Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Pentair, Inc. (NYSE:PNR)

Q3 2011 Earnings Call

October 26, 2011 9:00 AM ET

Executives

Sara Zawoyski – Head, IR

Randy Hogan – Chairman and CEO

John Stauch – CFO

Analysts

Jeff Hammond – KeyBanc Capital Markets

Jim Lucas – Janney Montgomery Scott

Deane Dray – Citi Investment Research

Christopher Glynn – Oppenheimer & Co

Chris Parkinson – Credit Suisse

Brian Drab – William Blair

Ajay Kejriwal – FBR Capital Markets

Terry Darling – Goldman Sachs

Garik Shmois – Longbow Research

Robert Barry – UBS

Scott Graham – Jefferies & Co

David Rose – Wedbush Securities

John Quealy – Canaccord Genuity

Brian Konigsberg – Vertical Research

Operator

Good morning. My name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pentair Third Quarter 2011 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) Thank you. It is now my pleasure to turn the call over to Ms. Sara Zawoyski to begin. Please go ahead, ma’am.

Sara Zawoyski

Thank you Nicole, and welcome to Pentair’s Q3 2011 Earnings Conference Call. We’re glad you could join us. I’m Sara Zawoyski, Head of Investor Relations. With me today is Randy Hogan, our Chairman and Chief Executive Officer; and John Stauch, our Chief Financial Officer. On today’s call, we will provide details on our Q3 2011 performance, as well as our updated full-year outlook, as outlined in this morning’s release.

Before we begin, let me remind you that any statements made about the company’s anticipated financial results are forward-looking statements subject to future risks and uncertainties, such as the risks outlined in Pentair’s 10-K as of December 31, 2010, and today’s release. Forward-looking statements included herein are made as of today, and the company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances. Actual results could differ materially from anticipated results.

Today’s webcast is accompanied by a presentation, which can be found in the Financial Information section of Pentair’s website at www.pentair.com. We will reference these slides throughout our prepared remarks. Any references 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, and comparative with adjusted figures, unless otherwise noted or highlighted.

The third quarter 2011 adjustments included acquisition related costs and restructuring charges of totally $0.07 of EPS again as outlined in the release this morning. We will have time for Q&A with investors and analysts after our prepared remarks.

With that, I’ll hand the call over to Randy. Randy?

Randy Hogan

Thanks Sara and welcome everyone. Let me begin with Q3 results as shown on slide 2 of the deck. Pentair delivered a solid quarter with sales up 15%, adjusted operating profits up 11% and adjusted EPS of $0.58 up 5% from the prior year. We posted this sales growth in both segments with Water up 20%, and Technical Products up 6%. A good indication that innovation continues to pay off, fast growth region sales remains strong and CPT is off to a great start.

We continue to drive demand for our products innovation focused on sustainability, energy efficiency, automation and safety together with strong focus on quality and delivery. U.S. residential sales for example grew 8% in the quarter and 6% year-to-date even without a notable end-market recovery. In fast growth regions, we continue to see good growth with sales up 22% in the quarter before including CPT. Latin America, India and Southeast Asia results stood out in the quarter.

Fast growth regions are approaching 20% of our total sales mix of 2011 compared to less than 15% just one year ago. And finally CPT sales grew nearly 25% from their prior year in local currency. With CPT now in the fold, we’re excited about the many growth opportunities ahead. Turning to margins, we said we’d get pricing and we did. 2% in both Water, and Technical Products. Pricing combined with the relentless focus on productivity more than offset inflation in the quarter.

As we anticipated CPT temporarily pressured overall margins, but did show sequential improvements on its own from Q2. The below line item tax and interests were in line with expectations. On earnings we delivered adjusted EPS of $0.58 at the high end of the guidance we provided in July, and we now have the most difficult GIWW comparison behind us. We enter Q4 with many things working for us and in our control, including pricing, innovation, and increasing scale in fast growth regions.

The end-markets we serve however continue to be mixed. Our updated full-year outlook range of $2.44 to $2.47 reflects both of these realities. Simply put we’re raising the bottom end of the range, reflecting our solid performance and taking $0.03 of the top end of the range to reflect less of a market contribution from mainly Europe. On free cash flow, we generated $70 million in the quarter keeping us on track to deliver more than 100% conversion in net income for the full-year.

Overall, we had a solid quarter and we are well positioned to deliver greater than 20% earnings growth for 2011. Now let’s turn to slide three for review of our Water business. Water revenues grew 20% in the quarter reflecting good growth across most of our businesses. The CPT acquisition contributed 17 points of this growth adding roughly $90 million in sales in the quarter. Volume is down 1% year-over-year reflecting the tough comparisons with the large GIWW projects. Recurring volume growth actually accelerated a 5% in the quarter from 4% in Q2, reflecting continued momentum in fast growth regions, innovation, and distribution gains.

By global business unit or GBU, residential flow continues its strong performance with sales up 15% in the quarter including three points of FX benefits. U.S. residential pump sales grew double-digits in the quarter helped by a strong flood season. Excellent operating performance by the team enabled us to service customers flood demand in efficient and profitable way. Pump sales in Europe moderated from first half but still grew in the third quarter.

Our agricultural lines including irrigation pumps and cross-spray products continued their double-digit growth trend growing 18% in the quarter and showing some nice added traction in Brazil. Residential filtration sales grew 5% in the quarter with FX contributing roughly two points. We continue to transform this business into one that is more global, with more point of use filtration and higher efficiency product offerings. In the developed market, our move towards more salt and energy efficient products and channel partner expansion helped to partially offset channel and discretionary spend pressures in the U.S., and Europe.

Fast growth regions grew over 20% in this business. India and Latin American sales virtually doubled in the quarter with more in-country for-country innovation and increased distribution coverage. To further support growth in India, we recently expanded our partnership with Eureka Forbes, a leading consumer company in India with a 7,500 strong direct sales force. Strengthening our foothold in the reverse osmosis market in India at the same time leveraging our goal of production capabilities.

Pool sales were up a robust 14% in the quarter as we continue to add dealers, innovate and grow outside the U.S. Q3 marked another good quarter of strong net dealer gain for pool, adding 75 in the adding in the quarter, bringing our net dealer gains for the year to over 300. We continue to lead in innovation around energy efficiency and sustainability evidenced by a strong Eco-Select performance in the quarter with sales up 35%.

And Eco-Select now represents over 35% of pools total sales mix, compared to 32% last year. Strong demand for our IntelliFlo variable speed pump platform was a big driver. The compelling paybacks for the consumer along with dealer training and incentives help extend the selling opportunities beyond traditional replacement and new pool sales. With less than 10% penetration for variable speed, meaningful growth opportunity for Pentair’s IntelliFlo remains.

We also launched seven new products in the quarter including a new generation of LED Lights and intense moderating control equipment interfaced with consumer devices like the iPad. Engineered flow sales decreased 32% in the quarter with $31 million in GIWW comparison driving 28 percentage points of that decline. The remaining 4% decline reflected continued softness from the large U.S. municipal project sales, only partially offset by higher commercial and industrial sales.

Within industrial, demand remains strong for reciprocating and centrifugal pumps in the oil and gas sector which for us was up over 30% in the quarter. U.S. municipal remains sluggish based on funding concerns, but we believe that the U.S. municipal markets reached bottom and we’re beginning to see some bid activity resume. In filtration solution, sales were 8% at CPT led by food service and desalination and including two points of currency. We continue to successfully expand distribution in our small project business in desalination and remain encouraged by some of the larger project wins including a $3 million benefit in the quarter from a project in the Middle East.

Foodservice share gains continued in the quarter due in part to the continued global rollout of Starbucks. The filtration solution opportunities are vast in markets like China, and extent beyond the large global food companies. And so we’re focused on those smaller companies too. We continue to make good progress in energy which is expected to be up 10% for this year as we acquired existing technology and system selling off to a broader set of customer needs in the oil and gas market. Recent wins include several natural gas liquid separation systems for gas and shale development in Texas and North Dakota.

Let me provide an update on CPT. With just the quarter end, we’re off to a great start. Even as Europe softened a bit, CPT sales grew an impressive 24% in the quarter in local currency when compared to their pre-acquisition 2010 sales last year. Growth was broad based across both water and beverage. The innovation remains robust and the installed systems base is growing helping to support compelling ongoing revenue going forward and replacement components and services.

As we move forward, we will move more deliberately and swiftly pursue synergies and improved margins. Globally, we began sharing our CodeLine vessels and X-Flow membrane opportunity. Cross selling opportunity extends to pumps as well. Recently we won a $1 million pump project in the Middle East leveraging Pentair’s customer relationship with sales team with the CPT know how’s [ph] flow technologies superiority. On the cost side, sourcing opportunity is plenty. Lean driven initiatives are just starting and structural cost takeouts have begun with the consolation with some regional buildup.

The right half of the page shows Q3 Water operating profits and margins. Water operating margins were 11% in the quarter, while this is 40 basis point year-over-year decline, it reflects an improved base margin performance of roughly 12% from a 60 basis point expansion offset by a 100 basis point negative impact from the lower CPT margins. Price realization was solid in the quarter, up 2% from prior year helping to offset inflation. We’re making meaningful progress on lean enterprise globally in Water. Although CPT margin impact was expected, we’re not complacent on it.

As I just said, we expect to drive sequential improvements in CPT margins through a combination of volume leverage, lean driven efficiencies as well as synergistic cost takeout. Overall, I am pleased with our Water performance this quarter. I am excited about its future with CPT in the fold and see leverage from the global investments we’ve seeded over the last several years.

Now let’s move to slide four to review our Technical Products. Technical Products sales were up 6% and operating profits were 14%. The top line results reflect solid pricing and continued strength in most end-markets, industrial, general electronics and energy all posted double-digit growth, a continuation from the strong first half performance. Notably the oil and gas opportunity extends beyond Water. Energy which is over 10% of Technical Product sales was up 30% in the quarter as we provide the control of automation cabinets intrinsic to the industry’s capital spending.

Communication which accounts for roughly 20% of Technical Products sales was down 18% in the quarter, consistent with what we said in Q2, this largely reflects the lumpiness in some of the telecom programs along with some underlying softness in the general electronics market. Technical Products posted another quarter of nearly 30% growth in fast growth region sales led by China and Latin America. We continue to leverage our global manufacturing capabilities in strong brands to build our position in key growth markets and expand distribution.

In China for example, we expanded our distribution coverage, increasing our distribution comp by 20% in the quarter. Highlighting our in-region for-region focus, we launched several new cooling solutions in the quarter designed specifically for the China market. Latin American sales were up 34% reflecting broad based strength across key verticals including energy. While there is clearly more work to be done, Technical Products has improved its fast growth region sales mix to 13% up from the 11% a year ago, and at the same time improved overall margins by an impressive 210 basis points year-to-date.

I am pleased with the Technical Product operating margin performance posting another quarter of 17 plus percent margin on vesting a growth initiative. Now let’s turn to slide five. For our Standard work, details of free cash flow are on the left of the slide, and a summary of our debt levels are on the right. We generated free cash flow with $70 million in the quarter reflecting the solid Q3 performance. Year-to-date we’ve generated $188 million of free cash flow and believe we’re on track to deliver roughly $250 million for the year.

We returned approximately $20 million to shareholders through dividends in the quarter with an annual dividend rate of $0.80 per share. In addition, we repurchased $12 million of shares under the $25 million share buyback authorization program. We continue to show progress on ROIC just shown on the bottom right section of the slide. We return on invested capital of 8.8%, an increase of 60 basis points. Our goal continues to be to drive ROIC into double-digits as we outlined for you at our Investment Day in September.

Now please turn to slide six. For the year, our execution has been sound and we entered Q4 strong with year-to-date revenues up 14%. Segment margin expansion of 110 basis points and 23% earnings growth. Pentair continues to perform well even if the few end-markets have not. On the top line we expect CPT to add roughly $100 million in sales in the quarter. We expect those things that helped us in Q3 to continue including sustained global industrial capital spending. We do expect Technical Products growth rates to moderate reflecting more difficult comparison as well as more challenging global electronics market.

In Water, we expect no near-term improvements in U.S. residential markets, still we expect to grow mid-single-digits in U.S. residential markets as we continue to capitalize on the secular trends around energy efficiency and sustainability. U.S. municipal spending remains under pressure, negatively impacting our large pump project business and as a result engineered flow is expected to be down roughly 30% in Q4 reflecting another difficult GIWW lap and down more than 10% ex-GIWW.

Across both segments, we entered the back half of the year with a mixed Europe. Today it’s probably a bit more mix with some moderating growth rates in Germany and pockets of weakness in southern part of the Western Europe. For reference Western Europe is roughly 14% of our total sales of which Germany is roughly half. In fast growth regions sales were up over 45% year-to-date and we anticipate continued robust growth in key regions, like China, Brazil and India. We’re just beginning we believe to see the benefits of our investments in these markets including CPT.

With higher volume in fast growth regions, from the scale to drive better operating leverage helping to advance margins. We’re committed to driving growth investments, productivity initiatives, and continuous cost structure improvements. In addition, we anticipate price alone to offset inflation in Q4 with productivity coming on top of that. For CPT, we expect sequential improvements in margins. We’re rapidly moving forward in the application of lean enterprise and rolling out the PIMS toolkit across CPT now.

We’re also developing plans for a more optimal combined go-to-market approach in key reasons with the goal of selling more together. We anticipate this will result in a charge in Q4 that is not reflected in the current guidance. So despite all of the headlines our view of opportunities remains relatively unchanged. We believe we are well on track to deliver greater than 20% earnings growth and record sales of nearly $3.5 billion.

Before I turn it over to John to review the Q4 outlook in greater detail, I know that many of you are interested in hearing our outlook for 2012. We’re working on those plans now and once finalized, we intent to review our outlook with you on September 14. To be sure our focus for next year continues to be growth. We believe the progress in 2011 to advance our strategy and technology and innovation, fast growth regions, and PIMS positions us well for sustainable profitable growth in 2012 and beyond.

As we said in September in our Analyst Day, what really enables and supports Pentair’s future are the mega trends that are driving the world. The biggest mega trend driving the world is the population and wealth growth of what I’ll call the new world. And the demand that puts on food, energy and infrastructure. We believe the two businesses that we’re in Water and Technical Products both had great opportunities here around efficiency, sustainability, health, and safety.

These mega trends and formally we’re focusing our growth initiatives and investments in Pentair. We continue to control our own destiny through focused execution of our consistent strategy, finding new ways to grow, advancing lean enterprise globally and accelerating our productivity and repositioning efforts.

With that I’ll hand it over John. John?

John Stauch

Thank you Randy. Let me begin on slide eight, titled Q3 Pentair performance assessment. We thought it would be helpful to share with you our growth in Q3, absent to GIWW project that existed in 2010 but not in 2011 and the CPT acquisition which is driving a more favorable year-over-year growth comparison. When excluding these two items, you can see our revenue growth was up 8% on recurring organic basis. While modestly below our year-to-date performance, this was in line with our estimates and position us well to finish the year strong.

When we make the same adjustments to Water for Q3, you can see that our recurring organic growth from Water was 9% slightly above our year-to-date average driven by mid-single-digit growth in developed markets including two points of realized price and 20% plus growth in fast growth markets. This means effective of products growth moderated in Q3 largely reflecting more difficult comparisons, industrial growth remains strong with some headwinds in global communications effecting growth.

Overall our revenue for Q3 was about as expected and still strong compared to our year-to-date performance in longer term growth targeted. When excluding the impact of GIWW and CPT, year-over-year on earnings per share, you can see that the Q3 our year-over-year growth is 18%. A solid performance led by revenue growth, and price cost relationship that was almost neutral and moderating year-over-year FX translation benefits. The Q3 performance sets this up nicely for a solid finish for 2011.

Please turn to slide number nine, labeled Q4 versus Q3 business expectations. In light of the solid Q3 revenue and operating performance, as well as from day to day market uncertainty of volatility, we want to share with you how we are thinking about Q4 and what we have included in our guidance. We are expecting recurring organic growth to moderate a bit from 8% in Q3 to around 7% in Q4.

This is driven by slightly less foreign exchange tailwinds about a point less, continued strong price realization, moderating Western Europe contribution, and the decline in communications revenue within Technical Products but with other developed markets tracking sequentially inline and continued robust growth from fast growth markets. This expected revenue growth along with a seasonally strong CPT performance will contribute nicely to the bottom line, generating expected EPS growth of greater than 20% for Q4 2011.

Please turn to slide number 10. We wanted to provide some richer color on our Q4 2011 EPS guidance. We delivered $0.49 per share of EPS in Q4 of 2010 with about $0.02 of that performance coming from the GIWW projects that was concluded in the fourth quarter of 2010, which means it is the last quarter in which we’ll have a year-over-year comparison with the project. We are expecting net CPT contributions, operating income interest less taxes to be greater than a nickel in Q4 2011 and this key performance quarter of the year generate solid margins.

Our base businesses are expected to generate between $0.07 and $0.09 per share which is up about 14% to 18% year-over-year, on the expected seven points recurring organic growth I mentioned earlier. Embedded in this performance is our expectation that return modestly positive our net pricing versus material inflation. And we therefore expect that material productivity to deal even more upside in Q4 and future quarters with net price less net productivity to be greater than material inflation.

I would emphasize from the last bullet that our CPT integration efforts remain on track and we expect that we will see continued improvements in the operating margins of CPT as well as strong double-digit top line growth in both with Beverage and Water businesses.

Please turn to slide number 11 titled Q4 ‘011 Pentair Forecast. For Q4, we expect revenue to be between $880 million to $900 million. Operating income is expected to be between $100 million to $104 million. Operating margin should be around 11.5% and EPS should be between $0.59 to $0.62 on an adjusted basis or up between 20% and 27% for the quarter.

We expect Water revenue to be up greater than 25% inclusive of the CPT acquisition and the year-over-year GIWW comparison. And we expect mid-single-digit growth in Technical Products. Water margins are expected to be around 11.5% and Technical Products margin should be delivered near 17%. We expect that our Q4 tax rate will be slightly less than 29% which will include some modest adjustments to bring our full-year run rate to around 30% consistent with our go forward rate assumptions heading into next year. We’re expecting a strong finish to the year in cash flow or about $60 million which should get us to our target of $250 million for the year.

Please turn to my slide, slide 12, full-year 2011 outlook. For the full-year 2011, we are expecting revenues around $3.5 billion consistent with our previous forecast, and EPS around $2.44 to $2.40 on an adjusted basis. These results will have Water up 16% to 18% for the year or up 7% to 9% on a recurring organic basis. And Technical Products should achieve double-digit organic growth for the year.

Overall, we expect our gross margins to expand greater than 100 basis points with price plus productivity offsetting inflation and we are maintaining our operating expenses to the 20% targeted level. Overall EPS is forecasted to be up 22% to 24% versus 2010 demonstrating both our growth and operating productivity leadership business. As I mentioned earlier, we are still expecting $250 million to cash flow with a strong finish to 2011.

Please turn to my last slide labeled adjusted to reported EPS forecast. Detailed on slide 13 is the quarterly breakout of reported to adjusted EPS performance. Similar to last time, we have divided these into four main categories. Deal costs which were completed as of Q2, customer backlogs which will conclude in Q4, inventory step-up which was completed in Q3 and repositioning actions which includes $0.02 of restructuring in Q3 related to global staffing and manufacturing reductions following the acquisition of CPT.

With the CPT acquisition now in the fold, we have looked at our go to market strategy and fast growth and developed regions. Our GE [ph] is structured around key product platforms as well as our manufacturing footprint and logistics optimization opportunity. We expect to announce some further actions in Q4 that will strengthen our capabilities in all of these areas as well as reduce our overall cost structure. We will be comparing the detail of those in the Q4 earnings call scheduled to late January.

I will now turn it back to Randy who will give us a quick summary before we turn it over to you for questions. Randy?

Randy Hogan

Thanks John. 2011 is shaping up to be a good year for Pentair, in meanings we better than what we thought it would be at the beginning of the year. As you recall we began the year with EPS expectations in the range of $2.20 to $2.35 a share compared to $2.00 a share in 2010. Today we believe we’re well on track to deliver EPS in the range of $2.44 and $2.47, up 22% to 24% from prior year.

This performance reflects roughly $0.05 from CPT with the remaining $0.40 or so cents driven largely by strong execution. So we’re counting on our market snapback in 2011 for several critical markets and we didn’t get it. Despite this, we grew sales and earnings better than we initially expected. As we move into 2012, we have more scale and fast growth regions, good price material momentum and the added technology and application know how of CPT positioning us well for continued success.

Thanks for your time in listening. We’ll now turn it over for questions. Operator, take over.

Question-and-Answer Session

Operator

(Operator Instructions) We will pause for just a moment to compile the Q&A roster. Your first question is from the line of Jeff Hammond of KeyBanc Capital Markets.

Jeff Hammond – KeyBanc Capital Markets

Good morning guys.

Randy Hogan

Good morning Jeff.

John Stauch

Good morning Jeff.

Jeff Hammond – KeyBanc Capital Markets

Just getting to Tech Products a little bit differently. So it seems like that the slowing really is isolated to Europe and the electronics piece. Can you just talk about what you are seeing in your developed markets traditional or electrical business?

Randy Hogan

Yes, the general electronics business still grew and the trough side business still grew in the third quarter. It was really the communication, the larger communication projects that saw that big decline I talked about. That said, we do see softening in Europe which is largely the general electronics and we see as we’ve seen a moderating if you will on the growth rate on the industrial side. We haven’t seen a decline. We’ve just sort of seen it leveling now which is what we’re reflecting in the fourth quarter guidance.

Jeff Hammond – KeyBanc Capital Markets

And what happens to communications in 4Q?

Randy Hogan

Communications is down again in 4Q. So communications is down, general electronics is down a little bit and basically the industrial side is flattening. We’re not getting to double-digit growth to single-digit growth. So that’s sort of how the mix works.

John Stauch

Jeff, just to quantify it. The communications for us is about 20% of total Technical Products and you could think of those down business are like IT is generally the growth decline. That compares to what was growth in Q2. So we saw that slide throughout Q3 and we’re not expecting that to get better, but as Randy mentioned in the industrial side, we’re still seeing double-digit growth in.

Randy Hogan

Getting to double-digit.

John Stauch

In Q3 and we expect that to be more like mid-single-digits growth in Q4.

Jeff Hammond – KeyBanc Capital Markets

Okay. And then just quickly on res flow. What do you think you are benefited just from the opportunistic weather flooding activity?

John Stauch

Yes, I’d quantify it somewhere between $7 million and $8 million Jeff. We have floods every year. I think the difference this year as Randy mentioned where we were much better prepared for the operating deliberate [ph] and made it more profitability this year.

Randy Hogan

And we made a couple of cents this year in the third quarter, the last year we’re in the beginning of the year and we didn’t make any money because it was all expedited and just turns lost productivity. The business did a great job this year.

So where the couple of cents and but Europe was probably weaker about a couple of cents in the quarter. So this is how I would like to.

Jeff Hammond – KeyBanc Capital Markets

Okay, thanks guys.

Randy Hogan

Thanks Jeff.

Operator

The next question is from the line of Jim Lucas from Janney Capital markets.

Jim Lucas – Janney Montgomery Scott

Thanks, good morning all.

Randy Hogan

Hi Jim.

John Stauch

Good morning Jim.

Jim Lucas – Janney Montgomery Scott

Couple of questions, John, at the end there you gave a little bit more color on the restructuring on the quarter and where you’re looking to do some other activities. As you are looking across the portfolio and putting in place these actions, what kind of paybacks are driving the decision making process?

John Stauch

I think Jim, I’d put in two buckets, I mean obviously the staffing decisions are very quick paybacks, right, I mean certainly less than a year. And there is obviously opportunities as we look across the businesses both in the channels and how we serve our customers better. And so we’re really focused market back, customer back how do we optimize the Pentair portfolio. And I think that will be the majority of the restructuring changes we make which really are designed to make it more seamless of doing business. On the plan side, Jim I mean two year paybacks are normal. And we look at the benefit we’re going to get on the logistics and the supply chain. And do we make ourselves easier to do business with and that’s really how we’re gearing our manufacturing analysis on plan.

Randy Hogan

If I could just add one thing and just sort of less about payback and more about philosophy. We continue to need to move our center of gravity to that new, new world, the fast regions. We’ve made good progress. But we have so much more to do in terms of getting our best talent and our best capability to the faces of best opportunities. And that sort of informs our thinking.

Jim Lucas – Janney Montgomery Scott

All right. That’s very helpful. And with regards to the CPT integration, one of the areas you talked about is go to market strategies and you gave a good example of the win in Middle East, when you’re looking at the timing in terms of how quickly being able to go to market, can you maybe expand a little bit more of what you’re seeing in putting the sales opportunities together?

Randy Hogan

Yes, the one we talked about in the Middle East was a great example. We had a good coverage on the ground in a number of countries that CPT didn’t in Middle East and so we had an opportunity. CPT has already technical solutions. And so the two groups who are working very well to get it by the way. The two groups that are large pump area with (inaudible) and CPT pull that together and we’re able to secure than when actually deliver it and it’s pretty impressive.

The simpler one are things like we make CodeLine vessels, any kind of high tech membrane goes in a CodeLine vessel. So CPT wasn’t buying those for their own system. So they are now as well as sharing these opportunities so there is both. And then the next step will be there to get what I would call more integrated design of for instance in our systems we have a set of standard systems. We haven’t fully incorporated the technical thinking, we have some CPTs. So I would say that sort of the shared opportunities like our contacts selling their products, their contacts selling our products is one type there.

And then there is the cross selling opportunities and then there is the integrated design. Those are the three buckets I just wanted to.

Jim Lucas – Janney Montgomery Scott

Okay. And finally just was hoping you could flush out a little bit more on engineered flow, you know obviously that market remains very next to say the least, could you talk about what you’re seeing on the quoting side, not just the quoting but are these just people getting the quotes, are they potential shipments as well as one of the things in the past talked about is that’s been in North American muni-centric business as you look, are there opportunities globally on the muni side for engineered flow?

Randy Hogan

Yes, the – let me begin with that one, that actually the Middle East one is that kind of we’ve been investing to put people on the ground to sell larger, more sophisticated pump systems. And the example of the win in the Middle East was just that. We didn’t had a ready solution based on our U.S. design, CPT did. I think there is going to be more opportunities as we get our sales force is better trained globally to sell those if you will in other 50 cycle European base design which is a (inaudible) versus our very well accepted design from the U.S. which aren’t as well known in sometimes in 60 cycles versus 50 cycle pumps.

So that’s a big opportunity for us. So we do have to get to be more global on that business because we suffer because we’re primarily in the large municipal business. We are in the break and fix world of the U.S. municipality. So we think we will make more progress as a result of CPT technology and our investments. That’s the way I am thinking about it.

Jim Lucas – Janney Montgomery Scott

And then with regards to the quoting activity in the U.S.

John Stauch

Quoting activity is I’d say stabilized. It’s going up a little bit. I am always I am looking forward to see orders going up.

Jim Lucas – Janney Montgomery Scott

Okay, thank you.

John Stauch

There cannot be more (inaudible).

Jim Lucas – Janney Montgomery Scott

Thank you.

Randy Hogan

Thanks Jim.

Operator

The next question is from Deane Dray of Citi Investment Research.

Deane Dray – Citi Investment Research

Thank you and good morning everyone.

John Stauch

Hi Deane.

Randy Hogan

How are you, Deane?

Deane Dray – Citi Investment Research

Just a follow-up on the flood contribution. My guess is that $78 million does not come at high margins since it’s going through big box. So if just comment on the profitability and Randy maybe expand on the point about you said that it was done efficiently and profitable. What went right in being in a position to benefit from that?

Randy Hogan

Yes, let me talk about the position and then I’ll let John to talk a little bit more about the specifics on the numbers but basically when we have the big floods in the beginning of 2010, we were not in the inventory position. We were focused on being efficient on the inventories but we didn’t have a lot of surge inventories and when those floods hit if you recall in the spring of 2010 they were pretty enormous, not necessarily up where you are but in the mid-section of the country.

What happens is we end up expediting things out of Mexico, expediting things out of China, expediting things. We’re running a lot of overtime. So we have a lot of negative areas against that product and because it is a thinner margin business, because it’s largely sold to resell, we actually didn’t make money doing that. So the residential flow business is a learning organization. So they said, if in fact we’re going to see more of these kind of larger events which someone predicts we will and in fact we have since then. They have changed their profile. They’ve actually invested more in inventory. They’ve focused through lean enterprise to being much more flexible in terms of their production and so we were ready for this thing.

And so we had the inventory. We had the processes in place to ship efficiently and actually make money. So and served customers very, very well. We got kudos from our channel partners there.

John Stauch

I would just add, I mean roughly there is about 20% contribution. So probably about a $1.6 million operating income side which converts to roughly $1.5 to $2.0 but it’s hard to exactly quantify because there will be returns and all kinds of netting costs. So but overall, I think it positions us well to secure the accounts and the way we respond means that we secure our position. It gives us a better negotiating position for 2012 and beyond. So I think we’re very proud of the team and the fact that we are able to deliver on that.

Deane Dray – Citi Investment Research

Great. Thanks really helpful. And then on how does that months play out in the quarter especially for Water July, August, September?

John Stauch

I mean I think July and August are always hard reads. September came in as we expected and July and August was mixed as Randy mentioned and we saw the lumpiness and the volatility across different product lines. So I think overall the quarter was more of a usual quarter of Water. And the Technical Product side as we mentioned industrial remains strong throughout the quarter, and the communications orders and the sales started to slide throughout the quarter which is why we are predicting lower revenues through Q4 in communications side.

Deane Dray – Citi Investment Research

And maybe this should be helpful to hear from you what the thinking was when you reaffirmed guidance for the year but not necessarily for the quarter, quarter seemed to play out fine, the months played out uneventfully but just looking ahead when we see a development like that.

Randy Hogan

We did not want our Analyst Meeting to turn into a quarter discussion, I mean I just didn’t want to do that. I felt like we needed to do stuff to affirm the year just to get it out of the way but we really wanted to talk about where we’re going for the next three quarters.

John Stauch

Deane it’s a standard practice, the full-year was required to kind of a give a launch point for where we were on the four or five year vision. So that’s our standard practice to confirm the year. And at the time of the Q3, there was nothing unusual to update on which is standard procedure.

Deane Dray – Citi Investment Research

Great, that’s really helpful. And then Randy maybe can you expand on the point where you commented that the muni demand may have reached bottom?

Randy Hogan

Well we’ve seen an increased level of activity in discussions and estimations biz and the like in the U.S. So that usually portends an uptick in our activity. So right now, we were not coming on that helping us in the fourth quarter or even I would if I can reach out to the far to the beginning of next year because we have pretty good visibility on that in that business of the quarter. So I think we sort of reached to the new normal and the water utilities or adjustments.

Deane Dray – Citi Investment Research

And then just last question from me, the most recent mix or the run rate mix for your muni business if you separate the break and fix which we recognized as the biggest component but how much is break and fix versus project related sales?

John Stauch

Well probably right around 85% to 90% break and fix at the moment and the rest is project in the North American side. Clearly if you look at the CPT side, as Randy mentioned on a global, there are lot more projects focused and the global bids are still fairly strong, the non-U.S. I mean.

Deane Dray – Citi Investment Research

It’s really helpful. Thank you.

Operator

The next question is from Christopher Glynn of Oppenheimer.

Christopher Glynn – Oppenheimer & Co

Thank you good morning.

John Stauch

Hi Chris.

Randy Hogan

Hi Chris, how are you?

Christopher Glynn – Oppenheimer & Co

So I was wondering if you could elaborate on what you’re seeing in Europe, if there are any pockets that have had some jarring developments or just sort of a gradual softening pretty much.

Randy Hogan

I wouldn’t say it’s jarring, I mean it’s no surprise to anybody that Southern Europe is weak that we get most of our sales out of Northern Europe. So the Benelux countries and Germany and France is an important country for us as well. And I would just say that adjunct to the third quarter, August is always slowing here by anyway. And September was probably a little weaker than I would have like to seen coming back. The residential market has been I would say soft all the year. And it’s more in the general electronics area where we’re beginning to see some more softening and that’s an important market for us in Germany in particular. So I’d say nothing specific just sort of a softening.

John Stauch

Just to provide more color to that Chris, probably we’re seeing this across to your landscape but Q1 for Europe was a very nice recovery especially in Germany. But to put in perspective if you look at volume growth our absent foreign exchange contribution in Q2, volumes were up 3% and 5%. So it wasn’t likely with the substantial contribution you still have the some small contribution in Q3. But it’s really I would say that the drop off in Europe happened in Q1 to Q2.

Christopher Glynn – Oppenheimer & Co

Okay, got it. One on the communication side, do you viewing this as sort of volatility in the spend that actually kind of favorable comparisons next year or just how you’re viewing what’s going on there?

Randy Hogan

Communications for us is our lumpiest business in Technical Products. It’s the place where we have the largest projects. So I would say that we have a one big project going end of life that probably has bigger impact on us than just the general level. However when we do look at the general level electronics it’s more challenged than the industrial side. So we’re cautious about that.

John Stauch

Yes, I don’t think we can certainly to do our plans but I don’t think we’re expecting it to be an upside next year. I think we think that that area throughout 2012 to be a tough environment and we’ll plan for it accordingly.

Christopher Glynn – Oppenheimer & Co

Got you. Thank you very much.

Operator

The next question is from Hamzah Mazari of Credit Suisse.

Chris Parkinson – Credit Suisse

Good morning, this is Chris Parkinson on behalf of Hamzah. I just had a real quick follow-up question, you mentioned you gave us some additional color in the cross selling initiatives with CPT. If could give us a little more color on the cost synergies and then how the ramp-ups like how that should occur in the fourth quarter as well as into 2012?

Randy Hogan

Yes, if you recall we weren’t looking at significant cost synergies when we put the deal together as manufacturing numbers and we looked about $4 million. What you’re seeing progressing forward is little over seasonality in CPT and therefore the leveraging of the amortization cost. I think if we take a look and we spent more time with the business, there is certainly things a $3.5 billion company you can bring to a $300 million business that drives efficiency especially in back office. And that’s where we’re expecting to be able to bring the synergies across the year within 2012. So I am looking steady improvements, continuous improvement every quarter as we would look at it and we would look to take a look at any channel opportunities as I mentioned the restructuring and opportunities that changed the business model of CPT going forward.

Chris Parkinson – Credit Suisse

Perfect, thank you very much.

Randy Hogan

Thank you.

Operator

The next question is from Brian Drab of William Blair.

Brian Drab – William Blair

I have just one quick question on the margins were so high. With respect to the fast growth regions and what you’re calling the new, new world. How are the margins in those regions in the quarter relative to what you see in the developed world and what do you expect going forward?

John Stauch

Yes, I mean obviously the developed world we got capacity and we’re absolutely a lot higher and I won’t give those exact percent, they are pretty high in the developed world but we are 10% in the developing world now which we think is showing and demonstrating what Randy mentioned of scale. And I think we expect that to continually improve. We’ve now got localized product and localized manufacturing to the regions that we’re serving. And we’re bringing to do it lean disciplines around cost management.

And we expect the growth to continue. As we mentioned at the Analyst Day, I mean we’re actually hearing price discussions in China for the first time. So with inflation there, I think people are starting to realize that value product is still being priced a little bit. So I think most businesses are in these regions to make money and we’re one of those businesses and we expect that the margins will continually improve.

Brian Drab – William Blair

And then we’ve had lot of questions around Europe, and may I ask a slightly different way, if you look at the water business and then the tech products business separately specifically within Europe and kind of look at how things progress July, August, September, October. How do you characterize each of those segments overall, and given that we’re almost through October now maybe you could make a comment on that month as well?

John Stauch

I’ll give you some quick color on the numbers and I’ll let Randy comment. But consistent with seeing that we brought to the Investors Day and consistent with the way that we’ve been developing and operating projects, these are developed regions, I mean GDP and the amount of population grows is not robust in the regions we’re talking about. Europe for us is less than 20% of our total sales and we don’t look at it as the significant or substantial growth environment. So it grew ultimately for the year greater than our expectation. As I mentioned Q1 was a significant contribution and we started to see a low single-digit growth in Q2 and Q3. That’s in line with what we think it’s going to be long-term.

And that’s consistent with both Water and Technical Products. It’s hard to be a globally competitive in euro at the rate that it’s at today. So you really you’re line of growth within those regions. And while there is still growth in Germany it’s not of the growth that’s equal to China, Brazil or India. I’ll let Randy answer.

Randy Hogan

Yes, growth from Germany is really their export growth, that is expensive. We support taking on the Technical Products side. The German X-Flow [ph] and that’s really what helps. Now our Western Europe team also has two of our growth regions which is Eastern Europe and the Middle East. So we want to invest there and when I talk about moving our center of gravity, we’ll be moving from Western Europe to Eastern Europe and the Middle East from United States to Latin Americas. From both of those regions to Asia because our base case has been the same since 2009 when we said that we expect Europe isn’t going to grow much at all for the next five years market. The U.S. is going grow like Europe used to which means that half of the rate of U.S. needs to.

But the fast growth markets are going to grow like they are doing now because the wealth of that populations demand there. So that’s really what informs the way we think about Western Europe and the U.S. business, it’s not new thing.

Brian Drab – William Blair

Okay, thank you.

Randy Hogan

And if you will quarter-to-quarter – quarters are annoying [ph] right now.

Brian Drab – William Blair

All right.

John Stauch

So I think it’s important to separate the foreign exchange impact in Western Europe and the actual volume we’ve had there.

Randy Hogan

Yes. And there was no contribution really to foreign exchange in Q1 and you add substantial volume. When you kind of look at Q2 as I mentioned before, volume was mid-single-digits and there was a substantial foreign exchange contribution. If now you look at volume, you are foreign exchange contribution is tailing off and your volumes moderating slightly. That’s the way we describe it.

Brian Drab – William Blair

Okay, thank you very much.

Randy Hogan

Thank you.

Operator

The next question is from Ajay Kejriwal of FBR Capital Markets.

Ajay Kejriwal – FBR Capital Markets

Thank you, good morning.

Randy Hogan

Good morning.

John Stauch

Good morning.

Ajay Kejriwal – FBR Capital Markets

Good, so just wanted to maybe first follow-up on the U.S. municipal discussion, I would be curious to hear your thoughts on what driving that pickup and bid activity because from everything that we are seeing and reading that does not look like finances of municipalities are improving. So any thoughts on what’s driving that, is that any break and fix that they have not done and they are trying to catch up or is it something else?

Randy Hogan

Yes, I’d call it dead cat bounce, I think it’s more of what were you talking about there. We have different shares and different positions depending on the area. I will go into which areas with. What we feel better is the more activity there is in the municipalities where we have very high share so because our share varies by region to region.

So I would just say that the area is that we are particularly strong in have got some larger projects that they have to keep going. And so that’s figure our way but when I say that this is pickup in bidding activity, I am not talking, I am not – that doesn’t portend 20%, 30% growth, it just pretends filling in some blanks. So don’t – I don’t want to even know the reason my comments on the U.S. municipal. They still have funding channels but most water utilities do have some other sources of funds. They can raise the rates and they can do some bonding, that’s other part of cities in the like that’s difficult to (inaudible).

Ajay Kejriwal – FBR Capital Markets

Got it. That’s helpful, and then on pricing you’re getting good pricing across both Water and Technical Products, I guess as material start to rollover and you’re seeing some potential demand issues in Western Europe. Maybe any sense on what – you think you could be given pricing a little bit or could customers be asking for some rollbacks?

Randy Hogan

Well I would say that the competitive dynamics and the customer relationship dynamics hasn’t changed much. Just to roll back history a little bit, one of our beliefs is that the ability to get price is a good market for being in an attractive business and we’ve generally been able to get price in these two segments, Water and Technical Products. We actually constrain, we decided not to raise prices fast as there is – when the recovery began because we work confident enough to raise prices and we don’t want to risk losing any volume because we raise prices. So we rectified that, and got back into what I would say the 2% is more of our structural practice, its normal we’re returning to normal.

Material has to support that but it’s really structure that supported our ability to get price more than material. So if anything we’re still catching up on material. The material inflation that we suffered in without raising prices before. So I don’t view them as totally coupled with materials and pricing.

John Stauch

Yes and to Randy’s point 2% is an average net right. So there is certain areas were we’re able to get more price and there is areas where we get lot lesser much more competitive. As you mentioned on the global project side, a lot of times it’s not counted as a price but that’s a bid activity on the global projects is more competitive because of the general pricing is coming down.

Ajay Kejriwal – FBR Capital Markets

Thanks for that. And maybe one more from me on CPT. My rough math suggests margins forestallers, intangibles in the high single-digit. And you’re getting very nice growth here. So maybe help us think about the trajectory from here as the intangibles come down and as you continue to grow, at what point CPT margins come to newer segment average?

John Stauch

Yes, just remember tangibles are flat right for the quarter, and those are over a long period of time. And what we’re seeing is more contribution over that intangible. Q4 will be a nice quarter for CPT. It will be definitely high single-digits or double-digit growth reflecting where they could be, but in the project business. And so Q4 tends to be the strongest season. So listen, I think we mentioned we’re in kind of high single or mid to high single-digit range in ROS [ph] ending 2011. We expect 100 to 150 to 200 basis points expansion next year and we continue to grow on that base, when we expect to make stable progress. So that’s kind of the way I would think about it.

Ajay Kejriwal – FBR Capital Markets

Got it. So the intangibles are flat on a dollar term but as sales increased the percent of sales that go down.

John Stauch

Correct.

Ajay Kejriwal – FBR Capital Markets

Got it. Thank you.

John Stauch

Thank you.

Operator

Your next question is from Terry Darling of Goldman Sachs.

Terry Darling – Goldman Sachs

Thanks.

Randy Hogan

Hi good morning.

Terry Darling – Goldman Sachs

John, maybe I am just trying to think through the end-market breakdown there for Technical Products on the organic growth side. So organic up 3% fast growth up 29% so I guess developed markets are down very significantly. Is that the right way to read it and then if you look at the individual segments there, only comps is down with a lot of big growth numbers in the other segments. What else down is from an end market perspective to get you all buttoned up to up only 3% for the segment?

John Stauch

Yes, I think it’s optical illusion on that chart, because we show kind of our high verticals. But fast growth definitely up nicely. And then the only market that was down and it was down strong was communications which as I mentioned is down mid-teens. And everything else was up. Industrial was up strong as I mentioned, certainly commercial was actually even up double-digits, infrastructure was modest up 2% to 3%. And our general electronics was still up. Medical is a market for us that we capture that tends to be lumpy as well, that’s very small market for us, less than 5%, that was down.

Randy Hogan

And security and defense which is a little bit bigger than that one.

John Stauch

Yes, that was down as well.

Terry Darling – Goldman Sachs

You said defense was down?

John Stauch

Yes, security and defense was down about 15%.

Terry Darling – Goldman Sachs

Okay.

John Stauch

It’s only about 5% of the Technical Products.

Terry Darling – Goldman Sachs

Okay. And how big is general electronics as a percentage of segment, at one point, I think you guys had a pie chart out there at 20% but that might be still?

John Stauch

It’s about 10%.

Terry Darling – Goldman Sachs

About 10%. Okay, so between comps and general electronics, about 30% of total. I mean would you think those to combined or down next year or do you think you’ve got some new products or some easier comps in the back half of the year that don’t make it that tough?

John Stauch

I think it’s flattish to up modestly.

Terry Darling – Goldman Sachs

Okay.

John Stauch

But we hadn’t the plan yet but I think.

Terry Darling – Goldman Sachs

Yes, but that’s where you think is not. And then on incremental margins I mean 40% here in third quarter for tech products and guidance implied pretty close to that as well, you’re getting that net price. As you move into next year, is there anything you would have us think about regards to the sustainability of incremental at that level?

John Stauch

I think – it’s really in the planning cycle but that would be our expectation. What you’re seeing as Randy mentioned in more normal environment in which our price and cost are more predictable and therefore the incremental margins are in that direction, also reminds you I mean electrical and industrial possibilities substantially higher in the communication so you can get a mixed backup too.

Randy Hogan

Well and as good as we filled our tech products business in our margins there is not profit (inaudible). It is still higher.

John Stauch

I’d say 40% incremental at least this quarter Terry, and the last quarter for that matter, but pretty tough across industrial so.

Randy Hogan

The 40% is what I mean is the 7% plus as other folks who are talking 20%.

Terry Darling – Goldman Sachs

Yes, okay. And then over to the engineered flow side of the house, I am just trying to put all of the different commentaries together there. You’re going to actually see organic on a year-over-year basis ex GIWW go from I think you said down 4% in 3Q to down to 10% in 4Q. What is driving the sequential deceleration, that’s just the tougher, it’s just the comps dynamics there or.

John Stauch

We had a few projects that were going end of life in 2010.

Randy Hogan

Yes we had some other big not huge projects but now we’re calling bigger that were in the fourth quarter. That’s what’s really I mean to John’s point earlier that there is 85%, 90% for break and fix. In other words, the smaller lovely business because it slows in expected margins but fewer of the big ones.

John Stauch

But Terry, I think the – we have to do a better job of helping everybody understand the global platform and clearly when we look in here (inaudible) from predominant U.S. business that I know reasonable to say that down mid-single-digits might be zero to down maybe 5%, it might be its run rate but when you flip right over the global side and take a look at (inaudible) and CPT we’re up strong double-digits because the global opportunities are still there. I think from finding the capacities Randy mentioned in the go to market on these two businesses combining the engineering talent the capability I think the globally we still expect the global pump platform to be up high single-digits next year.

Terry Darling – Goldman Sachs

Okay, that’s helpful. And then lastly Randy, any update on the private label strategy with CPT at this point?

Randy Hogan

Not any real update but just sort of make it a broader conversation so everyone knows, we believe that there are a lot of folks who we can supply membranes to as I call it – we call it sort of our Intel inside [ph] kind of thinking. We don’t want to be systems providers, we want to be component suppliers to a lot of vertical markets. And so we are pursuing those opportunities more aggressively than the former owners did because strategically they didn’t want to conclude their exit options. We certainly have a difference strategic thoughts in terms of when we think about CPT. But we’re still working on them. I am still bullish on that idea, but nothing new on that yet.

Terry Darling – Goldman Sachs

Okay, thanks very much.

John Stauch

Thank you.

Operator

The next question is from the Garik Shmois of Longbow Research.

Garik Shmois – Longbow Research

I think you just have question on pool. You’ve got a good job of winning share and penetrating the dealer channel. Just wondering how many more opportunities you have there and how sustainable this is?

John Stauch

I think you saw (inaudible) analysis and you see that they are doing pretty well and the market itself is doing well. We think the demographics of a pool owner is different than that of a broad based consumer group. And I think we think that there is opportunities continue to improve the penetration rate, I mean the penetration rate is variable speed and the energy efficiency is still below double-digits. And there is a lot of more opportunity for that platform as people change out the pumps and go more energy efficient. And also the automation platform and the ability to tie all the energy efficiency into control environment is also a higher penetration rate. So we think there is a long runway left with our current products set. And the more the acceptance rate is across the dealer channel which as Randy mentioned, we added a lot more dealers to our platform. There is also energy we make on this. So we think the momentum is building. So we think there is a long runway left.

Garik Shmois – Longbow Research

Thanks and just as a follow-up, can you just talk about perhaps the margin opportunity as you introduce your new products into the dealer channel?

Randy Hogan

Well margin dollars is a lot better. The margin percentage isn’t necessary best, these products are 2x to 3x higher in products, two or three times higher in price. So the margin dollars are higher but the technology content is also higher. So it’s a little bit lower gross margin but I still like it. So I like the dollars.

Garik Shmois – Longbow Research

Great, thank you very much.

Randy Hogan

Thank you.

Sara Zawoyski

Nicole, just given the time, if we can just get a quick check in terms of who is on the queue or how many numbers.

Randy Hogan

How many people.

Sara Zawoyski

Yes.

Operator

We have five questions left in the queue at this time.

Randy Hogan

Okay, we’ll go through them really quickly.

Operator

The next question is from Robert Barry of UBS.

Robert Barry – UBS

Hi guys, thanks for taking the question.

Randy Hogan

No problem.

Robert Barry – UBS

I’ll actually just ask two quick housekeeping items, one is whenever you gave the outlook for 3Q sales did you contemplate FX in the revenue growth expectations?

Randy Hogan

Yes, and just a way to put in for Q3 it was little lighter in the FX contribution side, the average euro to dollar which is our primary currency was little lowered than what was in the forecast.

Robert Barry – UBS

Okay, and then would you give what the breakout in that walk on water operating profit, $22 million between price and productivity?

Randy Hogan

Well you can see price on the right hand side, the prices shown on the left hand side. Sorry, on the left hand side.

Robert Barry – UBS

All right, fair enough, that was great [ph].

Randy Hogan

On the sales.

Robert Barry – UBS

Yes, okay. Great, that’s all for me. Thanks.

Operator

The next question is from Scott Graham of Jefferies.

Scott Graham – Jefferies & Co

Mine is quick as well.

Randy Hogan

Hi Scott.

Scott Graham – Jefferies & Co

Hi, how are you all doing? Page 10 of your handout where you talk about the high single-digit organic of the base business, this slide has ex CPT, ex GIWW. Previous page is saying were current organic growth of 7% I assume that’s what you mean in that sales up high single-digits.

John Stauch

That’s correct.

Scott Graham – Jefferies & Co

All right, now then the first page.

Randy Hogan

We had...

Scott Graham – Jefferies & Co

Okay. But then the first bullet down below says slightly moderate and year-over-year organic growth comparisons, now I do understand that that includes GIWW at least I think it does but your third quarter organic was two.

John Stauch

Yes, I think what you are arguing about is 7% organic growth high single-digits or mid to high but that you are looking at the same numbers. If you look at page nine, you’ll see that we mentioned the recurring organic is approximately 7%.

Scott Graham – Jefferies & Co

Yes.

John Stauch

For Q4.

Scott Graham – Jefferies & Co

Right.

John Stauch

That 7% is what the sales up high single-digits refers to.

Scott Graham – Jefferies & Co

Right. And that is – the 7% is ex GIWW.

John Stauch

That’s correct.

Scott Graham – Jefferies & Co

So when you say slightly moderating year-over-year, I am not sure what that means?

John Stauch

From just talking from 8% to 7%, so moderating versus Q3 is what we are referring to.

Scott Graham – Jefferies & Co

Okay, versus the.

Randy Hogan

The year-over-year rate in Q4 is slightly or point less than the year-over-year rate from Q3 to Q2.

Scott Graham – Jefferies & Co

Okay. And both of those numbers are ex GIWW?

John Stauch

That is correct.

Scott Graham – Jefferies & Co

That makes sense. Okay, thank you. That’s all I had.

Operator

The next question is from David Rose of Wedbush Securities.

Randy Hogan

Hi David.

David Rose – Wedbush Securities

Good morning. I’ll try to make up quick. If you could on the engineered flow side, can you discuss the strategy to grow the replacement side of the business and the margin component, one of your longer competitors talks about the strength in the aftermarket sales as it relates to a recurring string of replacement business and a higher margin profile. Is there something like that we can expect in 2012 and then.

Randy Hogan

I mean that’s function of two things one if you’re talking about one particular person who is in the rental business, that’s a service business and it’s a pretty attractive business which has a different demand profile. We’re really not in the rental business. And in terms of the service side, yes we service our install base. There isn’t a lot of cross service of other peoples install base. So I mean when I talk about break and fix that’s the service component is in there. We don’t have any major initiative to try to attack other peoples install base at this time.

David Rose – Wedbush Securities

Okay, fair. And then China residential, what you see on a domain [ph] go in terms of sales trends for your products?

Randy Hogan

They are up strong, things for sales are up high double-digits.

David Rose – Wedbush Securities

Okay. And then lastly the 70 products that you mentioned in the third quarter, how much of that would be incremental in terms of revenues for Q4 and or 2012 or is that just filling in existing products?

Randy Hogan

The pool is always a little bit, I don’t have it right on top of my head. It’s always a little bit of a cannibalization but one of the reasons we continue to gain share in pool is the fact that we cannibalize, we innovate over ourselves before other peoples do. So I don’t really have that number off hand but they do get 14% growth and I think a lot of that sales momentum is because of that innovation. So I don’t have really [ph].

John Stauch

Yes, it’s hard to quantify the quarter. The way we look at it longer term is we drive to one to two points on innovation and incremental to what the base growth rate would and that’s what we’re striving for. That’s net of cannibalization in what we’re trying for. I don’t have the exact number within the quarter.

David Rose – Wedbush Securities

Okay, great. Thank you.

John Stauch

Thank you.

Operator

The next question is from John Quealy of Canaccord.

John Quealy – Canaccord Genuity

Yes, thanks one more for John. You’ve talked about broadening about your capabilities in the energy space and you called up some filtration wins in gas this quarter. Can you talk about some of the figure opportunities you see there?

Randy Hogan

We have a really nice energy business in terms of doing a fluid separation in refineries in chemical plants. Well I mean fluid separation not that we tried but fluid separation is fluid separation. So we have a lot more – we put a lot more effort to get into the exploration production side and particular it’s related to the shale developments in some of this new natural gas area. So there is actually two or three different things we can be involved in helping with some of the filtration around the production fluids as well as some of the energy fuel fluid.

So a lot of the ones that I talked about were actually natural – are liquid gases, the propane and the butane and moving from the natural gas stream. That’s sort of like right in our real house. So we’re investing to get people on the ground to sell that more (inaudible) Q3. So that’s what that’s about. Hello.

John Quealy – Canaccord Genuity

Okay.

Operator

Your final question is from the line of Brian Konigsberg of Vertical Research.

Brian Konigsberg – Vertical Research

Good morning.

Randy Hogan

Good morning.

John Stauch

Good morning.

Brian Konigsberg – Vertical Research

I just had a quick question, you were trying to touch on this before with municipal funding and multiple sources, I feel like we’ve gotten different answers to this from different suppliers, but the funding sources between user fees and tax dollars, obviously it’s not that is more user fee type driven and should be a lot more stable than kind of fluctuations we’ve see in tax collections. It seems that more collections had a bigger impact this quarter than I would have thought but maybe you can give us a little more color on the dynamic there and how we should be thinking about it going into 2012, should we tracking more of the tax collections or should we think that as you kind of get more steady from here?

Randy Hogan

What I would say is large scale developments additional infrastructure development track more the ability to keep the system going, the break and fix side goes more to the usage fees and the fees. And so that’s why that money all would be there. It’s whether they are going to do a major upgrade in the system like they did in New York, there was one major upgrade in the suppliers [ph] in New York that was political will and they put the money there. And so it’s those larger scale projects that are really falling off.

So I don’t track tax receipts but I track quotation activities and try to put a reality factor on them as to whether the budgetary or whether they are (inaudible) or whether they are budgetary or whether they are actually funded.

Brian Konigsberg – Vertical Research

Got it. Thank you very much.

John Stauch

Thank you.

Randy Hogan

All right, thanks all and can you do the replay please.

Operator

Thank you for participating in today’s Pentair Third Quarter 2011 Earnings Call. This call will be available for replay beginning at 12:00 PM Eastern today through 11:59 P.M. on Wednesday November 30, 2011. The conference ID number for the replay is 14752542. Again the conference ID number is 14752542. The number to dial for the replay is (855) 859-2056 or (404) 537-3406. Again thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Pentair's CEO Discusses Q3 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts