starting off better here in July than they did in April.

Randall J. Hogan, III

It’s tough to look at year-over-year comps. I mean in this month for example, around the 4th of July holiday we had a number of plants that went on furlough so that kind of makes compares really difficult. But, we believe that we’re going to deliver the $1.40 plus and we think our cost is going to be delivered to get there.

John L. Stauch

I think we all would agree, we need stabilization before we get recovery. I think we’ve said that our residential markets are stabilized. We knew there’d be incremental softness in commercial and industrial like the rest of the market is participating in. Europe feels more stable here in Q3 than it did in Q2 and the tech products end market feels more stable than it did in Q2.

Hamzah Mazari – Credit Suisse

Just bigger picture, your return on invested capital in your water business has been much below expectations because of end markets. What has to happen there for that to come back? Is it just residential coming back or are there other structural changes that need to happen in that business?

Randall J. Hogan, III

Well, we really need volume. We need to globalize all of the water businesses very aggressively but particularly the filtration businesses and the residential business and we need to drive volume. So, global volume and what I call product innovation volume are the keys to getting the ROIC back and we think we can.

John L. Stauch

We’ve taken a lot of action around the cost basis in water. Obviously, goodwill is a large component of the investment base in water and that’s where we need the growth and we need the incremental conversion on that growth which is one of the reasons we highlighted the sequential improvement, we need to see that type of year-over-year improvement as we get the revenue.

Hamzah Mazari – Credit Suisse

Just last question, is the higher priced inventory, how far are you along in working that off? Is that behind you now and how is pricing holding up in your business lines?

John L. Stauch

It’s flipping positive in July. We’ve been realizing the purchase price variance in Q2 in a favorable area, it gets hung up in inventory and now it’s coming off and starting in July we actually have positive variances on the balances as we ended the quarter of Q2.

Hamzah Mazari – Credit Suisse

Just on pricing, are you seeing any pressure there across your business lines?

Randall J. Hogan, III

If you look at the first quarter we were up 1.9 points and in the second quarter we’re up 1.4 so it’s moderating and as you recall, I think we said on the last call that we’re not expecting a of benefit from price but we’re not expecting to give up a lot of price either in the second half. Actually, ironically the firming up of some material markets supports that.

Operator

Your next question comes from Shannon O’Callaghan – Barclays Capital.

Shannon O’Callaghan – Barclays Capital

A little follow up on the pricing question, you talk about this sequential net material benefit going in to 3Q, what do you expect for 4Q and is this something that flows in to next year or does it flatten out? How do you see it playing out?

John L. Stauch

Absolutely it gets better from Q3 to Q4 and it carries over at least until the first half of 2010. Then, just like any company we’ve got to go out and get incremental actions that improve it further. But, we’ve done all the right things, there has been a timing delay and when we’re recognizing it starting to roll out here substantially positive here in the second half you’ll see another first half benefit for sure in 2010 against 2009 first half.

Shannon O’Callaghan – Barclays Capital

So does it continue to be a sequential benefit like it is in 3Q?

John L. Stauch

Yes.

Shannon O’Callaghan – Barclays Capital

At about the same rate or does it moderate?

John L. Stauch

Probably slightly better.

Shannon O’Callaghan – Barclays Capital

Then can you fill out a little bit, you’re talking about pockets of improvement and North America residential pool a little better seasonally. Can you fill out, give a little color on what you are seeing get better and why you might be encouraged or hesitant?

Randall J. Hogan, III

In just looking at the North American residential market, as we look at what we saw in the second quarter, it looked like we were seeing end market demand so not a lot of distribution draw down. We saw additional distribution draw down in the first quarter and that seems to have, I wouldn’t say that they’re building inventory yet but, they certainly aren’t taking inventory out. Actually, in a couple of our businesses, as I mentioned, we had a better pool quarter than we had forecast. I think a couple of things drove that, one I believe our market position and our outstanding sales force has held us in good stead as well as our Eco-Select line of products.

Just as a reminder, Eco-Select is our line of environmental and energy sustainable products that we sell in pool. It includes a soft chlorinator, includes our [intella] flow high efficiency multi speed pump, it includes our [intella] touch controls, it includes our LED lights and that actually was 36% of our sales in the quarter. It was less than 30% not long ago so we think that’s share so we’re encouraged by that. We’re getting a lot more coverage, a lot more utilities are actually rebating those products so we think that’s encouraging.

As well as, when we look at residential filtration in particular we’re starting to see I think, I hate the term green shoots, because they get over used but that’s in fact what we’re seeing. We’re seeing more activity, more opportunity there in North America residential and that is our single biggest market so we’re encouraged by that.

Shannon O’Callaghan – Barclays Capital

Just a last one, on tech products your modeling in a sequential bottom here, you mentioned some of the way the month flowed out in 2Q but datacom looks really tough, electrical obviously it was below your plan overall for the segment and the quarter, what gives you kind of confidence in the sequential bottoming out there? And, do you specifically see anything that encourages you there in terms of inventory destocking or anything else?

Randall J. Hogan, III

Well, the datacom was down over 50%, part of that was those are end of life programs so we have a good handle on those. We mentioned cooling was down 38%, cooling is nice margin, good business. They were particularly hurt in April and in May and their run rate improved and I think that’s going to help. Then, what we call the big H, the Hoffman Electrical business, we’re seeing better daily order run rate at the end of the quarter and that’s why we see it a little bit better, it’s still down year-over-year but still better.

John L. Stauch

Shannon just to put it in perspective, Q1was down around 27% , Q2 down 32%, Q3 down 27% so I don’t want anybody to suggest we’re thinking about a recovery we’re just thinking that Europe was abnormally soft in April and May for tech products as well in Europe and we’re just not seeing that repeat.

Shannon O’Callaghan – Barclays Capital

So the Europe thing did you guys ever sort of make sense of why it was so weak for two months? Does Europe actually look like it’s getting better now versus those months?

John L. Stauch

I would say it’s down at the rate that we would have expected and June was a decent order month, one month doesn’t make a trend. But, we head in to July with a little better backlog and a little bit more predictability in the market.

Randall J. Hogan, III

A little color, it was like Europe was going through what the US went through in an accelerated fashion so we saw distributors really clamp down particularly on the water side, just basically not an order as they adjusted to what they saw as the new reality there. Then, as that settled in, I think it just happened in two months instead of six, in the US it was about six.

Operator

Your next question comes from Michael Schneider – R. W. Baird.

Michael Schneider – R. W. Baird

Just continuing on the European theme, how much visibility do you have in to your customer plans for the third quarter? Obviously, August is a normal vacation or holiday period for them but do your customers intend or have you been able to discern if they intend to shut down for even greater extended holiday periods this year?

John L. Stauch

Well, I think that’s the question we’ll be looking at. I mean July could be strong, we could see August normal shutdown and then September could be one of those months where it doesn’t turn back on. I think in our numbers we’ve put a little contingency in for that dynamic. But, right now the orders and the customers we’re dealing with, especially in technical products aren’t relative to those shutdown types of patterns that we would see. On the water side we’re expecting a soft Q3 as well there, we’re just not expecting it to be down 40% which was April and May was for us.

Michael Schneider – R. W. Baird

Then just on the price question, per the charge it looks like you still had a fairly substantial amount, $16 million in price benefitting the quarter. Could you remind us just how that gets anniversaried from some of the price increases last year and what the comparable contribution looks like in the second half?

John L. Stauch

You’ll see Q3, as Randy mentioned, dropped down from our Q2 realization and then we tend to implement price increases in Q4 that begin to get realized the first of the year. So, being in the distribution business most of our distributors only like prices to be adjusted annually and most of those are dealt with in Q4. Just a little preview in the 2010, I don’t think we’re expecting a robust pricing environment as we head in to 2010.

Michael Schneider – R. W. Baird

Then on materials, a similar question, in the slides you indicate that you expect a $30 million benefit for the year but building on Shannon’s question, if there’s a $7 million benefit in Q3 it implies $63 million in Q4 so it’s more than a slight increase or is my math not correct?

John L. Stauch

Well, the big wild card in that number is mix Mike. The mix of our product lines is also netted in that negative number. If you think about it, you’ve got electronics versus electrical and tech products and then you’ve got the mix of municipal which is lower margin then what we have in residential. So, the number I was alluding to accelerating rapidly is the net year-over-year procurement savings which you can kind of see what it is in Q3, it’s at least double that on a procurement basis in Q4.

Michael Schneider – R. W. Baird

In the water business, Fairbanks-Morris has this record order, it is incredible how big it is relative to the size of Fairbanks-Morris. Now I guess two questions, one are there additional phases to this New Orleans project that come beyond 2011 that you’d be bidding on? Then secondly, meanwhile do you have the capacity in Kansas City to take on more stimulus projects and just how limited are you in the wake of the New Orleans order.

Randall J. Hogan, III

I’ll answer the second question, yes we will have the capacity. One of the reason we reorganized like we did was to have focused and engineered flow. We have more flexibility across plants when you think about our Aurora facility and our Ashland facility as well as our ability to contract out. The $65 million includes buying out diesels and we buy them in so there’s a fair buy in content there, their diesel drive.

We look at the stimulus money and what we want to do is make sure that we don’t turn anything away because we can’t make it. Thanks to lean we have a lot of capacity in Fairbanks-Morris and thanks to bringing down the walls between the other engineered flow businesses we’ll have more flexibility in how we serve it. As for following on orders, for this particular plant I guess the answer would be know but for flood control projects I would say emphatically, follow on jobs, there are more, there’s a lot more. They even could be bigger.

John L. Stauch

There is a bigger one in New Orleans Mike that follows on to this one that is at least equal in size and we would like to be the winner of that one as well.

Michael Schneider – R. W. Baird

Then final question, just conceptually, water came in better than expected because of the residential and technical products maybe slightly lighter than expected. I noticed in the reconciliations for the slides it looks like you did raise your revenue forecast for water and trimmed your technical products but was that adjustment solely due to the second quarter or did you make a similar adjustment for the back half of the year between the segments?

John L. Stauch

The purpose of that was solely through Q2.

Operator

Your next question comes from Deane Dray – FBR.

Deane Dray – FBR

To go back to the question on the North American residential water improvement, how much of this might have been from the joint venture with GE? And, how much of that is represented in the business today?

Randall J. Hogan, III

We did have a pickup year-over-year but we factored that out when we went from the 18% down to the 17% down, you’ve got to look at foreign exchange. We saw residential filtration down in the teens but not because of the joint venture. If we could separate it out, which is a little difficult to do, separate the volume from GE or the volume from legacy Pentair, they were down similarly. But, what we see is we see more activity in the channel, we see more activity among OEMs as well so that’s why we’re encouraged that it’s getting better. Frankly, I think we are more in touch than we were a year ago, we’re more in touch with the customers there.\

John L. Stauch

Then again Deane, it’s not rapidly getting better, it’s turning positive sequentially which is something we haven’t seen for three years. So, we’ve hit bottom and we’re getting a recovery off of the bottom.

Deane Dray – FBR

Is there any difference in the go to market strategy there? Do you think you’re taking share in residential?

Randall J. Hogan, III

I don’t think we are yet, I think we are in a position to and I look forward to seeing us do it.

Deane Dray – FBR

Then over on the pool side, you did not benefit from an early buy earlier this year so just give us a sense as to are you seeing what would be characterized as just in time orders, is there any more destocking, what’s the inventory in the channel look like today?

Randall J. Hogan, III

I’d say the visibility we have, I think the sales actually were in line with what we saw. I think in general there were a few that did a little bit better in the channel in the sales in the quarter. But, people are being really, really cautious. We can tell from the nature of the orders that we’re seeing more end market demand, they’re smaller orders with more variety on them and they’re more urgent which tells you that’s an end market order not a stocking order.

I was encouraged that we got closer to what our business thought was their upside, we didn’t use that upside but we got closer to what they thought they could do. I think right now we’re being properly cautious as we look at the third quarter and the fourth quarter in our forecast as to what to expect from pool. We’re not expecting a return to past times, we’re expecting caution to hold.

Deane Dray – FBR

You commented in the past about the financing issue for customers who want pools but can’t get financing for that. How long do you think this lingers?

Randall J. Hogan, III

Well, until the banks decide, and we’ve been active in trying to get banks help some of our better, bigger pool builders and banks are really not stepping up to fund them. Really, the only pools that are getting now are the ones that can get built for cash. So, the market is probably about 90% replacement at this point, that’s my number not the businesses number but I don’t know how it could be any different.

Deane Dray – FBR

Just to clarify, on the New Orleans order, this does not get classified as any part of stimulus, this was all Army Corps of Engineers?

Randall J. Hogan, III

Yes, this is Corps of Engineers. Actually, the Army Corps of Engineers is going to have some stimulus money. This isn’t classified as a stimulus job, it’s classified as a flood control job for New Orleans.

Deane Dray – FBR

Then wasn’t there some orders right after Katrina that you got for flood control? Are these just follow on projects?

Randall J. Hogan, III

Actually, this is a cool project. What they’re doing is this is really a system that is going to basically pump water out of the flood control canals. So, it’s similar to the earlier project which was on the 17th Street canal which was actually a temporary measure, technically it’s temporary, it will be there 25 years from now I’m sure. But, the idea is a lot of the reason that the canals failed is because there was so much water in the canals the levies couldn’t handle it. So, once it’s pumped out of the low spots in to the flood control canals you’ve got to be able to get the water out of the flood control canals in to the Mississippi or in to the Pontchartrain. This is an enormous pump station to do that. These are 12 foot diameter pumps.

Deane Dray – FBR

How would you characterize the win? Did you win on specs, did you win on an efficiency comparison? What there anything innovative in design, was it price?

Randall J. Hogan, III

I think our competitors will tell you it’s price but I would tell you this, it was based on our performance, on prior programs so very high confidence from the end customer together with very solid technical solutions, so spec. I’d say we won on relationship and spec. I’m not unhappy with the margins.

Deane Dray – FBR

The first shipment is again?

Randall J. Hogan, III

Next year.

Operator

Your next question comes from Michael Cox – Piper Jaffray & Co.

Michael Cox – Piper Jaffray & Co.

I was just curious, on the non-recurring benefits it looks like those went up in your projections by the same amount as your non-recurring charges? I was just wondering if you can give some color around what these benefits are and is it just a coincidence that they seem to offset the charges?

John L. Stauch

It’s not a coincidence it’s just simply one tax refund that we’re expecting from prior periods an consistent with our practices we would disclose that and call that a non-recurring benefit. The timing of it is hard to gage because a small piece of it is getting a re-audit related to an R&D tax piece of it. So, overall it’s one item and it’s about $10 million.

Michael Cox – Piper Jaffray & Co.

That will be called out separately? I assume that’s not in your guidance?

John L. Stauch

No it’s not and we would call it out separately and put it down there in the reported adjusted line.

Michael Cox – Piper Jaffray & Co.

On Slide Six where you go through the productivity improvements, let’s say for the sake of example that unit volumes next year rebound just as much as they were down this year so you’re sitting back where you were 2008 levels, how much of that $65 million maybe in percentage terms would be a permanent take out versus what would come back in a better unit volume environment.

Randall J. Hogan, III

God, I hope you’re right on that rebound.

John L. Stauch

A lot of the benefit and changes in wages, a good chunk of that was volume related but also plant closing related. We would think that you would start with sales minus less material and you would get a contribution margin and we would not have to put in significant capacity to handle call it a 5% revenue growth. Now obviously, that depends on where it is but we should see some pretty good incremental margins which is call it 35% to 40%. We saw sequentially 40%, we’d like to have it be 40% but we would continue to try and invest in some sales and marketing R&D programs so let’s say 35% of whatever sales volume we have should drop through as incremental.

Michael Cox – Piper Jaffray & Co.

My last question is on the Asia Pacific region, it decelerated in the second quarter versus Q1. I know you commented a lot about Europe but can you talk a little bit about Asia Pacific?

John L. Stauch

There are two things happening in Asia. First of all, I think stimulus money has come back in to the market quicker than we saw here in the states. I think it’s more focused so as we take a look at Q3 and Q4 I think we’re going to see a quicker recovery in some of the slowdown that happened. Also, just – I’ll take you inside baseball here but there were some valves that were being sold out of Asia in to Europe that are now being directly shipped from North America and Europe. It’s a temporary reset on our year-over-year performance in Asia.

Operator

Your next question comes from [Mark Zepp].

[Mark Zepp]

On Slide Seven you cite $55 million of productivity carry over in to 2010. Is that a net number against any kind of near term cost actions that would be expected to flow back in to the P&L in 2010?

John L. Stauch

Yes, the reason I shared it this way on page seven is I do think it’s important to highlight the $20 million in furloughs and 401k as something we would not want to continue to realize the benefit from and so we would look at turning those programs on when the market recovers and that would be a particular headwind against those savings that we shared with you.

Randall J. Hogan, III

But $55 was permanent.

[Mark Zepp]

Then just to reconcile the tech products comments, you have 3Q essentially a little bit better than 2Q but there’s a big spike in restructuring for 3Q. Is that just a lag affect in terms of timing or if the declines extended in to 2010 would we be looking at potentially more actions on the tech product side?

Randall J. Hogan, III

That particular action is an action we announced early Q3 related to a Minnesota factory we’re closing and consolidating in to our other Minnesota location so it’s a particular action. Clearly, we’ll continue to take a look at the cost basis in technical products as our other businesses and take the necessary actions if the markets don’t recovery.

John L. Stauch

So technically speaking we’ve talked about 17 plants previously, we’ve now gone to 18 and we’ll have this plant closed by the end of the year as well.

[Mark Zepp]

The entire charge will be taken in the third quarter?

John L. Stauch

Correct.

Operator

Your next question comes from Christopher Glynn – Oppenheimer & Company.

Christopher Glynn – Oppenheimer & Company

Looking at the datacom performance, I was just wondering in how core are you viewing that business these days and strategic?

Randall J. Hogan, III

It’s disappointing to see how much datacom went down. Its’ very lumpy in terms of demand but it’s one vertical market. The plant capacity is spongeable in terms of the vertical markets we aim it at so I think the real question is how can we stabilize datacom so it doesn’t have the lump effect it seems to have in our larger electronics vertical. As you may remember, we consolidated the organization in tech products at one leader. We’re making the plant, if you will, end market agnostic so we can leverage.

Those of you who were on our tour a number of years ago in Reynosa Mexico saw very, very busy [inaudible] plants and not so busy electronics plants and now that’s over. We have all the plants managed under one operator so we can balance that volume better. So, I would say I think about datacom as a market segment that is less attractive than some of the other ones but it’s a vertical market that we can serve without it costing us a lot versus some of the others.

For instance, I’d like to do more OEM business in the industrial space which would be more of electrical. I think there’s going to be those opportunities, we’re seeing some of that in Europe right now, we’re seeing some of it in the US, we’re seeing some of it in water in Europe actually where folks are looking at their own foot print and saying I may exit that manufacturing and I’ll buy it. We’d like to be in a position to pick up some of that business so I’d rather do more of that and less datacom given the lumpiness of datacom.

Todd Gleason

We want to get everyone’s question, I just thought I’d ask since we’re running a little over how many more people there are in the queue.

Operator

There are four more questioners in queue.

Todd Gleason

We’ll try to quickly go through them then.

Operator

Your next question comes from Analyst for John Quealy – Canaccord Adams.

Analyst for John Quealy – Canaccord Adams

I think my questions have been answered, maybe if you can just provide an update on some of the longer term growth initiatives, kind of the traction you’re seeing with some of the newer energy related product lines?

Randall J. Hogan, III

Well, we talked about the energy related product lines in pool already. We’ve introduced a variable speed drive for the well pump market. We think that the variable speed drives applied in the HVAC setting is going to be outstanding on the commercial side. Our biggest opportunities are globalizing engineered flow and that would include serving RO and [inaudible] and really driving our hospitality initiative globally. Those are a couple that I’m quite excited about.

Then water reuse which is we have a number of interesting products in water reuse. We haven’t yet, and nobody has, really developed water reuse as a business and I think we’ve got as good a shot at that than anybody and I have a lot of personal energy and excitement about that. We’ll talk more about that. We have our analyst meeting in September, it’s going to be in New York City. We hope to see you all there. We’ll share some of the exciting pieces of water reuse. And, I mentioned earlier power and petrochem in the industrial filtration area which is kind of exciting, some new products and new applications.

Operator

Your next question comes from Brian Drab – William Blair & Co.

Brian Drab – William Blair & Co.

I’ll just ask one question, when you look at the total targeted cost savings of $215 million, can you help us get a handle on maybe break these costs down in to temporary and permanent? Of course, you can make an argument that any costs could fall in to either one of those buckets but could you just attempt to break it down in to temporary and permanent cost savings? As you do that could you tell us how much in overhead you took out of the costs structure in closing down these plants.

John L. Stauch

To answer your question, if you look at page seven, we’ve highlighted two of what I would call the non-permanent actions which are the furloughs and 401ks. The other piece that is hard to quantify is how much the discretionary spending went away is permanent. Now, we’re going to do our best to make almost all of it permanent but we have cut travel, cut expenditures, certainly some of that will come back in some day when we grow but we’re going to do our best to manage that out.

Randall J. Hogan, III

I think we’ll be a lot more [inaudible] though. I think a lot of companies have found they didn’t need it and we are one.

John L. Stauch

Then, your final question is how much true overhead, if I look at just the leases, the rents, the utility costs, etc. it’s somewhere in the neighborhood of $10 to $15 million a year permanent cost gone because the rooftop is gone.

Brian Drab – William Blair & Co.

Maybe I’m missing something but when I add up on Slide Seven the $30 million, the $75 million, the $70 million is $175 million plus you just said another $10 to $15 million in overhead costs –

John L. Stauch

The rest is in the variable manufacturing bucket if you look on page six, we kind of highlighted that, and last quarter as well, and that’s things like freight distribution costs, volume related activities as well.

Operator

Your final question comes from Scott Graham – Landenburg Thalmann.

Scott Graham – Landenburg Thalmann

Just two questions for you, Randy when you talk about and I guess this just may be a fifth way to skin the same cat but second quarter is seasonally better in water just by its nature so when you’re saying you kind of came out of the gates a little slow and then you kind of improved in June and that kind of thing are you essentially saying that yes, all three months together we essentially had a second quarter season sequentially from the first quarter or are you saying that maybe in June things were a little bit better than that? Just help me understand in the context of the second quarter being an in season quarter in water if you feel better about things or just kind of the same as you did a quarter ago?

Randall J. Hogan, III

April and May in water were really bad in Europe but we are off to a pretty as expected seasonality in US residential and that’s what really drives it. It’s usually residential flow and the pool business that drive the seasonality in the second quarter and that was about the kind of seasonality we expected. It’s still down year-over-year but the seasonality we expected. What happened was Europe popped up in June to being down like we expected so it was a run rate improvement from April, May to June but it was still down year-over-year.

We felt good about that because when we were looking at April and May we were deeply concerned about Europe. I would tell you I’m still very uncertain about Europe but as we said earlier in the call June was better and July seems to be more consistent with June than April and May so that’s encouraging. But, I’d say the uncertainty is still greater than confidence in my mind when it comes to Europe.

John L. Stauch

The only thing I would add is normal seasonality would include a normal pool season and we haven’t seen a normal pool season in some time. So, we’re not seeing any lift from Q1 to Q2 like we use to when the pool season hits it peak and therefore we’re not seeing the subsequent drop in to the Q2, Q3 and Q4 ranges like we use to.

Randall J. Hogan, III

We expected it to be higher first quarter to second quarter because I think as Deane mentioned earlier, we didn’t have as much early buy shipping in the first quarter ’09 as we had in ’08 so that decline year-over-year in pool was that much more dramatic. So, the step up from the first quarter in pool to the second quarter was bigger than the usual step up and that was more because of the comp in the first quarter than it was any major seasonality increase.

John L. Stauch

But, to summarize yes, Q1 and Q2 in water has seasonality but we’re reflecting that we think the markets are improving sequentially, we’re talking the seasonality out and saying the average daily order rate feels like it has bottomed in North American residential. It’s not getting significantly better but it’s no longer declining like it has for the last three years.

Scott Graham – Landenburg Thalmann

So that’s really the answer I think, your comment essentially considers the seasonality?

John L. Stauch

Yes.

Scott Graham – Landenburg Thalmann

Was the weak start to the quarter in Europe, did that prompt the additional restructuring charges or was that going to happen anyway?

John L. Stauch

It certainly feed in to it but it might have happened anyway.

Scott Graham – Landenburg Thalmann

Last question is you’ve got this terrific order out of New Orleans and you’ve got the enviro now under your belt, how do we go out now and market these, particularly the big water win, how do we sort of stimulus market that? How do we get the enviro in to more end points, can you talk a little bit more about that?

Randall J. Hogan, III

Two separate points, enviro is actually not just McDonalds who likes it, Starbucks likes it, everybody likes it because it is very, very efficient, a RO system, it’s a superior solution. So, we have a very effective sales force in our food service division and they’re marketing it, you can see it online, we have all kinds of promotions that we’re working at. As I mentioned, we’re selling in to hospitality too because we think it’s going to be a major product for hotels. That’s one of our I’d say higher performing marketing groups anyways.

In terms of the promotion of a win like the New Orleans win, those are project and engineered based bids so what we’re doing there, and I commend if you haven’t looked at it on our website, you can see our white paper on the stimulus spending. We have a website where we’re working with our distributors more directly in talking to them about the specific money that is targeted to their service areas to make sure that we are bidding and quoting those projects and that they understand our position in terms of our buy America position which is very strong as well as our capabilities which that order affirms if you will.

The Corps of Engineers is always a good reference point. For history, about half the pumps in flood control in New Orleans have been made by Pentair company. That’s not a bluebird, that’s a market that we compete in quite effectively.

Scott Graham – Landenburg Thalmann

I guess what I’m asking here Randy and it sounds like I think you’re saying yes to this is that off of these wins and placements your guys are out there developing market plans or maybe they’ve already been developed and with these wins there, they’re kind of taking them –

Randall J. Hogan, III

Absolutely. We have not cut as deeply in R&D and in marketing and sales precisely so we can keep the pressure on to try and drive growth. I am not happy to have had to laid off the people we hired, it’s a terrible thing to have to do. So, I want to get volume, I want to put people back to work.

Operator

I would like to remind everyone that this call has been recorded for playback. If you would like to listen to today’s call again you may dial 1-800-642-1687 with the pass code 99593493. Again, the conference ID number is 99593493. Thank you. This concludes today’s conference call you may now disconnect.

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Source: Pentair, Inc. Q2 2009 Earnings Call Transcript
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