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Pall Corporation (NYSE:PLL)

F2Q10 (Qtr End 01/31/10) Earnings Call

March 12, 2010 8:30 am ET

Executives

Eric Krasnoff – Chairman and CEO

Lisa McDermott – CFO and Treasurer

Analysts

Dan Leonard – First Analysis

Brian Drab – William Blair

Jon Wood – Jefferies

Richard Eastman – Robert Baird

Adam Brooks – Sidoti

Christopher Parkinson – Credit Suisse

Operator

Welcome to Pall Corporation's conference call and webcast for the second quarter of fiscal 2010. Today's call is being recorded and simultaneously webcast. Instructions for the question-and-answer session will be provided at the end of managements prepared remarks. Right now, all lines are in a listen-only mode.

We would like to remind you that the company's second quarter press release is available at www.pall.com. Management's remarks this morning will include forward-looking statements. Please refer to slide two or request a copy of the specific wording of this qualification for the company's remarks. Management also uses certain non-GAAP measures to assess the company's performance. Reconciliations of these measures to their GAAP counterparts are included in slides at the end of the presentation.

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

Eric Krasnoff

Thank you and good morning. We appreciate you joining us today to review the second quarter. I'm sitting here with Lisa McDermott, our Chief Financial Officer and Frank Moschella, Corporate Controller. We'll provide some color on the business results and trends and Lisa will review Pall's financial performance. Following that, we'll open up the lines for questions.

Second quarter sales were $560 million, up about 3% on an as reported basis and down about the same in local currency. Earnings increased almost 28%, very positive sales mix augmented by ongoing cost reduction and pricing improvement programs propelled gross margins. Gross margin improvement in both the quarter and the half was lead by Life Sciences with gross margins exceeding 56%. Lisa will cover this in more detail in a few moments.

Pall's second quarter sales make it abundantly clear that the economy is still challenging and the pace of recovery uneven. Life Sciences is performing well lead biopharmaceuticals, which is particularly strong. The recovery in Industrial is slower, but we believe we are seeing positive trends that are indicative of growth for our second half. The most notable green chute in this past quarter is microelectronics, one of our most profitable industrial sectors. Power generation was also strong. We continue to get price increases in both business segments and the markets that were hardest hit throughout 2009 each improved sharply on a sequential basis.

The Asian economy outside of Japan has rebounded quite nicely. Total Asian sales increased over 7% with all but the small A&T markets contributing. This return to good health follows four down quarters.

Orders grew for the first time in more than a year with strong order growth in microelectronics, municipal water, industrial manufacturing and food and beverage. Orders continued to be strong for Life Sciences. Our book-to-bill in the quarter was 1.1 to 1, supporting a growing backlog.

Capital spending, which mostly affects our energy, water and process technology markets is throttling up in many areas. System orders were particularly strong in muni water, pharmaceuticals and food and beverage, the latter two being sub markets where the time between order and shipment is shorter, as is the time until annuities kick in. Quoting activity is increasing across most of the business. We're expecting a strong finish for the year.

Now, let's look at the markets in a little bit more detail. Sales in Life Sciences increased 4% in local currency driven by biopharm, which posted 8% growth. Sales in Life Sciences were up in all regions with sales in the Western Hemisphere and Asia each growing over 7.5%.

Life Sciences orders were up about 10% in the quarter. Major drivers in Life Sciences remain the same, increased production of filtration dependent biotech drugs and vaccines along with a growing demand for our single use processing technology. We saw the benefits of these trends with a 15% increase in base business on top of a 16% increase in the base business in the prior quarter, a key driver of the surge in margins in the quarter.

Conversely, system sales were down 54%, reflecting an industry-wide slowdown in capital spending last year. This is now abating and we expect higher system sales in the second half of this year based on the current backlog.

The Asian pharma markets propelled primarily by China and India, while still relatively small, are steadily growing by double digits. An important trend is emerging. Chinese drug producers are increasingly adopting FDA manufacturing standards which require drug companies to insure the safety, purity and efficacy of their products. Any country that wants to export to the U.S., still the largest and most lucrative drug market must adhere to them. This is resulting in an opportunity for global leaders like Pall Corporation. Now, our expectation for biopharm sales growth is in the high-single digits for the year as the growth rate moderates due to the timing of demand within the biotechnology market.

Medical sales were down slightly in the quarter, while filter sales were up overall driven by increased adoption of leukocyte reduction in Asia and by modest growth in the large U.S. blood market. Western Hemisphere blood filter sales were up slightly despite what the blood centers are reporting as decreased demand for blood attributable to declines in areas such as elective surgery.

Now we believe the fact we grew, albeit slightly and despite this drop off, is a good indication of market share gains. Approximately 20% of medical sales in the quarter were from new products and these higher margin products made medical a key contributor to Life Sciences overall strong profit growth in the quarter. We expect medical to continue its low-single digit growth the remainder of this year.

Now turning to Industrial, sales were down 8% in local currency. Asia grew, they were up 7% for the first time after four down quarters and accounted for a little over 37% of industrial revenues. Sales in the Western Hemisphere and Europe are still down sharply from their highs. Some of this was attributable to timing and the balance we believe stems from lingering sector related softness. On a sequential basis, the signs continue to be more encouraging.

Microelectronic sales jumped almost 15% after a four quarter free fall. Sales were strong in all regions, but especially so in the large Asian and Western Hemisphere markets. The semiconductor side of the micro e-market has rebounded strongly. Now the chip producers are operating at near capacity and they are again investing in tools and this is triggering good activity at the OEMs as well.

The consumer electronics side of our markets, largely centered in Asia, is also coming back in part due to local stimulus programs designed to keep factory filling. Orders were up 45% in the quarter, giving good credence to our expectations for a very strong second half.

Now, turning to Aerospace and Transportation, the situation is essentially unchanged from last quarter. We expect a difficult year and is just what we're seeing. Airlines are under clear pressure from the economy particularly the regional and private jet sectors.

Military aerospace is down with a deferral of military spending, particularly in the U.S., following an extended period of high growth. Sales decreased 27% in the quarter compared to 13% growth last year in military. Our expectations for a difficult year primarily relate to $25 million of orders in 2009 that are expected to repeat, but not until 2011. The smaller transportation piece of the business is one of the markets where we see steadily improvements sequentially. The quarterly drop was just over 7%. That compared to a 22% drop in Q1 and 46% drop at the end of fiscal 2009. Order patterns are starting to return to pre-2009 levels.

Let's look at the energy, water and processing technologies section now. This market serves a broad swath of basic industrial production and was down about 10%. Given this result in the quarter we now expect EWPT to be down mid-single digits for the year.

Let's look at the sub markets in the quarter. Fuels and chemicals has not seen much of a recovery. Q2 sales declined almost 13% as production volumes from our customers, particularly in a refining and chemicals market, remain low. Like capital orders and long lead time systems last year are having a dampening effect on this as well. The trend is not appreciably improving in this sub market. Several large projects have been delayed or cancelled and orders are up sharply in Europe, but down elsewhere. Quoting activity however is reasonable.

Sales in the sister's small market Power Gen increased 11%. Growth in Asia was strong and sales in Asia are being driven by increased manufacturing output and continuing development of the nuclear and wind turbine markets in China. Western Hemisphere sales were up for the first time in a year.

Industrial manufacturing was down just 2% after four quarters of declines from 19% to 29%. It looks like we're almost out of the woods or bottomed out in this high margin business.

Sales in food and beverage decreased 8% in the quarter, but the project pipeline is stronger than it's been in a very long time. We saw good orders growth in every region. Customers are looking for technologies to bring their production costs down and this new urgency for productivity enhancements is really propelling Pall order quoting activity as well as expected strength in the second half. We are winning more of the available business as a result.

Municipal water revenues were down 40%. This is a lumpy business, but one that has consistently delivered good growth over the medium term. This is still its potential. The backlog in this market is up 17% for the year. Activity level improved with orders up 13.5% in the quarter and our hit rate based on performance is high. We've quoted about $30 million worth of projects involving all ARRA money, that's the American Recovery and Reinvestment Act. Stimulus money has the potential to impact our EWPT markets more than any other currently.

As we have shared before, it's both a benefit and a source of frustration. The prospect of free money has had the effect of accelerating quoting activity and delaying project implementation today, just as it did last year. But in any case, we remain optimistic about municipal water over the next 12 months and that the flow of our money into actual implementation of projects is starting slowly.

Among today's greatest opportunities are energy and water related quality and availability. Regardless of whether the customers need to stretch the flies and insure they meet quality environmental standards or develop alternative sources of supply, Pall has an innovative solution. Opportunity to filter water pervades the business and as capital spending and government stimulus programs move into that execution phase, Pall is well positioned. So although the economy is not yet back to full strength conditions are improving. We've taken tremendous costs out of the business and particularly in manufacturing operations. And with what we've left in place and particularly a strong base of sell-in capability and customer support and technology, we are very well poised for the recovery.

So with that quick review, let me turn the meeting over to Lisa.

Lisa McDermott

Thank you, Eric and good morning, everyone. I'll provide a review of the financial results for the quarter and first half. Net earnings in the quarter were $49.6 million or $0.42 per share compared to $38.9 million or $0.33 per share last year. On a pro forma basis, earnings per share in the second quarter of last year as defined on slide 21 was $0.38.

Net earnings in the six months were $116.6 million or $0.98 per share compared to -- excuse me, almost $82 million or $0.68 per share last year. Earnings per share on a pro forma basis as defined on the same slide were $0.82 per share compared to $0.78 per share a year ago.

The estimated impact of foreign currency translation increased earnings per share by $0.04 in the quarter and $0.06 for the six months. The December 2009 strengthening of the dollar reduced earnings per share by approximately $0.02 compared to our expectation for the quarter. Sales in Pall Industrial, principally in the energy, water and process technology markets, fell short of our expectations.

Now, I'll discuss the drivers of these results which are displayed on slides fifteen and sixteen. As Eric mentioned, sales increased about 3% in the quarter and decreased 1% in the six months. Foreign currency translation added $32.5 million or 6% to our top line in the quarter primarily due to the dollar weakening against the Euro, Pound and Japanese Yen as well as the Australian dollar.

In the six months, foreign currency translation added about $41 million or 4% to our top line due again to the weakening of the dollar overall for the period, particularly against the Euro. Excluding this impact, sales were down almost 3% in the quarter and 5% in the first six months compared to the same periods in fiscal year 2009. Increased pricing achieved in both the Life Sciences and Industrial segments contributed $3.7 million or 70 basis points to the overall sales change in the quarter and $6.5 million or 60 basis points in the first six months. Gross margins in the second quarter improved 350 basis points to 50.7%. This result principally reflects continued upward momentum in Life Sciences gross margins.

Let's take a look at the details. Life Sciences gross margin increase of 680 basis points quarter-over-quarter, reflects the successful execution of three initiatives we've spoken about before. One, cost reductions benefited gross margins by about 350 basis points. Two, pricing, of 2.7% improvement in biopharmaceuticals pricing added about 50 basis points to Life Sciences gross margins. And three, taking certain biopharmaceutical sales direct from distribution contributed approximately another 20 basis points to gross margin.

And the balance of the improvement was attributable to favorable product mix. Demand for our high value-added single use technology and filtration products and the manufacture of vaccines and biotechnology drugs showed through in the second quarter of approximately 15% growth in biopharmaceutical consumable sales, again with similar growth in the first quarter. The sale of fewer, albeit more profitable, systems also had the compounding effect of increasing margins.

Looking to our second half, we expect continued year-over-year improvement in Life Sciences gross margins from the sustainability of the three initiatives I just covered. We do not expect to see gross margins to continue at this level. As Eric mentioned, we expect biopharmaceuticals consumable sales to moderate and capital spending to substantially increase compared to the first half.

Industrial gross margins increased 70 basis points to 45% in the quarter. The key drivers of the improvement in gross margins in the quarter were a change in mix estimated to have increased gross margin by about 110 basis points, principally from the increase in microelectronic sales and reduced capital sales. These beneficial items were offset by the impact that decreased volume levels have had on industrial ability to absorb its manufacturing overhead.

Slight pricing improvements and cost reductions have neutralized the impact of inflation. Here again, given significant increase in capital spend we are forecasting for the second half, we expect gross margins to drop a bit compared to the first half. Volume increased year-over-year are expected to contribute to margin improvement year-over-year. Taken together, we expect to be within the companywide gross margin range provided in December of 48% to 49%.

SG&A, including corporate expenses, increased 12% compared to the second quarter of fiscal year 2009 and excluding the estimated impact of foreign exchange, which increased SG&A by about $9.7 million, SG&A increased quarter-over-quarter by 6%. The increase in SG&A expenses in local currency reflects companywide inflationary pressures related to employee benefit costs and costs related to investments in information technology infrastructure.

Life Sciences spend has also increased due to cost related to the market channel I mentioned a moment ago, acquisition related costs, as well as money spent to establish the European Life Sciences headquarters in Switzerland. Industrial cost reductions are mapped by the aforementioned companywide increases resulting in SG&A being flat quarter-over-quarter excluding the impact of foreign exchange.

In our second quarter, SG&A was up about 5% compared to our first quarter. In particular, this reflects the ramp up of the cost for Switzerland, acquisition costs in the quarter and the spend on our IT infrastructure. We expect spend in our second half to be at about the same level as the first half and on higher sales dollars sequentially.

Segment profit margins in the quarter were 16.4%, compared to 15.6% in the second quarter of last year, as an improvement in Life Sciences operating margin was offset by a decline in Industrial. For the six months, segment profit margins were 16.3% compared to 16.2%, again, the improvement in Life Sciences offset by a decrease in Industrial. Consolidated operating margin in the quarter improved to 14% from 13.2% last year. And for the six months, operating margin was 14% compared to 3.5% last year.

Turning to income taxes, the effective tax rate, or as reported rate for the first half, was 20.8%, reflecting a $13 million benefit related to the favorable resolution of a foreign tax audit in the first quarter. Excluding discrete items, the underlying tax rate for the six months was 31.6%. Net interest expense in the six months reflects the benefit of reversing interest accrued of $9 million related to the tax audit I just mentioned. Excluding this item, net interest expense decreased by about $4 million, primarily attributable to the repayment of foreign debt in the second and third quarters of fiscal year 2009.

Turning now to cash flows and liquidity, operating cash flow in the six months was about $156 million, compared to $62 million last year, an increase of $94 million or over 150% improvement. The increase in operating cash flow primarily reflects reduced outlays for interest on indebtedness, reduced investment in inventories and improvement in management of payables. We have realized a reduction of 14 days in our full cash conversion cycle.

Significant uses of cash during the six months included $63 million in capital spending, reflecting increased investment in our IT infrastructure and final costs for our headquarters renovation, $34 million in dividends to shareholders which is a 10% plus increase year-over-year, $25 million of repurchases of the company's stock. And $9 million for the acquisition of a biotechnology company during the quarter. Our cash position was $442 million at January 31, 2010. And our net debt to net debt plus equity stood at 19%, down from about 21.4% at the end of last fiscal year. Our balance sheet and liquidity remained solid.

Now, turning to earnings guidance, the range of earnings per share guidance we originally provided for fiscal year 2010 largely rested on assumptions for timing of the recovery in the Industrial markets. On the low end, the recovery was timed for later in the year and at the high end possibly as early as our second quarter.

Our new earnings per share guidance has an estimated reduction in the benefit of foreign exchange from $0.17 to $0.09, some of which we saw in our second quarter. Subject to this, we have retained the low end of $1.95 and we have revised the high end to $2.05, all of this excluding discrete items. This equates to an expectation of earnings per share of $1.13 to $1.23 in the second half. This does include a $0.03 benefit from foreign exchange and strong sequential growth in core industrial.

I'll close by saying that overall we are pleased with our progress, especially in light of the challenges the economy has presented. Successful execution on key initiatives is clearly showing through in our results and we remain confident in our ability to execute on our strategic plans. I'd like to thank you for your attention this morning.

With that I'll hand this back to Eric.

Eric Krasnoff

Thank you, Lisa. I will just make a few quick comments and then we'll get to your questions. Pall's strong financial position continues to improve as you've heard, including working capital and the cash conversion cycle. And Pall has a solid track record of reducing global footprint, managing expenses and executing on lean manufacturing initiatives.

Life Science continues to look solid and while the Industrial recovery is slower than we would have hoped, we are seeing across those markets with the exception of aerospace and transportation, many positive signs. And more importantly, the business drivers for Pall remain compelling.

Filtration supports lower operating costs for customers, enabling technology for innovative products and processes, the reduction of hospital acquired infections improved medical outcomes and environmentalism which drives application across our markets. And saturates compelling market drivers, broad capability, strong customer relationships and a proven track record, we remain very confident in delivering sustainable profitable growth.

So now with the help of the conference operator, we welcome your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Dan Leonard with First Analysis.

Dan Leonard – First Analysis

Thank you. My first question on SG&A expense, how should we think about your ability to offset inflationary costs in the SG&A line going forward through cost reduction efforts or otherwise?

Lisa McDermott

Well, we've seen on our SG&A, expense inflation of approximately 2.5% to 3%. We continue to execute on a number of initiatives to offset that. What I will say is we are making a number of strategic investments that are showing through in the SG&A spend and what you saw in the sequential increase quarter-over-quarter, particularly as it relates to some acquisition costs, IT and our most importantly, our headquarters in Europe and Switzerland. So while we are endeavoring to offset our underlying core cost of SG&A, we are seeing increases related to strategic investments.

Eric Krasnoff

And I think as they occurred with those increases, consolidating our operations for command and control within Switzerland, expenses also for our Asian consolidation of management into Singapore. And the completion of our global enterprise resource program through SAP, are all going to be able to drive down SG&A and that's the longer term plan.

Dan Leonard – First Analysis

Okay. Thank you. And my follow-up question. What percentage of your total revenue were system sales in the quarter?

Lisa McDermott

About 9%.

Dan Leonard – First Analysis

Okay. Thank you very much.

Operator

Your next question comes from the line of Brian Drab with William Blair.

Brian Drab – William Blair

I just wanted to first ask a question about guidance to make sure that I understand this. You're maintaining the low end of guidance at $1.95, but was previous guidance though for $2.02 to $2.19 and you're simply saying that you're only lowering the low end based on currency?

Lisa McDermott

That's correct.

Brian Drab – William Blair

Okay. And so it is lowering at $0.07 compared with $0.08 difference in currency is just rounding I would guess?

Lisa McDermott

Yeah. I think it's rounding, yes.

Brian Drab – William Blair

Okay. And just one other question. There really wasn't a lot of restructuring activity in the quarter it appears. Should we expect restructuring related to the EuroPall and AmeriPall and AsiaPall initiatives to be winding down or is this -- an anomaly in the quarter?

Eric Krasnoff

I think the activities we're seeing are more adding some SG&A. The completion of the Swiss entity, which by the beginning of next fiscal year should be contributing to the bottom line after tax Asia and as we mentioned also the IT initiatives, which are enabling a variety of AmeriPall and EuroPall initiatives to come to completion with significant reductions in SG&A.

Brian Drab – William Blair

Okay. Great. Thank you.

Operator

Your next question comes from the line of Jon Wood with Jefferies.

Jon Wood – Jefferies

Hi, good morning. Eric, so on the biopharma expectation for high single-digit growth in FY '10, a bit lower than the expectation that you offered at your Analyst Day for 10%. So where is the -- I mean your commentary seemed quite positive. Where is the disparity versus what you expected at the Analyst Day?

Eric Krasnoff

Like -- It's deferred, but it's not denied. We see in biotech lumpiness. So as an example, large chromatography resin sales do not necessarily come on an annual basis. It really relates to the customers production cycles, so some of those are being pushed out into the next fiscal year.

There's also a couple of key biotech products that did not get on the market when we expected them to. So that reduced our sales for the second half. So nothing -- really nothing profound, it's not lost business. It's just the variation in the selling cycle.

Jon Wood – Jefferies

Okay. My follow-up is on the cash flow. Lisa, do you have any update to the cash flow guidance for the year. And then I guess as it relates to that just comment on the general M&A environment. You are saying -- should we expect additional tuck in acquisitions in the back half of the year? Thank you.

Lisa McDermott

Well, in terms of operating cash flow. We continue -- given what we've seen in our first half, we continue to believe that operating cash flow will fall within the range that we provided originally, perhaps with some upside. Eric, if you want to comment on M&A.

Eric Krasnoff

Yeah. As you know, we continue to look at modest bolt on acquisitions. We've also been steadily acquiring distribution and moving into a direct sales model in the Life Science factor and that actually also pulled a little bit off that growth in Life Sciences by going direct.

Jon Wood – Jefferies

Okay. Thanks.

Operator

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

Richard Eastman – Robert Baird

Hi, good morning. I just wanted to check and you may have commented on this. But what did system sales total for Pall do year-over-year in the quarter? Were they down, I guess my math is about 30%. Is that about right total?

Lisa McDermott

Give us a moment, Rick.

Richard Eastman – Robert Baird

And just conversely the consumables growth and how you get to that number?

Lisa McDermott

System sales were down about 30% in the quarter.

Richard Eastman – Robert Baird

Okay. And I can drive the consumables number. And then -- I'm sorry? And then…

Eric Krasnoff

I was just going to go on to the systems orders if you want that.

Richard Eastman – Robert Baird

Yeah. That would be fine.

Eric Krasnoff

Which were up about 5%.

Richard Eastman – Robert Baird

Systems orders were plus five?

Eric Krasnoff

Yeah.

Richard Eastman – Robert Baird

Okay. And then in that energy water process business within industrial, you had mentioned that's the one area where sales fell short of your expectations. What was the impact of system sales? In other words was some of that an inability to ship some of the systems or I'm just trying to get a sense of how much of that was consumables shortfall versus the lumpiness of the systems impact.

Lisa McDermott

Well, what we are seeing in EWPT is a decrease in system sales. And fuse and chemicals, in particular we are seeing decrease in fuse and chemicals is the largest market with the EWPT. And then second to that, the second largest market is food and beverage, where we have seen not a great result in consumables was somewhat flat and systems were down.

Eric Krasnoff

Okay. And the systems down aside from food and beverage relates to the really shut off for the statement for capital orders a year ago.

Richard Eastman – Robert Baird

Okay. Okay. And then just the last thing, on the industrial business, when we think about that geographically and we look at Western Hem and Europe, I think Western Hem was off almost 18% and Europe down about 13%. Again, was there a system impact there or which markets maybe were the weakest in each of those two geographies?

Lisa McDermott

Well, certainly in the Western Hemisphere, municipal water was off, which is largely capital intensive and that is the result of a couple of things. One is just the timing of shipments and timing of orders, which started to slowdown last year. So for the Western Hemisphere that's a large driver of a reduction in Industrial performance in the quarter.

Richard Eastman – Robert Baird

Okay.

Lisa McDermott

Clearly, aerospace and transportation, which is significantly concentrated in the U.S., contributed to the Western Hemisphere Industrial 18% decline as well.

Eric Krasnoff

Right, Europe has a very small microelectronics sector that's 10% of our overall sales. So it didn't get the lift of other geographies did from micro e.

Richard Eastman – Robert Baird

Okay. Okay. Great. Thank you.

Eric Krasnoff

Thanks.

Operator

(Operator Instructions) Your next question comes from the line of Adam Brooks with Sidoti.

Adam Brooks – Sidoti

Yes. Can you give us a feel for I guess the annual run rate for the single use products in biotech? And maybe how you see that market unfolding over the next five years?

Eric Krasnoff

By run rate, you mean -- I wouldn't want to provide a specific dollar amount for it. But the product line is growing more than 10 to 15% per quarter right now. It's really expanding and over the next five years, we expect a substantial amount of biotech production to move to this much more flexible and much more economical for the customer to operate type of processing. Particularly, as more vaccines move into the self culture methods as well that they're ideal in terms of their characteristics for this type of process.

And the other nice thing about it is that we add more and more core technologies on to it sensors, sterile connectors, our bag technology. So we really have a lot of other products that can add to that total fluid management for the biotech industry.

Adam Brooks – Sidoti

Okay. And one quick follow-up. I guess how is the kind of Acrodose progressing? I know we talked about how it takes time for technologies to take hold. How is sales moving along with Acrodose?

Eric Krasnoff

Good. In particular in the U.S., we're seeing a swing back from expenses, a single donor platelets to using that free resource of random donor platelets that are now still 85% of the time you donate them they get thrown out and some other donor gets pulled in off the streets to get platelets.

We had a couple significant wins in the last quarter and a couple of good commitments from larger blood centers in the U.S. that will start up in the remainder of the year. So that was a good part of the 20% new products in medical that I referred to in my speech.

Adam Brooks – Sidoti

Great. Thank you very much.

Eric Krasnoff

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Hamzah Mazari with Credit Suisse.

Christopher Parkinson – Credit Suisse

This is Christopher Parkinson on behalf of Hamzah Mazari. Good morning.

Eric Krasnoff

Good morning.

Lisa McDermott

Good morning.

Christopher Parkinson – Credit Suisse

We were just wondering if you could elaborate a little more on your process of getting SG&A as a percent of revenue down to the 26 to 27% range.

Lisa McDermott

Well, clearly one of the things that will get us into that range is -- and that's a 2013 range is the leverage that we'll positions for with top line growth and the cost controls and the underlying cost controls and cost reduction initiatives that we continue to work on. So right now what we are suffering from a bit is lack of top line in Industrial while we kept the hold of what we thought was an appropriate sales staffing level to poise us for this recovery, as well as some incremental costs that we are incurring from strategic investments that we're making.

Christopher Parkinson – Credit Suisse

All right. Thank you.

Lisa McDermott

That simple.

Operator

At this time, there are no further questions. I will turn the call back to Mr. Krasnoff.

Eric Krasnoff

Thank you. We appreciate your participation this morning and your interest in Pall Corporations. Please put June 8 and June 9 on your calendars. We will relay our Q3, 2010 results on the eight after the market closes, followed by our traditional conference call the next morning at 8:30. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference. You may now disconnect.

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