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Franklin Electric Company, Inc. (NASDAQ:FELE)

Q3 2009 Earnings Call

October 26, 2009 5:00 pm ET

Executives

Patrick Davis - Treasurer

Scott Trumbull – Chairman, Chief Executive Officer

John Haines – Chief Financial Officer

Gregg Sengstack – Senior VP Fueling and International Water

Analysts

Michael Schneider – Robert W. Baird

Matt Summerville – Keybanc

Paul Mammola – Sidoti & Company

Operator

Welcome to the Franklin Electric’s third quarter 2009 earnings conference call. As a reminder, today’s call is being recorded. I would now like to turn the call over to Mr. Patrick Davis.

Patrick Davis

Welcome to the Franklin Electric third quarter 2009 earnings conference call. With me today are Scott Trumbull, our Chairman and CEO, John Haines our CFO, Robert Stone, SVP of America’s Water and Gregg Sengstack, SVP of Fueling and International Water.

On today’s call, Scott will review our third quarter business results and John will review our third quarter financials. When John is through we will have some time for questions and answers.

Before we begin, let me remind you that any forward-looking statements contained herein including those relating the company’s financial results, business goals and sales growth involve risks and uncertainties. These include but are not limited to risk and uncertainties with respect to general economic and currency conditions, various conditions specific to the company’s business and industry, the weather conditions, new housing starts, market demand, competitive factors, changes in distribution channels, supply constraints, technology factors, litigation, government and regulatory actions, the company’s accounting policies and future trends and other risks which are detailed in the company’s SEC filings included in Item 1-A of Part 1 of the company’s annual report on Form 10-K for the fiscal year ended January 3, 2009, Exhibit 99.1 attached thereto and in Item 1A of Part 2 of the company’s quarterly reports on Form 10-Q.

These risks and uncertainties may cause actual results to differ materially from those indicated by the forward-looking statements. All forward-looking statements made herein are based on information currently available and the company assumes no obligation to update any forward-looking statements.

I will now turn the call over to our Chairman and CEO.

Scott Trumbull

Water Systems represent about 83% of our total sales and in this segment our operating earnings before restructuring expenses improved by $2.3 million or 12% versus the third quarter last year and our operating income margin increased by 323 basis points.

Much of the Water profitability improvement is attributable to a share increase in operating income margins in our businesses in the U.S. and Canada. The U.S. and Canadian Water Systems revenues account for about 43% of our total sales, and during the third quarter operating margin on these sales increased by over 500 basis points compared to prior year.

This improvement in operating income margin was brought about by reduced raw material costs, reduced price promotion activity and the start up of expanded production operations in our Linares, Mexico factory and the curtailment of capacity in more expensive North American plants.

As a result, our operating earnings in the U.S. and Canada grew by about $3 million despite a $14.1 million or 16% reduction in sales. Based on trade association data, we are confident that we are continuing to gain share in our key product lines in the U.S. and Canada but we have not been able to offset the decline in the residential and light commercial pumping equipment market.

Again, according to trade association data, the North American residential and light commercial pump market was down 25% during the first half of this year in units brought on by the decline in housing starts, consumer spending and credit availability.

We believe that the rate of decline of our sales in the U.S. and Canada is slowing and that during the fourth quarter our sales in this region will approach prior year levels. Certainly, the significant increase in operating margin in our U.S. and Canadian water business, coupled with improving sales outlook was the most encouraging development during the quarter.

Our Water Systems businesses in international market represent about 40% of our total sales. During the third quarter our sales in these markets declined by about 5%. Excluding acquisitions and foreign currency effects, they declined by about 6%.

Sales increases in Latin America and Asia Pacific were not sufficient to offset the declines in Europe, the Middle East and Africa. International operating income declined modestly.

Fueling Systems represent 17% of our total sales during the quarter and Fueling operating income declined by $15 million versus prior year which more than accounts for the $12 million decline in total company third quarter operating earnings.

During the third quarter last year, Fueling Systems achieved record earnings as we benefited from surging sales of vapor control equipment to gas station owners in California who were complying with an environmental mandate in that state.

We have known for quite some time that the Fueling Systems sales surge in California would wind down in late 2009 or 2010, and since the fourth quarter last year, we’ve also experienced an unprecedented decline in our Water Systems markets. As I mentioned earlier, based on trade association data, the overall market for residential, light commercial pumps in North American is down 25% through the first six months of this year.

In light of this situation, we focused much of our effort in 2009 on fixed cost reduction and cash generation. We’ve reduced fixed costs which are a combination of SG&A spending and plant fixed spending throughout the year. In the third quarter, fixed spending was lower than prior year by $6.3 million or 10%.

We’ve concentrated on cutting costs without jeopardizing our competitive position. So for example, while we reduced our corporate staff head count by 17% during the first three quarters of this year, we’ve also increased our RD&E spending over the same period. During the first three quarters of this year, we generated cash flow from operations of $88.3 million, and increase of $60 million versus the same period prior year.

This has enabled us to reduce our net debt from a $141 million last year to $81 million at the end of the third quarter this year, and our net debt to equity from 40% last year to 21% at the end of the third quarter this year.

We’ve generated cash flow of about $40 million by reducing inventories. Reducing inventory by 20% at a time when sales are down by 19% requires drastic reductions in plant capacity utilization and concurrent penalties to the P&L.

But focusing on cash flow and inventory reduction in these market conditions is clearly the right thing to do and positions us well for the future.

While the rate of decline in our Water Systems business has abated sequentially in each of the last three quarters, we have not seen consistent signs of a market recovery. Nevertheless, we believe our Water Systems sales should increase modestly during the fourth quarter as the prior year comparison is easier and the dollar is weakened. We believe that our Water Systems operating income margin should exceed prior year in the fourth quarter.

We are reluctant to provide guidance regarding overall fueling sales in the fourth quarter. While we believe approximately 1,800 California station owners or about 15% to 20% of the total have yet to comply with the January 1, 2010 deadline, their equipment purchases will be heavily influenced by their expectations regarding the State of California’s policy on levying fines as well as the availability of financing for station owners to make the investment.

Last year our Fueling sales other than those related to the California initiative were about $27 million, and we believe they’ll be about 5% to 10% less this year due to the reduction in overall commercial construction activity and the lack of availability of credit to small business in the United States. We believe Fueling systems operating margins will be sequentially higher in the fourth quarter 2009.

In summary, while we are sobered by the difficult market conditions we’ve been facing, we are encouraged by the improved profitability of our Water Systems business brought on by reduced raw material costs, reduced price promotion activity and the start up of our expansion in Linares. These factors, combined with reduced fixed costs and inventories position us well to achieve significant operating leverage as our sales increase from the current depressed levels.

Now I’ll turn the call over to John Haines, our CFO who will provide additional color on the quarter.

John Haines

Good afternoon. Our fully diluted earnings per share were $0.37 for the third quarter 2009, a decrease of 50% compared to 2008 third quarter earnings per share of $0.74. Earnings per share before restructuring charges were $0.40, a decrease of 46% compared to the prior year.

Third quarter 2009 sales were $166 million, a decrease of 23% compared to 2008 third quarter sales of $215.8 million. The strengthened U.S. dollar lowered sales by about $5.5 million in the quarter versus the third quarter of 2008.

Water Systems revenues declined by $17.2 million or about 11% overall from the third quarter of 2008. The Water Systems organic sales decline excluding foreign currency translation and acquisitions were $18.3 million or about 12%.

Internationally, Water System sales excluding currency translation and acquisitions declined by about $5 million or about 6% versus the third quarter of 2008. Sales improvements in both the Latin America and Asia Pacific regions were not enough to offset declines in the Europe, Middle East and Africa regions.

Fueling systems sales declined by about 53% during the third quarter of 2009 compared to the same period in the prior year. Sales of Fueling systems vapor recovery products in the State of California decreased $26.7 million or 90% in the third quarter of 2009 versus the same period in 2008.

The company’s consolidated gross profit was $50.2 million for the third quarter of 2009, down $16.2 million from $66.5 million in the third quarter of 2008. Correspondingly, the gross profit margin decreased to 30.3% for the third quarter of 2009 from 30.8 for the third quarter of 2008.

Overall, operating income before restructuring expenses was $15.5 million or 9.9% of sales in the third quarter of 2009, down 40.5% from the same period in 2008; however up 110 basis points sequentially versus the second quarter of 2009. The entire decline in operating income before restructuring expenses can be attributed to the volume declines in Fueling systems.

During the third quarter of 2009 SG&A expenses decreased by $5.1 million consistent with managements fixed cost reduction initiatives started in the fourth quarter of 2008. SG&A expenditures for corporate administrative related costs declined by 19% in the third quarter of 2009 versus 2008.

Water Systems operating margin before restructuring expenses improved dramatically in the quarter as a result of the cost reduction efforts previously disclosed by the company despite the decline in the Water Systems volume of 11%.

Operating income before restructuring expenses increased $2.3 million or 12% in the third quarter of 2009 versus the same period of 20088. Operating income before restructuring expenses as a percent of sales improved to 15.3% in the third quarter of 2009, a 320 basis point improvement versus the third quarter of 2008.

Sequentially, Water Systems operating income before restructuring expenses as a percent of sales improved by 120 basis points versus the second quarter of 2009. SG&A expenses were lower in the third quarter of 2009 by $2 million from the same quarter of 2008.

Operating margin before restructuring expenses in Fueling Systems was about 14% of sales in the third quarter 2009 versus 31.5% of sales in the third quarter of 2008. Despite fixed expenses being 20% lower than the third quarter 2008, the reductions were not enough to offset the leverage loss from lower sales volumes.

Restructuring expenses for the third quarter of 2009 were approximately $1 million and reduced diluted earnings per share by approximately $0.03. Restructuring expenses include asset impairments, severance expenses and manufacturing equipment relocation costs.

The company’s efforts to improve working capital and cash flows gained significantly in the third quarter 2009. Cash flow from operations improved by $60.5 million versus the first nine months of 2008. Cash and cash equivalents on hand at the end of the third quarter of 2009 were $71.2 million, a $10.4 million or 17% increase compared to the end of the third quarter 2008.

The company had no borrowings outstanding on its revolving credit line at the end of the third quarter 2009. Inventory balances declined to $137.6 million at the end of third quarter 2009, 16% lower when compared to $164.4 million at the end of the third quarter 2008.

At the end of the third quarter the company’s ratio gross debt divided by earnings before interest, taxes, depreciation and amortization or EBITDA, was 2.1 versus 1.8 at the end of 2008 and 1.9 at the end of the third quarter of 2008.

Cash on hand, internally generated funds, and existing credit arrangements provided sufficient liquidity to meet current commitments and service our existing debt. As we have previously disclosed, the company’s revolving loan agreement with its bank is in place until the end of 2011 and we have no scheduled principal payments on our long term debt until 2015.

Finally, on Friday, October 23, the Board of Directors of Franklin Electric declared a quarterly cash dividend of $0.125 per share payable November 25, 2009 to shareholders of record on November 12, 2009.

This concludes our prepared remarks and we’d now like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Schneider – Robert W. Baird.

Michael Schneider – Robert W. Baird

I wonder if we could first talk about the margins in Water Systems. Last time we talked on the July call you made a point of calling out that Water Systems had a 17% margin in June. It looks like it came in in the mid 15% for the quarter now. I suspect raw materials are even lower during the third quarter for you, so could you reconcile what’s changed in that mix?

Scott Trumbull

If you were to take our June sales in Water Systems and extend them out for a full quarter at that rate, the quarter’s sales would have been about $152 million. Our sales in the third quarter in Water were about $137 million. If we had had sales of $152 million for the quarter at the contribution margins we’re achieving in Water, our margins would have been in excess of 17%. The difference is our third quarter sales were lower than the run rate in June.

Michael Schneider – Robert W. Baird

Geographically, is there a mix impact as the U.S. declined more than the foreign markets?

Scott Trumbull

Our contribution margin in our international markets and our current contribution margin in our domestic markets are very similar. Certainly within product lines, some of our products have significantly different margins than other products but overall in our Water Business, the contribution margin that we get on an incremental sale on average in our international markets are not materially different than the contribution margin we get on incremental sales in our domestic markets.

Michael Schneider – Robert W. Baird

Your comment, you expect Q4 Water revenue in total to be up year on year or just the domestic markets?

Scott Trumbull

No, we said we think that in the domestic markets, I think we used the term in the region will approach prior year levels, and then for the overall, we indicated that we felt that if the fourth quarter overall Water Systems sales should be up modestly.

Michael Schneider – Robert W. Baird

Does that hold true sequentially as well for water, because Q4 is fairly low water mark? In fact that’s when the cataclysm started.

Scott Trumbull

We would not expect Q4 sales versus Q3 sales to be up sequentially just because of the seasonality of the business.

Michael Schneider – Robert W. Baird

But just for Water overall, $108 million is what you did last fourth quarter. That’s a fairly low water mark, so if you’re going to be up year on year, I don’t think it’s all that big move year over year, especially sequentially. If you were even just flat year over year, that’s be a pretty steep and unusual seasonal decline.

Scott Trumbull

I think our business typically falls off in the fourth quarter pretty significantly. There has been within the Water Systems business a practice over the last decade where at the end of the year, distributors who are working toward a year end for discounts will push hard and in fact frequently, the pump companies will encourage that to get year end sales and to get their products on the shelves going into the first quarter and that sort of thing.

We are not expecting that to occur in the fourth quarter this year. So to some extent, the fourth quarter will be influenced by a, we believe, a lack of price promotion activity and a lack of inventory building at the end of the fourth quarter this year and in fact some of our conservatism with respect to fourth quarter sales this year is because of that expectation.

Michael Schneider – Robert W. Baird

Raw materials sequentially, have you seen your low water mark in materials during the third quarter or do they go lower yet in the fourth quarter?

Scott Trumbull

We saw the low water mark in the second quarter. Let me clarify that. We buy two classes of material. The bulk of the materials we buy are components that are made out of commodity metals typically, and that’s got to be 70% of our purchases, maybe more. The remaining portion is the commodity purchases themselves; steel, copper, aluminum, polypropylene, those commodity materials actually bottomed out in April.

The products that we buy that is made of those materials; we’re still seeing price reductions in that because of the lag between the decline in the material cost, the commodity cost and the cost of those materials. But as far as our commodity purchases are concerned, they bottomed in the second quarter.

Michael Schneider – Robert W. Baird

Looking at Water again, in the higher horsepower motors which I believe are principally ag, can you give us a sense of what the trajectory is in that market and just what your expectations are for that market?

Scott Trumbull

I would say consistent with what we said earlier in the year and even late last year, the ag markets have been down year over year from what we’ve seen. Last year was an exceptional year with energy prices driving a lot of ethanol production and very good weather conditions drove a lot of business.

We expect that this year’s ag business and it is down and consistent with what we’re seeing in the rest of the market really.

Michael Schneider – Robert W. Baird

Are the declines moderating like the Water group overall or are they accelerating?

Scott Trumbull

I would say they’re moderating.

Operator

Your next question comes from Matt Summerville – Keybanc.

Matt Summerville – Keybanc

With regards to the Fueling business, how much inventory do you think is in the channel for the remaining 1,800 stations in California on the vapor management systems?

Gregg Sengstack

I’d say there is at least from our point of view not very much inventory in the channel. We have done various managed inventory for our distribution and distribution’s run down their inventories as well, so we don’t think there’s very much inventory in channel for the balance of the conversion.

Matt Summerville – Keybanc

How quickly can a station place an order and get a system installed right now would you say?

Gregg Sengstack

I would say that they can get the equipment very quickly. We have inventory on the ground in California through our better managed inventory, and they can go to their distributor and get that equipment, or a contractor can go to a distributor and get that equipment and install it in very short order if the station has the permits they need to install the equipment.

Matt Summerville – Keybanc

On the vapor monitoring side, how many stations do you believe still have to move with regards to ISV?

Gregg Sengstack

We don’t have a lot of clarity on that. We know that in some of the air districts they’ve mandated that they put in the ISV system at the same time as they put in their vapor recovery system; so many ISV systems were put in early in the conversion.

There are other air districts that do not or did not require that. So it would be an estimate that there are 2,000 to 3,000 out there, but really we don’t have very much visibility to that number.

Matt Summerville – Keybanc

On past calls you’ve done a walk around the world with the opportunities you see out there in Fueling. Would you mind going through what you see in Europe, Asia and if there’s anything in Latin America looking out over the next several quarters from a vapor management standpoint?

Gregg Sengstack

If you focus only on vapor management, there is a European initiative that approximately 25,000 stations will need to convert before 2018, so that’s fairly far out. There are small pockets of upgrades of vapor management and countries in the Middle East, but there’s no mandate for that.

When you move to the far east, we’ve talked repeatedly about China, particularly in the Shanghai area and then in the [GuanJo] area. We’re beginning to see some movement but not as quickly as we saw in Beijing. There is still an initiative in Korea. It’s moving slowly.

There’s initiative in Australia which again is a small market which we expect to start about a year from now. So those would be the initiatives that I’m aware of in vapor management.

You go beyond vapor management; there are several areas in the world where we’re going to see organic growth as people continue to convert to pressure systems. We’re going to see additional opportunity for organic growth as people install more tank gauging and monitoring particularly as fuel prices begin to climb again. So those are the other opportunities as well.

Matt Summerville – Keybanc

Scott I just want to be clear with regards to Mike’s question. Will your actual raw material costs flowing through your P&L, will that be more favorable in the fourth quarter or less relative to the third bearing in mind what you’ve stated about the 30% of underlying raw commodities you buy versus the 70% of components that contain those commodities. I just want to make sure I’m clear on that.

John Haines

The increases that we’ve seen as Scott pointed out come basically from April forward and each commodity or base material type is a little bit different. It’s important to note that the increases have not reached the ’08 level yet so we’re seeing the increase take place, but we’re not seeing the prices or the cost reach the point of the ’08 average.

So depending on the material, the product that it goes into, how quickly that product is moving through inventory, we would basically say that the fourth quarter would reflect more of what the prices in the second and third quarter were and then the third quarter would reflect more the prices that were first or second quarter.

So we expect that the fourth quarter prices or material cost will increase marginally over the third quarter.

Scott Trumbull

We are not however anticipating that our contribution margin in Water will move materially one way or the other in the fourth quarter. So the main effect on fourth quarter operating income will not be the relationship between price and raw material costs. It will be volume related.

Matt Summerville – Keybanc

With regards to the overall inventory situation in Water, I think you mentioned earlier that you’ve taken out some $40 million. Is there more inventory to take out and what would you overall assessment be of the channel right now?

Scott Trumbull

That’s our inventory and our goal is to reduce inventory further in the fourth quarter. So we’ve taken out about $40 million across the company. That includes productions in Fueling too. So we’ve taken out that amount up to now and we will take out more in the fourth quarter.

Operator

Your next question comes from Paul Mammola – Sidoti & Company.

Paul Mammola – Sidoti & Company

Scott on your comments right there you suggested that you would take out inventory in the fourth quarter. Should we presume that there would be machine down time or shifts taken out? Can you comment on any of that?

Scott Trumbull

There’ll be a lot of shifts taken out in fourth quarter. The fourth quarter is always a slow quarter from a sales perspective anyway, but to take inventory out during that and especially with sales not being particularly robust to begin with, there’ll be a lot of machine down time in the fourth quarter.

Paul Mammola – Sidoti & Company

So if we look at it sequentially should we assume maybe it would go to the equivalent of a three day week versus five? Would you say that’s fair?

Scott Trumbull

That’s not the way we’ll do it. Over holiday periods we will just be down. We’ll shut down early for holiday periods and not come back as soon. We’ll take days of production out.

Paul Mammola – Sidoti & Company

You mentioned pricing in the fourth quarter which is helpful, but competitors improved price a bit in the fourth quarter. Do you have any price action either way in this quarter or 3Q?

Scott Trumbull

We didn’t have any list price increases but we had less price promotional activity, so it had the effect of moving our average price up. Price was positive in the third quarter for us.

Paul Mammola – Sidoti & Company

What are you hearing from stations right now? I thought you had the mindset of maybe a few hundred stations would close their doors rather than upgrade. Do you still think that’s the case and if so, should we presume that your share of the remaining stations would be in excess of 60%. Is that how you’re looking at it?

Gregg Sengstack

I think what you’re talking about is related to California. As they approach the deadline, it’s going to depend heavily on how the regulators respond. They are confronted with large fines we expect the station owner is either going to have to operate or they’re going to stop pumping.

The upgrades are going to have to find financing. We understand that many of these stations that are left to do are smaller stations that are individually operated or individually owned and the access to financing today, of course small businesses is not easy.

So confronted with that they will maybe elect just to not pump gas. Now as financial markets improve or the economics of the store improves, if they want to make that upgrade then we would expect they would proceed and then they’re going to look at our systems and competitive systems and make a choice based on what’s the best economics for them. We would hope to gain the majority of that business, but that remains to be seen.

Paul Mammola – Sidoti & Company

Can you walk me through how you’re thinking about the product portfolio right now? You’re obviously in a great relative capital position. In terms of acquisitions, where do you add product here? What’s attractive in your mind right now?

Scott Trumbull

First of all acquisitions generally are not high on our list of priorities. We are pretty committed right now to organic growth and driving up contribution margins to the greatest extent we can in these kind of market conditions, and moving toward operating leverage going forward, and taking inventory out of our system so when things turn up we can move as quickly as possible to increase utilization rates and further improve margins.

That’s really where we’re focused right now. I think that would we do acquisitions, we would be looking at companies that would expand our reach internationally. In Fueling we have a very large opportunity to expand our Fueling business internationally and there are companies out there, hold on kind of acquisitions that would give us a nice additional distribution and product lines that would be relevant to our Fueling business.

And there are companies that would do the same thing for us on the Water side of our business, expand our product lines, give us more low cost manufacturing capacity, give us distribution of submersible motor products in regions of the world where we’re not strong right now.

So those would be the kind of acquisitions that we’d be looking at.

Operator

There are no further questions at this time. Mr. Davis, I’d like to turn the conference back over to you for any additional or closing remarks.

Patrick Davis

We saw Matt come back into the queue.

Matt Summerville – Keybanc

With regards to the cost actions taken in 2009, can you update us as to what you believe the annual cost savings realized will be this year and how much would be incremental in 2010 versus 2009 and that’s savings mostly around Water?

Scott Trumbull

The guidance that we provided in the past, the $23 million to $27 million based on the third quarter results, we believe that continues to hold. As we talked about in the past as well, there will be a certain costs that we will add back from an SG&A perspective that we cut out this year; merit increases and matches on 401-K’s and things like that.

But for the most part, we believe that these cost reductions will hold going into 2010. Now the discussion around raw material prices and where those costs go is something we have to stay on top of and that we watch very closely, and those may need to be offset by price increases.

But in terms of the cost reduction that we’ve seen year to date, we expect in 2009, we expect the bulk of that to carry over and continue into 2010.

Matt Summerville – Keybanc

You discussed in the past the contemplation beyond what you’ve done already with additional relocation of man hours from the U.S. to Mexico. What’s your thinking on that for 2010?

Scott Trumbull

We have fortunately, we have a very talented management team in Linares and we as I think I mentioned before, we designed our Linares facility to house the capacity for the production that’s currently in it. But because they have leaned out their processes, we’ve got room for roughly 100,000 square feet more of production activity.

So we would say right now that about 60% of our overall manufacturing head count is located in low cost regions and that by the end of next year, that number will be 67% or 68%. That’s the way we’re looking at it.

Matt Summerville – Keybanc

Can you maybe comment from an international Water standpoint, if you look at how the business has progressed this year, is the magnitude of decline you’re seeing getting worse, getting less severe, and how do you think about Southern Hemisphere seasonality moving into Q4.

Scott Trumbull

First of all I think we would say generally across the piece in our international Water business we would not see our sales situation getting worse because we see the unit sales outlook firming somewhat. I’ll ask Greg, he can give you a travelogue on a couple of the regions of the world.

But also, because on a year to date basis, in Water, our sales have declined by about $27 million because of FX and as we go into next year, if exchange rates stay where they are now, not only would that $27 million go away, we’d actually start to pick up sales because of translation gains.

So Greg, why don’t you comment on what’s going on in a few of the regions?

Gregg Sengstack

In the Southern Hemisphere is would speak to Australia is having a good start to their season. In Southern Africa we’re beginning to see increased activity as mines begin to open. Certainly as commodity prices rise that will help our business in Southern Africa.

From a standpoint from a standpoint of Brazil and South America your view is, Brazil and Argentina in particular, two large areas there have not been as affected by the economic slowdown, at least in our segment. There’s a lot of areas, more developed areas in the world.

On the cyclicality, there’s calendar cyclical. In the summer there’s basically six months off, so while inventories are typically coming down low in the northern hemisphere this time of year, we’re building up inventories in those markets because they’re seasons are about to start. So that is a factor, and that is actually beneficial to us over all in that it will remove a little bit or minimize to a degree the seasonality of our overall Water business.

Then moving back to the north you’d say that Europe has been, we haven’t seen the slow down that we saw in the United States. It’s steady in the European theater but it is still weaker than some of the other international markets, but it is down year on year.

The when we look at our Asia Pacific business, we continue to have a record performance partially because of Australia and partially there’s a very strong market in Korea, and as those currencies strengthen against the U.S. dollar, we’re seeing a very steady business in Asia.

Matt Summerville – Keybanc

With regards to FX if current rates hold through 2010 how many points of FX benefit would you see in your Water business?

John Haines

Not one I can give you a quick answer to.

Matt Summerville – Keybanc

Do you know where exchange rates will be?

John Haines

They’ll hold where they are.

Matt Summerville – Keybanc

If we assume that exchange rates hold steady with where they are today, how many points? You mentioned very specifically a $27 million.

John Haines

We know what it’s been through the third quarter in terms of our FX loss. I have not seen a calculation which would look out at applying the current exchange rates to various future scenarios of sales by region. Unfortunately I don’t think we have that. The $27 million loss would go away and it would become positive, but how positive we just haven’t done that calculation yet.

Operator

It appears there are not further questions at this time. Mr. Davis, I’d like to turn the conference back over to you.

Patrick Davis

I think we’re done. We’d like to thank everybody for dialing in and wish you all a good evening.

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