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Executives

Jim Lucas – VP, IR

Randy Hogan – Chairman and CEO

John Stauch – CFO

Analysts

Brian Konigsberg – Vertical Research

Brett Lindsay – KeyBanc Capital Markets

Hamzah Mazari – Credit Suisse

Garik Shmois – Longbow Research

Robert Barry – UBS

Deane Dray – Citi Research

Mike Wherley – Janney Capital Markets

Brian Drab – William Blair

Scott Graham – Jefferies

Christopher Glynn – Oppenheimer

David Rose – Wedbush Securities

Pentair, Inc. (PNR) Q2 2012 Earnings Call July 24, 2012 9:00 AM ET

Operator

My name is Katie and I will be your conference operator today. At this time, I would like to welcome everyone to the Pentair Q2 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I’d now like to turn the call over to Jim Lucas, VP of Investor Relations. Please go ahead. Mr. Lucas.

Jim Lucas

Thanks, Katie and welcome to Pentair’s second quarter 2012 earnings conference call. We’re glad you could join us. I’m Jim Lucas, Vice President of Investor Relations. With me today is Randy Hogan, our Chairman and Chief Executive Officer and John Stauch our Chief Financial Officer. Today’s call we will provide details on our second quarter 2012 performance, as well as our full year 2012 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 for the year-ended December 31, 2011 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 investor’s section of Pentair’s website. We will reference these slides throughout the prepared remarks. All references today will be on an adjusted basis unless otherwise indicated, for which the non-GAAP financials are reconciled in the appendix of the presentation.

I would like to also point out that the third quarter and full year outlook does not include any future impact related to the pending Tyco Flow deal that we announced on March 28 as stated in this morning’s release. We will be sure to reserve time for questions-and-answers after our prepared remarks. I will now turn the call over to Randy.

Randy Hogan

Thanks, Jim and welcome. And good morning to everybody. Let me begin with second quarter results as shown on slide three. We had another strong operating performance in the quarter driven by our focus on the three Ps that we can control.

PIMS, price and productivity. We grew sales 3% on a reported basis. We drove operating profits up 11% expanding adjusted operating margins by 100 basis points and we delivered adjusted EPS of $0.83, which is up 11%.

While a combination of unfavorable foreign currency translation, continued softness in Western Europe, and the last quarter of an end-of-life telecom project tempered top line growth, we saw continued strength in many of the sectors we serve.

Industrial, agriculture, pool and energy all contributed solid gains in the quarter and we saw strong pricing across the portfolio with total price favorable by 2.4%. Fast growth region sales were slower but still grew faster than overall Pentair.

We continue to expect double-digit growth for the full year in fast growth regions as we execute our expansion plans. Adjusted margins increased 100 basis points to 14.3% in the second quarter as we continue to drive greater productivity and execute the pricing actions to offset material inflation while funding growth investments. While we have seen some easing in commodity inflation, our pricing initiatives remain sound.

In the second quarter, we delivered adjusted EPS of $0.83 compared to the $0.75 in the prior year driven by our strong operational execution in the quarter, which helps somewhat mitigate the areas out of our control, such as softer Western European volumes and continued headwinds from foreign currency.

On cash flow, we saw the seasonal rebound in free cash of $222 million in the second quarter, bringing the year-to-date total to 140 million, putting us well on our way to converting more than 100% of net income to free cash flow, something we’ve done consistently eight out of the last 10 years.

As Western Europe continues to be a headwind and uncertainty persists, we accelerated several repositioning actions during the quarter. This is not dissimilar to the approach we’ve taken during other challenging times in the past.

All in, we delivered another quarter of solid operating performance with well executed productivity initiatives, good price realization, while continuing our growth investments, which we believe position us well for the balance of 2012 and beyond.

Now, let’s turn to slide four for a review of our Water & Fluid Solutions segment performance. Water & Fluid Solutions sales grew 7% year-over-year in the quarter largely driven by the CPT acquisition, which added $40 million in sales. Excluding CPT, Water & Fluid sales grew 3% in local currency as price realization remains favorable.

Aquatic Systems delivered solid results in its seasonally strongest quarter and treatment process continues to benefit from a strong backlog and a healthy pipeline of new product introductions.

Let me begin with the flow business, where sales were essentially flat in the quarter, an improvement from the decline seen in the first quarter. The business continues to see softness in residential pumps through the absence of any major weather related activity this year. Municipal was flat, but the project business saw a healthy, double digit increase in orders and the backlog continues to build, signaling some increases in sales in this vertical starting in the fourth quarter this year and into the first half of 2013.

We are not prepared to call a bottom in Municipal, but we are seeing signs of stabilization and an increase in quoting activity in the traditional break and fix activity, which may signal a return to more normal demand.

Agriculture grew at a mid-teens rate in the quarter, as we continue to see strong share gains in this vertical. The integration of Nijhuis into Flow is progressing nicely. Cross training of the sales force is well along and we’ve begun to combine product offerings in some verticals, such as Fire. In the first quarter, we mentioned several joint sales calls that have made – that we’ve made and this continued into the second quarter, most recently in Canada to promote the new fish friendly pump.

Within Treatment and Process water purification sales grew 4% year-over-year in local currency. Fast growth region sales continued to grow at double-digit rates, with India doubling once again on expanded coverage and added new products.

In contrast, sales in the U.S. were up modestly and Europe was relatively flat, largely in line with our expectations. Importantly we did see U.S. inventory levels stabilize and Europe distributors some sentiment improved from the October and November low points.

New product launches remain on track, including our industry changing innovation Hybrid DI, which combines the benefits of reverse osmosis filtration with those of a water softener using capacitive electrodes to remove hardness and total dissolved solids from the water, all without employing any salt.

In addition to residential use, this groundbreaking system could be used in a wide range of applications, including in hotels and restaurants and the broader commercial sector. We’re very excited about all these applications and look forward to winning a lot.

As part of our rapid growth process, we’ve had some success with programs first introduced in China and then launched globally. Most recently we’ve begun our USA Builder initiative that targets a select group of builders that are still growing in areas such as Denver, Houston, San Antonio and even Tampa. This is based off a program that we had success with in China targeting large housing complexes. The USA builder initiative has had some early wins and we’re looking to expand into other regions entering next year.

In China, we recently launched the POU Homespring product, which is exceeding our initial expectations. This product has been well received in China and we’re looking to roll this out globally later this year. Both of these initiatives, the Builder program and the Homespring product, demonstrate our ability to not only develop programs locally in fast growth regions, specifically China in this case, but to also take this knowledge and transfer it globally.

In the other part of Treatment and Process, process technology sales were up 29%, or up 3% including CPT and a 6% foreign exchange headwind. Advanced Water Systems and Energy both grew double digits in the quarter. Within Advanced Water Systems we continue to see growth in desalination through the distribution channel along with some project work.

Energy grew double digit once again. We continue to pursue larger system sales and penetrate new applications within refineries and natural gas production, while growing recurring revenue and maintaining above average margins.

Our second quarter performance once again demonstrated the great strides we are making with our Polarex Extractive Separation Systems. Our technology and systems expertise provide alternatives to conventional natural gas treatment methods at a fraction of the cost with better efficiency and a much better environmental footprint.

We secured several new orders in the quarter, which highlights the growing acceptance of this technology. Food Service remains steady as we expand into new customers, such as convenience stores. We reached the one-year anniversary with CPT in mid-May, so only half of the results were included in acquisitions during the quarter. CPT added $35 million in acquired sales in Q2 contributing to both flow and treatment process. Backlog grew once again, particularly in beverage, which we believe sets us up nicely for 2013.

Process Technologies had several strategic wins during the quarter. First, we’ve established a framework agreement with the major brewer for all filtration projects through 2015 including BMF projects underway in England and China.

We continue to win contracts for dairy applications as well. Next we won our single largest code line order to date for a desal project in Saudi Arabia. Finally, we won a large membrane systems order in France and see opportunities to expand our global Anaerobic MBR reach in the future.

Turning to Aquatic systems, once again it was another great performance. Sales were up 8% in the quarter, reflecting continued share gains and good pricing. Growth fundamentals remain strong in Pool with continued investment and significant installed base growing energy rebates and good secular trends around sustainability, efficiency and automation.

As result, in IntelliFlo pump sales remained impressive growing another 30% in the quarter. We continue to expand coverage and penetration adding another 132 dealers in the quarter and add new products to the lineup, such as the IntelliZone Ozone Generator system that helps sanitize pool water and reduce chlorine use by as much as 50%.

The right half of the page shows second quarter Water & Fluid operating profit margins. Water & Fluid adjusted operating margins increased 50 basis points to 14.7% in the quarter. Successful pricing actions and strong productivity helped to offset persistent inflation and we continue to make progress at CPT as the adoption of PIMS has contributed to improvements in quality, delivery and cost. Overall, I’m very pleased with the Water & Fluid segment performance this quarter.

Now, let’s move to slide five for a review of Technical Products. Technical Product’s sales were down modestly compared to prior year in local currency, while adjusted operating profits grew 5%. Price realization was good, but volumes were down year-over-year due to an expected end-of-life telecom project. This is the last quarter of that particular project headwind. Even with the reported sales decline, Technical Products delivered 11% operating income growth and adjusted operating margins expanded 290 basis points to 20.2%. This marks another record margin performance for the segment.

We believe we are well positioned to deliver the expected 100 plus basis point margin expansion in 2012 as pricing initiated in March reads through along with continued productivity, repositioning benefits and better growth in the second half.

In our focus verticals Industrial, Energy and Infrastructure, we grew sales a combined 5% globally and 9% in North America in the quarter as we fill in our global product portfolio, add coverage, particularly in Energy, and launch our new accelerate program that highlights better lead times and ease of doing business.

This quarter we also launched PCF stainless steel wall mount enclosure line, which was designed and produced in China. This targets petrochem, pharmaceutical, and food and beverage applications.

In contrast, Communications, which accounts for roughly 19% of sales was down nearly 30%, reflecting the anticipated negative impact from the end-of-life program as well as softness overall in telecommunications orders.

Cooling was up 6% excluding FX, and continues to be a key focus as we expand coverage in innovation globally. This quarter we launched a Direct Air Cooling System, an energy efficient cooling platform for electronics. This new systems offers flexible effective heat removal for outdoor enclosures. Looking ahead, we have an exciting innovation calendar in Cooling with the expected launch of a compact cooling offering, added controller and communication capabilities and expanded offerings specifically for fast growth regions.

We are also seeing early successes of integrated cabinet and cooling solutions, for example a tow-way project in Brazil with each controller requiring three cabinets plus a cooling unit. This is in the testing phase now, but we see great potential for it after the testing phase is over.

Fast-growth region technical product sales grew 8% in local currencies as we add distribution and expand our product portfolio to meet local needs. In China, sales improved quarter-over-quarter with some stabilization, and importantly good traction on our distribution expansion efforts, adding nearly 20 more distributors this quarter and yielding 30% sales growth through distribution.

In Latin America, Tech Products largest fast growth region, sales were up nearly 20% in local currency with infrastructure a bright spot. Middle East, albeit small today, was up 17% in the quarter. I believe we’ve only just begun to see the benefits of our expanded distribution and product offerings in fast-growth regions for Tech Products.

Bottom line, in Technical Products is that while volumes are more challenged in the second half of the year, we continue to invest in new products and global expansion, while driving productivity and Lean to grow operating profits and advance margins.

Let’s now turn to slide six. Now that we’re past the halfway point for the year, I wanted to spend a few moments updating you on our key geographies and verticals. Starting with our largest region, the U.S. and Canada, year-to-date sales were up 5% if we exclude the previously mentioned end of life telecom contracts in tech products.

Industrial, Agriculture and Energy have been the three strongest sectors. And while we are seeing some moderation in Industrial, Agriculture remains strong. And we’re making good inroads into energy, which is growing off a smaller base. Western Europe remains an important area and we have not been immune to the challenges throughout the region. Excluding FX translation, volume were down 8% in the first half.

While we anticipate translation headwinds to continue, the rate of decline in volumes appears to be moderating in Europe. Within fast growth regions, there are several moving pieces. China was flat on an organic basis in the first half of the total enterprise, but we saw over 20% growth in other key regions such as the Middle East, Latin America and India.

As I mentioned previously, Industrial and Ag – agriculture – aquaculture are up double digits year-to-date. We have seen modest gains in Commercial and Infrastructure and Residential has been flat. While we continue to bounce along the bottom in Residential and Commercial, Infrastructure recently had seen some pick up in orders and backlog.

Our investments in strategic growth platforms continue to pay dividends in the form of increased orders. Energy, water reuse, industrialization, and agriculture are all areas where Pentair is positioned in the new, new world.

Let’s turn to slide seven for a look forward at the second half of the year. After posting 5% top line growth in the first half, with acquisition contributing from CPT, we would expect modest reported top line growth in the second half as FX translation remains a headwind. We are not alone in this, but we are focused on elements within our control.

For example, our strong price contribution in the first half is not a short-term phenomena and we have strong price actions carrying through into the back half of the year. In addition, improving backlogs in Municipal and Beverage portend an improvement for these verticals. Fast growth remains on track for double-digit growth this year even as China’s growth has been muted.

Operating margins have benefited from price and productivity, two of the elements within our control. We’ve seen some moderation on the inflation crunch, which has helped and we continue to drive productivity. Given the ongoing challenges with the macro environment we did accelerate some repositioning spending in the quarter. Overall, we are on track to deliver adjusted operating margin expansion of 100 basis points and double-digit EPS growth for the year.

Before I wrap up my comments, on slide eight I would like to provide an update on our announcement – announced merger with Tyco Flow Control. We continue to be excited about the merger announced at the end of March. We believe this transaction is a great strategic fit increasing our global presence and exposure to high growth and attractive sectors.

Let me first provide an update on the transaction timeline, what we’ve done in the last 118 days and what’s still to come. From a regulatory perspective we received U.S. and EU clearance with regulatory filings underway in other foreign jurisdictions. We’ve established an Integrated Planning Management office, led by a proven Pentair executive, which is fully staffed with a team of 40 functional and business unit team leaders to drive the global integration planning.

These initial integration planning efforts will be critical as we ramp up towards the expected close at the end of September. We filed a preliminary proxy statement and Form S-4 for SEC review, which is progressing. Still to come are a few more foreign regulatory approvals, and of course Pentair and Tyco International shareholder approvals. As we work through regulatory approvals and SEC filings we are limited in further commenting on the transaction, but we wanted to provide an update on what we’ve accomplished to-date.

Now let’s turn to slide nine. In summary we’re off to a solid start. First half was not without its challenges, nor will be the second half. But we continue to demonstrate our ability to drive strong operating performance through the elements within our control. We are doing this while still investing in the long-term as evidenced by our continued expansion into new areas, such as energy and agriculture, and a strong new pipeline like with the Hybrid DI.

We are well aligned with the biggest mega trends that, I believe, are driving the world today and in the future. The population and wealth growth of what we call the new, new world will continue putting incredible pressure and demands on food, water, energy and industrial infrastructure. From CPT to the transformational Tyco Flow deal, we continue to better position Pentair to serve this new world.

In addition, we remain committed to organic investments for growth in serving these attractive trends, sustaining higher R&D investments to deliver customers what they need, including better efficiency, sustainability, automation and safety.

With that, I’ll turn the call over to John.

John Stauch

Thank you, Randy. Please turn to slide number 10, labeled first half and full year operating margins. Let me begin on the left hand side of the chart. As Randy mentioned previously, we expanded Pentair adjusted operating margin by 100 basis points in the second quarter versus last year. Tech Products led the way with 290 basis points of margin expansion, while Water delivered 50 basis points of expansion. Adjusting for the last quarter of the CPT acquisition headwind, which was 70 basis points, Water delivered around 120 basis points of margin expansion.

Both Water and Technical Products benefited from acceleration of PIMS and Lean initiatives, proactive pricing actions, lower raw material costs, value engineering efforts, prioritized investments and previously taken repositioning actions. We continue to focus on four wall accountability and we are raising the expectations of the plants and businesses and they are responding with thoughtful projects that are yielding significant results.

Also a benefit in the quarter in both segment were more significant contributions in income from fast growth regions. Our efforts to localize sales, marketing, engineering, sourcing and manufacturing in these regions is being rewarded.

As we look at the full year expectations for 2012, we see most of the trends from Q2 remaining consistent into the second half of the year. We expect the top-line contribution to be a little lighter than previously anticipated due to FX translation, not just in Europe, but also in Brazil, Canada and India back to the U.S. dollar. While the top-line impact of FX was nearly 27 million in the second quarter, the estimated impact of the bottom-line was only about $0.02 of EPS due to the fact that we benefited from transactional FX, in some cases, as well as we were proactive in taking out costs in most regions affected.

For the full year, the impact of FX on year-over-year basis is forecasted around $90 million or about 2.5 points of top-line impact. In addition to FX, Western Europe represents just under 15% of our overall revenue. In total, we are now forecasting Western European volumes to be down around 6% to 7% for the full year affecting the top line for Pentair by just under a point.

While China has received a lot of attention for slowing, and no doubt it has, we continue to make progress in fast growth regions with year-to-date revenue in total fast growth, up just over 20%, and anticipated to grow 20% for the year and finish greater than 20% of Pentair’s total revenue base.

We still believe fast growth regions long-term are the right place to be positioned, and while one or two geographies every year may not experience double digit growth, because of our product offering, lower share position and investments locally; we believe we are well positioned to grow double digit and fast growth as a whole for the next several years.

So, in summary for operating margins, we have done nicely for the first half. We expect Europe and China to be sluggish into the second half, FX to continue as a headwind, price to be maintained, and raw material inflation to be moderate. We feel we can control our own destiny and deliver a second half and full year operating performance, while we anticipate the closing and integration of the Tyco Flow businesses.

Please turn to slide number 11, labeled balance sheet and cash flow. We had a strong cash flow quarter, as anticipated. We delivered $222 million in cash flow for the quarter, which is about $40 million more cash than we delivered in the second quarter of 2011.

Working capital was strong, as is typical in our second quarter, which is when we collect unreceivables from the early buy season in our pool business. Net debt ended the second quarter at about $1.35 billion slightly better than forecasted. It’s setting us up nicely for the anticipated closing of our proposed merger with Tyco Flow. ROIC improved to 9.3%, still below our long-term expectations of 15%, but on pace for double digit by the end of the year.

Please turn to slide number 12, labeled third quarter Pentair outlook. Our third quarter Pentair outlook assumes that the overall economy does not get much better. Volume growth in Europe in the second quarter was down about 10%, which was consistent with the first quarter. Sequentially the second quarter is about the same as the first quarter, so it did not really deteriorate. It just did not get better.

Our forecast for the third and fourth quarter assumes the same general global economic picture with the only deterioration, a moderating North American industrial outlook as capital spending tightens. With that as a backdrop, we expect third quarter sales to be up around 1% to 3% organically or close to up 3% to 5%, excluding the impact of 2 to 3 points of FX headwind.

Increases in volume are expected in Water, where CPT is now contributing to organic sales and a healthy backlog of global industrial projects related to CO2 recovery and Beer Membrane filtration systems, as well as water reuse projects for large industrial customers. Also accelerating are energy separation projects, aquaculture applications, and global agriculture systems. Easier comparisons in Europe will also help Water, primarily in the water purification business.

Order trends and building backlog in municipal infrastructure should result in revenue growth in that segment in the second half, versus declines in the first half. For technical products we expect top line growth to continue to be challenging as North American industrial revenue expansion slows from plus 7% in the first half of the year to plus 3% to 4% for the second half of the year, as well as datacom, communications, and general electronics globally experiencing close to double-digit declines on lower capital investment.

European headwinds are expected to continue through the third quarter and should ease a little as we close out the year. Overall, Pentair adjusted operating income, before any impact of the Tyco Flow merger, is expected to be up 4% to 8%, and adjusted operating margins should be up around 60 basis points year-over-year as productivity continues to contribute to bottom line expansion.

Overall adjusted EPS is expected to be between $0.61 to $0.63, reflecting lower contributions, as is normal, from Aquatics due to the end of season sell-through and the typical impact of Western European shutdowns for the month of August. Third quarter performance should set us up nicely for closing out the year and achieving our full year expectations.

Please turn to my last slide, labeled full year 2012 outlook. For the full year, we have tweaked our guidance by raising the bottom of the range by a nickel to $2.70, reflecting second quarter performance and our current outlook for the second half. We have adjusted the top end of the range to $2.76 from $2.80, reflecting impact from FX.

Overall, our new adjusted EPS outlook is $2.70 to $2.76, reflecting a full year EPS expansion of 12% to 15%. Driven by top line expansion of four to five points, and overall margin expansion about 70 basis points, or around 100 basis points excluding impact of CPT, and in line with our productivity expectations and previous performance history. Free cash flow is expected to exceed 100% of net income and be greater than 270 million for the year.

Katie, can we please take our first question?

Question-and-Answer Session

Operator

Absolutely. (Operator Instructions) Your first question comes from the line of Brian Konigsberg from Vertical Research. Your line is now open.

Jim Lucas

Brian?

Randy Hogan

We cannot hear you, Brian.

John Stauch

Brian?

Operator

Mr. Konigsberg, if your line is on mute, would you please un-mute.

Brian Konigsberg – Vertical Research

Can you hear me? Hello?

Randy Hogan

Yes, we can now.

Brian Konigsberg – Vertical Research

Okay. Sorry about that.

Randy Hogan

No problem.

Brian Konigsberg – Vertical Research

Just first question on Technical Products, great quarter. Margins at 20%, I think that is a record from what I could tell. I’m just curious, with the volumes under a bit of pressure, what are the chances you get push back from your distributor base asking for a price concessions, given that also some of the commodities are seeing some relief.

Randy Hogan

There is always a risk of that in major project settings. But one of the great things about the structure of our industry is when you sell through distribution the prices kind of roll through. We don’t do surcharging. Everything goes into the base. So we always assume that in our – that there will be some erosion due to the larger projects. But in terms of the flow business, stuff that really just flows through distribution, it’s a virtuous situation. Distributors benefit from price increases as well.

Brian Konigsberg – Vertical Research

Got it. And just moving over to Europe, what gives you confidence that you should see stabilization in the second half of the year? And I think you made a comment that the weakening Euro is spurring a little bit of a demand. Can you maybe just give some color on how much benefit you are seeing from that and what do you expect in the second half?

Randy Hogan

Yes. The biggest factor in the second half for Europe is that a lot of our European business saw the decline last year, saw some precipitous declines in the third and fourth quarter. So the comps are easier. So we are not saying that things get better. We just said that year-over-year it doesn’t look as bad, I would say the biggest factor there. That’s particularly true in Water Purification. And you want to talk about the lower Euro helps our exports, right?

John Stauch

Yeah. I mean – we are not yet at a point where the Euro is low enough where I think we see the benefit. I mean, when we saw it under 120 last time, we saw a pretty significant pick up in exports. So we’re not calling for that or planning for that in the second half. But we do buy projects or buy products from Europe and we are absolutely seeing a transactional benefit of purchasing, drives for instance, and our IntelliFlo pumps come from Europe. And we also cross ship and sell into the U.S. technical products.

So I think we’ve got the foreign exchange, although it’s a headline on the top line. I think we’ve got it managed on the cost position well. And just to reiterate what Randy said, I mean, we’re not looking for a pick up. Matter of fact, Q3 will be down sequentially as normal because of the August shut down, which is typical in Europe. And then as Randy mentioned, starting in September of last year, we saw a significant decline in our water businesses. So I think we’ve framed it appropriately and obviously we’re not looking for a pick up.

Randy Hogan

And if I could just add one more thing, China and Europe or Western Europe are pretty light, I mean, Western Europe is the largest – a very large export market for China, which is affecting China. And a lot of the European exports, particularly the German exports, go into China to help drive manufacturing investment, or to support manufacturing investment. So weaker China, even with a lower Euro, it doesn’t mean that there will be a huge demand increase for European – for the OEMs that we serve in Europe. So anyway that’s the way we’re thinking about it.

Brian Konigsberg – Vertical Research

Great. Thank you very much.

Randy Hogan

Thank you.

Operator

Your next question comes from the line of Jeff Hammond from KeyBanc Capital Markets. Your line is now open.

Brett Lindsay – KeyBanc Capital Markets

Hi, good morning, this is Brett Lindsay stepping in for Jeff.

Randy Hogan

Hey, Brett.

Brett Lindsay – KeyBanc Capital Markets

Hey, just on the restructuring plans, which businesses in the quarter were most impacted from some of these initiatives weighted between Water and Technical Products?

John Stauch

Yes. We took, if you think about it, it’s a third roughly in Tech Products where we took some actions in Europe based upon proactively assessing where the volumes were at. And two thirds of it would be Water and we again more heavily weighted to Europe and the sense of rightsizing the volume on anticipated lower demand.

Brett Lindsay – KeyBanc Capital Markets

Okay. And then you mentioned in your comments about moderation in North America. Could you just talk in a little bit more detail around the puts and takes domestically where you might be seeing signs of deceleration within the business?

Randy Hogan

Yes. Industrial is the place where we are seeing deceleration and which we see a little bit in the Water and more in Tech Products. At the same time we think Residential, and Municipal, and Commercial have – we see some encouraging signs in that. Not huge volume necessarily. But certainly as we mentioned in Municipal, we expect to see actually an increase in volume sales in the fourth quarter. But some of the programs that we have in Residential I think are quite promising to help us drive growth and Residential is clearly coming off the bottom now.

John Stauch

I mean, just to put some context there. I mean, we are really saying that high single-digits in North American industrial slows to 3 to 4 points of growth, which I think is a probably more normalized long term growth rate. In Residential, if you really look at it, we’ve got two businesses Water Purification and our Pool business that are in the high single-digits and we’ve been impacted on the retail side of flood related products to the tune of down 30% year-over-year. So, we have seen a recovery in the Residential in two of our three businesses. And we’re expecting those year-over-year comparisons in the retail side to mitigate at some point here, and I think you’ll see the residential growth start to accelerate.

Brett Lindsay – KeyBanc Capital Markets

Okay, great. I’ll get back in queue. Thanks.

Operator

Your next question comes from the line of Hamzah Mazari from Credit Suisse. Your line is now open.

Hamzah Mazari – Credit Suisse

Good morning. Thank you. The first question...

Randy Hogan

Hi.

Hamzah Mazari – Credit Suisse

Hey. The first question is just on repositioning actions and spend. Maybe if you could talk about get into some more detail on what are some of the actions you are taking? How much are you spending there? And how that ramps up through the balance of the year?

Randy Hogan

Yeah. If you look at the two charts, you can see the $7 million on the Water chart and the $3 million, and it’s really – it’s all about people. It’s basically to pay for the reduction in force, which is as you know more expensive in Europe. But we expect, John, the benefits would start reading out fairly quickly.

John Stauch

Yeah. Q3, Q4 next year and think of the pay back being 40% to 50% of the expected reduction. I think – to put it in context, we look at delivering the long-term goals with the type of merger is delivering the base. Making sure that the synergies are additive to that base and then our bolt-on acquisitions would be additive to those numbers and think of this as securing the base in wake of what is now a slightly slower Europe than expected, and making sure that we’re staying out ahead of the cost actions to stay competitive.

Hamzah Mazari – Credit Suisse

All right. And just on the Tyco deal, you know that deal obviously closes in Q3. But maybe if you could share when you think you will be in a position to talk more in detail on revenue synergies and sort of the top-line opportunity out of that deal. I know you’ve already highlighted the cost side.

Randy Hogan

Yeah. We –as we’ve been allowed – to the extent we’ve been able to work together and get into the details we still feel very good about our plan, we still feel very good about the strategy. What I’d like to – what we are planning to doing is bringing the teams from both sides together as soon after closing – like that first week. And then probably back to you in terms of – in terms of detailed guidance and then probably have an analyst meeting probably pull it into November-December somewhere in there where we will bring everyone together and we’ll go through things in detail.

Hamzah Mazari – Credit Suisse

Great. And just the last question. On weather, maybe if you could remind us on how that’s impacted your business this year. You mentioned the flood side, flood being slower. Maybe any other businesses where you saw pull forward due to weather or any other impact as we think about your business next year?

Randy Hogan

In terms of the – as you know the Pool business got off to an early season in the first quarter, the first quarter was – it came out like we thought. The first quarter was stronger and we got the 8% growth in the second quarter here and as we look at the first half it was just what we thought it would be. So we feel good about that. We had floods both in Europe and in the U.S. in the spring last year, in 2011, and didn’t have either this year. So, I don’t John how much is...

John Stauch

I mean, our flood related SKUs, put in context, are down 30% year-over-year. So that gives you a context. I mean, it’s hitting our Water business by roughly 2 to 3 points on a year-over-year basis. We don’t have any anticipated weather in the second half. We’re not weather forecasters here. So we’ve kept things consistent with where they’ve been sequentially.

Randy Hogan

Price sold pumps in Minnesota this morning, early this afternoon. They had three inches of rain this morning.

Hamzah Mazari – Credit Suisse

All right. Perfect. That’s good color. I appreciate it. Thank you.

Operator

Your next question comes from the line of Garik Shmois from Longbow Research. Your line is now open.

Garik Shmois – Longbow Research

Thank you. Just wondering if you can give us a little bit more color on how the sales trends progressed as you moved through the second quarter, April, May and June, that would be helpful.

John Stauch

We track them all along, I mean, we didn’t see any different or uniqueness. June finished fairly strong. April and May were consistent with what our expectations were. So as far as color, I mean, we anticipated some challenges and things played out pretty much as expected except for the currency and Europe not getting better versus Q1.

Garik Shmois – Longbow Research

Okay. So there wasn’t any market deceleration as you moved through the second quarter.

John Stauch

Not as we see it.

Garik Shmois – Longbow Research

Great. And then just secondly, you identified a number of new projects looking out over the next several years. As a result of CPT, the desal project in Saudi Arabia. I was wondering if you can maybe put some numbers around these new project opportunities, maybe on annual basis, anticipated revenue growth just so we can get an idea of the order of magnitude that we’re looking at from these projects that you’ve highlighted.

John Stauch

I’ll just give you the numbers piece first and then I’ll let Randy kind of fill in the color. I mean, we’ve got a really growing robust backlog in our CPT related project businesses. And as we mentioned on the last several calls we’ve been in the transition of moving away from the muni projects, except for desel where we have a really nice product offering, and transitioning into more water reuse and CO2 recovery and Beer Membrane filtration industrial side.

We are targeting north of 10% growth on what is now north of $300 million annual basis and you should think of the backlog or the project deck being multiple times that as you would expect leakage in that project and the push out of the projects. So that gives you an idea of what we are targeting and kind of where our backlog is. And I will let Randy put in the color where we...

Randy Hogan

Yes. And the way I like to think about it is we bought CPT to have double-digit growth, $240 million in sales, that double-digit growth would be $24 million a year. I think a lot of that is from the new applications and it’s in the $20 million to $30 million range.

We are making a lot of progress in Dairy. We were making a lot of progress in as – we mentioned – we mentioned a framework agreement, which is kind of interesting it’s the same sort of approach that Tyco Flow Control uses in the energy side using big frame agreements to look at multiyear relationships. We see some real opportunities to do that in food and beverage. We see some real opportunities to do that in what I would call industrial water. So and that’s where, as John mentioned, water reuse.

Water reuse is – we have the technology. We have systems. We believe water reuse. We just look at the droughts and look at the issues being caused by lack of water. People – the industrials are going to be the first people that are serious about taking care of water, so we really see that technology being useful there. So I think about it in terms of $20 million to $30 million kind of a growth a year. On top of that, I believe there is at least that – there is another $20 million or so that’s in the water purification area. That’s why we focus so much on the filtration side. We are very – I’m very bullish on Hybrid DI. I think, I said before it’s not an iPad, but we’re going to work like hell to make it one. It really can be a game changer in terms of Residential and Commercial.

Garik Shmois – Longbow Research

Okay, great. Thank you for the color.

John Stauch

Thank you.

Operator

Your next question comes from the line of Robert Barry from UBS. Your line is now open.

Robert Barry – UBS

Hi, guys, good morning.

John Stauch

Good morning.

Randy Hogan

Good morning.

Robert Barry – UBS

Question on the Technical Products margins. Is that communications revenue that’s been weak especially low margin?

John Stauch

Yes.

Randy Hogan

Yes.

John Stauch

There is a mix benefit, no doubt about it.

Robert Barry – UBS

I guess that was my question, I’m trying to unpack like where in the walk the mix comes in, is it under productivity price, and how big is it?

Randy Hogan

It would show up in productivity, yeah.

John Stauch

If I was estimating it, you can’t be precise on that, but I would say it’s anywhere from 70 to 80 basis points of mixed benefit. If you think of it in areas that we’ve been challenged, I mean, our European businesses don’t have the margins that our North American business does in Technical Products. And the communications side, which is OEM and project related work, especially towards the tail end of those projects where the volumes aren’t where they used to be, tend to be very low margin.

Robert Barry – UBS

Got you. So it sounds like there is still some room that you’re actually raising price on kind of a like-for-like product basis?

Randy Hogan

Yeah. There was definitely price and there was definitely productivity. And that was 270 basis points...

John Stauch

220 net.

Randy Hogan

To 220 net. You take out the 80 and we’re still up 140. So price plus...

John Stauch

It’s 290 minus 80 would be about 210 and that would reflect the ongoing price.

Robert Barry – UBS

And then I just wanted...

John Stauch

But I think – just to follow up on that. I mean, one of the things Randy is challenging this business for sometime about is, we don’t need to continue to chase these large telecommunication businesses. So as we build the factories and start to fill the international locations, we’re looking more for that steady margin, industrial energy and infrastructure.

Randy Hogan

And that’s what exciting about when you see we are adding 20 distributors in China and we are getting 30% distribution growth in China. That telecom project that we are finally getting out of was one we took back during the financial crisis to fill the factory. I mean, so this is what happens when you don’t have lane discipline, and by the way we were on board with that decision at that time.

Robert Barry – UBS

Yeah. So it’s not like – it’s a benefit that unwinds?

Randy Hogan

Correct. Right.

Robert Barry – UBS

Yeah. And I just also just wanted to follow-up on Pool and you touched on it little bit earlier. The growth decelerated quarter-to-quarter still good, but decelerated a lot versus a much easier comp. I mean – and you also had that deal, I think the Brazil acquisition in there. I’m curious how much that added and how you are thinking about Pool given the deceleration from quarter-to-quarter.

John Stauch

Brazil was a rounding error, Rob. I mean, with the time you take to add in the revenue less the foreign exchange in the Real, I mean, maybe less than a $1 million.

Randy Hogan

(Inaudible) the inventory...

John Stauch

We are just getting it up and then we’ve got an inventory impact. Yeah, I mean, I think it’s hard to call upper-single digit 8% growth in a business that’s not seeing an increase in installed base, and our Pool permits today are 80% or down 80% from where they were at the peak. So we are not seeing a substantial amount of increase in Pool builds, but we are seeing an increase in content from the energy efficiency line that we are adding.

Randy Hogan

Yeah. The point about the good secular trends that I talked about in my script remains true. I mean, it actually as housing stabilizes particularly as the Florida market has stabilized and houses start to turn and people start fixing their pools. I’m not worried about Pool at all.

Robert Barry – UBS

Yeah, do you think the second quarter growth is (inaudible).

John Stauch

Well, as I said, I kind of looked at the first quarter as the weather was so good that had to be – couldn’t continue that we thought there was (inaudible) from second quarter. We planned, we thought that way and in fact it was. So we kind of look at the first half and say, yeah, it was about like we thought it should be.

Robert Barry – UBS

Got you. Okay. Thank you.

John Stauch

Thank you.

Operator

Your next question comes from the line of Deane Dray from Citi Research. Your line is now open.

Deane Dray – Citi Research

Thank you. Good morning, everyone.

John Stauch

Good morning.

Deane Dray – Citi Research

And also best wishes to Jim and his new role. First question on the Pool, just to follow-up on Rob’s questions on the Pool side, in adding these new dealers, was there any channel fill benefit that was meaningful in the quarter?

Randy Hogan

Not really. Our dealers are really pool builders and so they basically pull through Pool Corp or whatever distributor they work with, as they do a service on a pool, rebuild or build an actual pool. So there aren’t that many of them that stock and they are particularly – the ones we added are smaller ones, so they particularly don’t really stock.

John Stauch

But we do look at it as way to gain more content in the overall market Deane, and so we hope that that has a sustainable impact on the growth rate long-term.

Deane Dray – Citi Research

And then do you have a sense of how much the – some of these green products, the IntelliFlo, have contributed to the top line. And just if you kind of parse out what the year-over-year is? How much of that are these green products?

Randy Hogan

The IntelliFlo grew 30% in the quarter. It’s now...

John Stauch

35% of the overall...

Randy Hogan

The whole Eco Select product line, all of what we call the green Eco Select bottom line is 35% of our growth, and it’s been growing at least twice the rate of the overall business. So it’s been a big part of it.

John Stauch

And Deane, just as we shared with you or shared with everyone earlier, the overall market is not growing. So we definitely think that this Eco Select line is helping us grow double-digit, high single-digits in what is not necessarily a robust market.

Deane Dray – Citi Research

Great. And then over on the CPT side, it sounds as though you have got some new products or some new business on the beverage side in China. So we were at the Singapore water tradeshow a few weeks ago and there was a lot of buzz about what the opportunities are for CPT in China, and specifically on the beverage side. So how does that business look? Are you displacing competitors there? Or is it just better distribution into China? Just give us an update if you could?

Randy Hogan

I think it’s the advancement of the technology as they continue to build out what I would call more world class food and beverage capability. As you know, their dairy business is going through quite a cathartic change and so bringing in more world class technology is where we see it. Also, Beer Membranes versus the (inaudible) approach and getting these relationships with these brewers and these dairies are really the opportunities. I think less of it as takeaway as terms of just getting the growth.

Deane Dray – Citi Research

Great. And then I might have missed this, but on the repositioning actions, can you comment on what the payback period is? If you’re doing this in Europe, typically that’s a little bit more extended than North America. But what can you quantify the payback?

John Stauch

Yeah. It’s about 4 million to 5 million total payback. And we expect it to start – annually – so we expect to start within Q3, Q4, so (inaudible).

Deane Dray – Citi Research

So we would start seeing the savings in what quarter?

John Stauch

Starting in Q3.

Deane Dray – Citi Research

Of this year?

John Stauch

Yes.

Deane Dray – Citi Research

Okay. Thank you.

John Stauch

Thank you.

Operator

Your next question comes from the line of Mike Wherley from Janney Capital Markets. Your line is now open.

Mike Wherley – Janney Capital Markets

Good morning, guys. I was just wondering, if you could give us a little more detail on what you’re seeing in muni, you said that you’re getting some improvements there, and I just wonder if you could give a little bit more detail.

John Stauch

Yeah. Let me, just give the first piece and then I’ll let Randy share with you. For the first half of the year to put in context, our overall global infrastructure in muni was down about 5% to 7% year-over-year, and so what we’re now – sales. So now what we’re heading into is a growing backlog in order rate in which we think that at least is not negative in the back half of the year.

Randy Hogan

When we look at it, we look at orders when we look at backlog. The backlog is actually up 32% as we exit the quarter versus a year ago, which is good. And the first half orders are up 6%. The second quarter was up 20%. So – and if we look at – if you will, the quote activity right now, it’s up over two times. So, we view that as all good signs. We secured everything that’s in order. We secured and we know when that ships, that’s why we feel like the fourth quarter we’ll be up in municipal and the first half of next year. So as I said, is this another dead cat bounce in this market? And that’s why we’re not saying it’s – we feel good about it, but I am not calling the bottom yet.

Mike Wherley – Janney Capital Markets

Do you – what do you attribute this big pick up to? I mean, do you think that these cities have just put this off too long?

Randy Hogan

No. I view it as break and fix. What happened was the stimulus – we are – this is primarily in the pump business and it’s primarily North America. We are making progress outside North America in this business, but the big changes – the stimulus package that the government –U.S. government had pulled ahead a bunch of investments. It basically paid for stuff and as soon as that money ran out, everything stopped. And then what happens is in the municipal world – I mean, our strategy has always been in municipal in U.S. is a break and fix world. It’s not – they’ve never priced to the point where they do what we would call state-of-the-art kind of investment and maintenance. They just don’t price water that way in the U.S. So what they do is when things break they fix it. And so it’s a break and fix world and they can only put that off for so long. So that’s what we believe is – they pulled ahead of a bunch of stuff when the U.S. government was paying and then it stopped, and now they can’t put it off any more.

Mike Wherley – Janney Capital Markets

Okay. Thanks a lot guys.

John Stauch

Thank you.

Operator

Your next question comes from the line of Brian Drab from William Blair. Your line is now open.

Randy Hogan

Hey, Brian.

Brian Drab – William Blair

Good morning. I just have one question at this point. On the Ag space, can you talk a little bit more about that business? And Randy said you’re gaining share there at 13% growth. What’s that market then growing and as secondary question, are you seeing any pressure on that business given some of the restrictions around irrigation given the drought?

Randy Hogan

The answer to the second question is yes. In certain areas of the Midwest, which are big irrigation areas, there are some restrictions, which haven’t read through to our order rate yet, but could do. Although it could favor more wells, well pumps as opposed to surface water pumps. The reason we think the business is up maybe around 10, so up around 13.

We think the share gain – we know that we have added distributors and we’re up a lot with those distributors in some areas in the Midwest where we’re frankly under penetrated and under covered in the Midwest and Texas. We’ve also raised our service levels in California so we know our order rate there is very good. So those are the sources of why we feel good about the share gain because we can see it in different regions where we’ve had lower market share.

Brian Drab – William Blair

Okay. And roughly what is the revenue in that business quarterly at this point?

John Stauch

It represents about 5% to 6% of our overall Pentair revenues.

Brian Drab – William Blair

Of total company rev.

John Stauch

Correct.

Brian Drab – William Blair

Okay. All right. Thank you.

John Stauch

Thank you.

Operator

Your next question comes from the line of Scott Graham from Jefferies. Your line is now open.

Scott Graham – Jefferies

Good morning.

John Stauch

Hey, Scott.

Scott Graham – Jefferies

Just wanted to see if you would share with us kind of the same type of analysis that you just did on muni with respect to resi. Maybe kind of how orders progress during the quarter? What are you seeing out there because there is a lot of distribution out there? What are your distributors telling you? Resi looks like it’s picking up in some of the macro data, but is it starting to pick up in your business as well?

John Stauch

As I mentioned earlier, Scott, I will break into the three components and think of this as roughly a third, a third, a third. You know, a third being our water purification business, which is seeing definitely a pickup in orders and shipments in North American residential. And I would put that more in the mid- to high single-digit range.

Pool as we mentioned earlier experienced double-digit for the first half and eight in the Q2 and we have it in sort of the 5% to 7% range for the rest of the year. Now that is a season that starts to dwindle off here, so it’s not really an indicator.

And then we are experiencing this headwind in the flood side of residential flow, but if you take the pump business that goes into well, which benefits from the drought season, again, we are seeing an uptick in the orders somewhere in that 5% to 7% range. So definitely movement in residential, certainly a long way from the top, but starting to feel like we are seeing some recovery.

Scott Graham – Jefferies

True. And I probably should have been more specific on that. The water purification business is certainly the one that’s certainly most intriguing. That is a little bit of a higher margin business for you as well, is that correct than some of your other businesses in water?

John Stauch

Correct.

Randy Hogan

Correct.

Scott Graham – Jefferies

Okay. Very good. That’s all I had. Thank you.

John Stauch

Thank you, Scott.

Operator

(Operator Instructions).

Randy Hogan

Go ahead.

Operator

(Operator Instructions).

Jim Lucas

Any questions left, operator?

Operator

Yes, we do have a few more questions.

Jim Lucas

Okay, Katie.

Operator

Your next question comes from the line of Christopher Glynn from Oppenheimer. Your line is now open.

Randy Hogan

Hi, Chris.

Christopher Glynn – Oppenheimer

Hey. Wanted to look at reuse from a high level, a couple years ago you talked about the Twins stadium installation as a reference site. We’re hearing about a lot of new regulations in fracking, you mentioned industrial reuse. Can you comment on the market opportunity you see there and the traction that you’re seeing?

Randy Hogan

Yeah. I mean, we are very small in fracking, but we have had a win there in terms of pumps and treatment. We are working on gaining better access to that market because we do have technology. The big opportunities we see are where we are strong in food and beverage. Where we can get – we can reduce there – that’s one of the exciting parts of dairy is to actually reduce their water use.

And the other one is in the produced water area, again and that’s regarding fracking when this stuff comes back up, it’s taking that water and cleaning it and reusing it. That’s a very promising area for us.

Christopher Glynn – Oppenheimer

Great. Thank you.

Randy Hogan

Thank you.

Operator

Your next question comes from the line of David Rose from Wedbush Securities. Your line is open.

David Rose – Wedbush Securities

Good morning. Most of my questions have been asked. I do have a follow-up on CPT. Just trying to get a better idea of sort of the pricing discipline and overall discipline when you put in CPT and what we can expect for margin improvement in 2013, given that you have a lot of system orders in place, you start to benefit from the consumable side at some point. Do we see any benefit in pricing discipline to some of the actions you’ve taken at Lean? And then three, any benefit from consumable sales in 2013 or ‘14? And as a corollary to all of this, is there any distraction from Tyco’s merger as it relates to the integration process with CPT.

Randy Hogan

Let me start with that one, because I didn’t put this in the script. But I’m very proud of how well the Pentair team has stayed focused on execution, while all of this other work is going on in terms of the Tyco integration. It’s very impressive and I thank everybody at Pentair for the great job they have done with that.

There will be a time when there is going to be more. Right now we don’t have a lot of discussions going on for legal reasons between go-to-market sides of the Tyco and the Pentair, because that has to wait until proper regulatory approvals. So there will be a time when there is going to be more of that and we are very watchful to make sure we don’t take our eye either off the Tyco core business or the Pentair core business. That’s why, as John said, that’s why our focus is on firming up our core.

In terms of CPT, we have instituted different pricing mechanisms in pricing. There was an approach to basically make money on the membrane and sell the system at cost and just make the money on the membrane. We don’t take that approach. We want to make money on the systems too and so we winning with better pricing, so that’s going to read through as we ship those.

And in terms of productivity, some of the restructuring we did actually is related to CPT as we’ve gotten to the point where Lean is having an impact. We either fill the factories with additional business or we take costs out, so some of the repositioning is actually related to CPT, so we can get some of the benefits from Lean to actually go to the bottom-line. I don’t know John if you want to...

John Stauch

Yeah. I would just add. I mean, to answer your question, I think of it is 200 to 250 basis points a year for the next couple of years, and that’s both from the integration of the back office, the pricing disciplines that Randy mentioned, the better positioning of products into industrial versus muni. And then just a lot of the Lean activities that are really starting to read out and as they embrace it.

David Rose – Wedbush Securities

Okay. Thanks. And then lastly, can you provide us with the backlog figure for CPT? You did I think in the last quarter.

Randy Hogan

I don’t have that right here.

John Stauch

I don’t have it with me either.

David Rose – Wedbush Securities

Okay. Well, I can follow-up afterwards.

John Stauch

I will follow up with you off-line.

David Rose – Wedbush Securities

Okay. Thank you both.

Randy Hogan

Thank you.

Operator

We have no further questions in queue. I’ll turn the call back over to the presenters.

Randy Hogan

All right. Thank you very much. There will be a call-in number, do you have the call-in number, operator?

Operator

I sure do. The playback for this call will be made available to you on July 25, 2012 at 5:00 P.M. Eastern. So to access that recording please dial 855-859-2059 or 404-537-3406 and enter the conference ID.

Randy Hogan

Thank you and talk to you later. Bye.

Operator

This concludes today’s conference call. You may now disconnect.

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