Q2 2013 Earnings Call Transcript
Transcript Call Date 02/28/2013

Operator: Welcome to Pall Corporation's Conference Call and Webcast for the Second Quarter of Fiscal 2013. Today's call is being recorded and simultaneously webcast. Instructions for the question-and-answer session will be provided at the end of management's prepared remarks. Right now, all lines are in listen-only mode.

We would like to remind you that the Company's second quarter press release is available at Management's remarks this morning will include forward-looking statements. Please refer to Slide 2 or request a copy of the specific wording of this qualification of the Company's remarks. Management also uses certain non-GAAP measures to assess the Company's performance. Reconciliations of these measures to their GAAP counterparts are included in slides at the end of the presentation.

At this time, I will turn the call over to Mr. Larry Kingsley, Pall Corporation's President and CEO. Please go ahead, sir.

Lawrence D. Kingsley - President and CEO: Thank you, Christie. Good morning and thank you for joining us. I am here today with Lisa McDermott, our CFO; and Brent Jones, VP of Finance. Our remarks this morning will be on a continuing operations basis.

As you've seen in the release, we performed reasonably well given the environment. Many end markets are soft, however earnings were a little better than anticipated, driven primarily by improved operational execution. Just as importantly, our operational execution is also being recognized by our customers as they are beginning to see the benefits of our Pall Enterprise System.

Clear prioritization and cross-functional focus on our people, process and technology initiatives are enabling us to accelerate new product introduction plans, drive productivity in operations and improve our overall cost structure. We believe that we have a long way to go, but that we are making solid progress and we have improved confidence that we can both grow and deliver consistent bottom line performance. As you remember from our Q1 call, we characterize the macro environment as sloppy. We also discussed the relative strength of the end markets served by our Life Sciences segment as well as the demand challenges facing many of the end markets served by our Industrial segment.

Based on what we are seeing in the business and what we're hearing from our customers, not a lot have changed over the past quarter. Life Sciences and BioPharm especially continues to perform well. January in particular was a very strong month for both sales and orders. The macro trends underpinning the business remained very healthy. Importantly, our sales execution and market position continues to be strong. The Industrial business on the other hand is challenged with the difficult to medium term coupled with some mixed macro indicators for the remainder of our fiscal year. We serve a broad range of Industrial end-markets in OEM segments as you know.

It's rare that a majority of them are simultaneously soft. In particular, water, alternative energy, off-road equipment, and the semiconductor markets are all down. Most of the other process technology end markets are weak, if also not down a bit. In addition, our Industrial emerging country market demand is generally slow with particular pressure on larger projects that require capital commitments. Last quarter, we discussed the impact of destocking versus end market performance, contributing about a third of our demand weakness to destocking. I would stick with that proportion, if not more attributed to market demand. Our forecast reflects a similarly conservative demand pattern assumption. However, the combination of our segments continues to ensure reasonable total top line performance and the business model leverages our integrated operation structure.

On a related note, the emerging economies have been integral to our Industrial business model in Pall generally. We've take a very close look at our Industrial strategy for China, which has been performing below our expectations and contributed to the negative Asian order performance in the quarter. As you'll recall, we've spoken externally about our inability to achieve price there and the high proportion of our Industrial business content that is systems versus consumables. While changing course in China was not a top priority at the beginning of the fiscal year we decided there was a good time to do so given the general market softness there. Our team at China has tactically executed pretty well, but we need to shift to a business model that is consistent with our Pall industrial global strategy and is best in class in every respect.

We have recently made a number of structural and management changes in Asia that were necessary to reposition us in markets that will grow and be profitable. China today represents about 7% of sales and while Life Sciences is meeting expectations, Industrial should also consistently grow in excess of the Chinese GDP rate. So we will keep you posted.

I am going to dive into the specifics of the quarter on Slide 5. With regard to overall performance in the quarter total sales were $662 million compared to $640 million last year, excluding FX sales were up 4% year-over-year. Overall gross margins declined 120 basis points to 51.6%. This reflects decreases in both businesses. SG&A excluding FX decreased about 1% associated with savings generated by our structural cost improvement initiatives (in all) the investments we are making. Due to the offsets of margin decline in SG&A savings, operating margin was flat year-over-year at 17%.

The underlying tax rate in the quarter was 21.7%. compared to 24.6% last year and pro forma earnings per share in the quarter were $0.73 an increase of $0.06 compared to last year bringing this increase growth – bridging this increase, growth in operating profit contributed about $0.05 less $0.03 of transactional FX headwind to net the $0.02. The tax rate and share count reduction combined contributed about $0.05, translational FX reduced EPS by about $0.01 for a combined FX headwind of $0.04. So on sales growth of 4%, EPS grew about 15%, excluding the impact of FX.

I'm now on Slide 6. Life Sciences sales grew by almost 11% in the quarter, excluding FX and Industrial declined by 2%. Consumables, that's the replaceable filters, which comprised 86% of sales in the quarter grew 12% in Life Sciences and decreased 6% in Industrial. Systems, which comprised 14% of total sales in the quarter, grew 30% overall. This reflects an increase of over 20% in Industrial, while Life Sciences sales were flat for Systems.

Turning to 7, the key drivers for Life Science, first let's look at Consumables. BioPharm consumables sales grew 11% in the quarter on continued strength in the biotech sector augmented by contribution from ForteBio, the acquisition we made last year. Consumables sales in Food and Beverage were up 5%, we saw strong growth in Americas, particularly Latin America but sales in Europe, our largest Food and Beverage market were flat and weakness in wine and beer.

Medical consumables sales increased 21%. The flat System sales in the quarter reflect an increase in Food and Beverage, which was offset by a reduction in BioPharm, and that's largely timing. Life Science orders increased 14% in the quarter with consumables growth also at 14%. System's orders were driven by BioPharm, offset by weakness in Food and Bev.

So moving to 8, Life Sciences gross margins declined 100 basis points to 58.4%, the year-over-year performance reflects about 50 basis points of FX headwind related to the deterioration of the Euro and unfavorable mix, but partly mitigated by favorable pricing. R&D expenditures increased about $3 million or 24%, excluding FX and 50 basis points as a percent of sales. We continue to increase our spend on product development, particularly related to our BioPharm instrumentation product lines. SG&A increased about 9%, excluding FX, which was principally ForteBio associated cost and relative headcount allocation. As a percentage of sales, SG&A declined 50 basis points to 28.7%. Segment margin was 25.1%.

Moving on to Slide 9 for Industrial; consumable sales for the process technologies portion of Pall Industrial were down 12% in the quarter, reflecting broad weakness across most end markets as I mentioned. Aerospace consumable sales rose 14%, driven by commercial aerospace, which grew about 31% either by a reduction in overdue though in the quarter. Microelectronics consumable sales declined 6% on continued softness in that market.

Moving on to the System sales for Industrial; System sales increased 21%, driven by fuels and chemicals. Municipal water was very weak however, as customers continued to delay projects based on funding challenges. Looking at Industrial orders for the quarter; consumables were down about 9%, the impact to consumables performance was pretty broad-based. Municipal water, military aerospace, and MicroE were all down double digits, but again commercial aerospace was a bright spot, it was up 7.5%. Industrial Systems orders were down 11%, driven by weakness, principally in the energy and water markets.

Then on Slide 10, gross margin in the Industrial segment as noted decreased by 210 basis points year-over-year corresponding to 45%. The sequential decline from Q1 was 110 basis points. As we indicated last quarter that sequential decline reflects unfavorable mix and year-over-year comp also reflects an unfavorable absorption this year based on the lower volume in the plants. SG&A declined about 10% excluding FX and the segment margin all-in therefore improved by 30 basis points in the quarter.

Then on Slide 11, we illustrate how the Company performed on a regional basis beginning with the Americas. Sales increased 12% ex-FX and 9% organically with strong growth in Life Sciences across the board basically and select growth in the Industrial markets. Again weakness in municipal water most adversely impacted the region. Orders increased by 1% with strong growth in Life Sciences driven by BioPharm. Industrial orders were down again with weakness in several end markets.

Then in Europe sales were up about 2% excluding FX. Aerospace performed well as I said also augmented by very solid BioPharm growth. Orders in Europe were very strong in the quarter up 8% driven by global customer activity though, which just was transacted there in the region. Finally Asia, sales were down 1% due to Industrial weakness and that gain specifically is Microelectronics and the Machinery & Equipment markets. Life Sciences did grow pretty nicely at 6% in Asia. Orders were soft down nearly 8% in the quarter and this was largely due to Microelectronics in mature Asia, but also Industrial process across the emerging country markets, it's similar to my comments I already made regarding China.

On the cash flow and working capital, turning now to Slide 12, operating cash flow in the first half was just $89 million compared to the $204 million last year. This reflects the impact associated with the settlement of several years' worth of U.S. tax audits and the costs associated with restructuring in the period.

On a year-over-year basis, our inventory is essentially flat with finished goods down about $19 million and the combination of raw and WIP, up about the same and this is again part of the strategy that we talked last quarter about as we reallocate to WIP, so that we can more globally flexibly respond and reduce our dedicated finished goods inventory. Significant uses of cash during the first half included $303 million return to shareholders with dividends of $53 million and stock repurchases of $250 million, and $42 million of capital spending.

Then wrapping up the discussion regarding liquidity, our cash position stood at about $870 million as of January 31 and our cash position net of debt was about $160 million. This compares to a net debt position of $196 million as of July 31st of '12.

So moving onto '13 and concluding, in the face of a reasonably challenging economic environment, I think the team delivered pretty solid shareholder return in the second quarter. This is largely due to continued operational execution, as well as the effect of the structural cost reductions that I spoke to. As I said before we reinvigorated our focus on innovation. While we won't see that translate into revenue this year, I'm confident it will and we will continue to invest for growth, but we will also fund those investments through the disciplined and sustainable cost reductions that we are taking elsewhere.

To update you on our outlook; as we think about the balance of the year versus our full-year guidance this is good news, bad news situation in terms of the impact of our operational improvements. The good news is we've seen a significant reduction in our past few shipments following our ERP transition and it resulted in more revenue in the quarter than expected. However, as a result we're netting the Q2 higher revenue out of the back half of the fiscal year. When you combine the Q2 better performance with what we're seeing in industrial demand patterns and factor in specific customer input, our full-year organic sales forecast is reasonably consistent with our prior comments. We expect overall revenue to grow in the flat to low single-digit range. Life Sciences will perform in the mid to high single-digit growth range and that's consistent with what we've said previously. However, we now expect industrial will decline at a mid-single digit rate versus the previously stated range of low to mid-single digit decline.

Current rates FX will probably not impact us as adversely for the full year as we had indicated last quarter, the euro has strengthened a bit. However, the Yen has weakened. On an EPS basis, the combined changes in FX assumptions may yield $0.03 to $0.04 more than we had previously anticipated, but we also expect less full-year EPS benefit from share repurchase. So, with the various puts and takes to EPS our view is unchanged with full-year pro forma EPS in the range of $2.95 to $3.15 and we think that we can certainly ensure that, by way of continued strong execution.

Finally before we go to Q&A, I want to thank Lisa McDermott for her contribution to Pall. As you know, Lisa decided to move on to pursue other interests. So this is her last quarter earnings call as the CFO of the Company. So she will certainly remain a friend of Pall and we have obviously benefited and will continue to benefit for quite some time to come from her contribution to the Company. So Lisa, thank you very much.

Lisa McDermott - CFO and Treasurer: Thanks, Lawrence.

Lawrence D. Kingsley - President and CEO: So Christie we will open the lines now for Q&A.

Transcript Call Date 02/28/2013

Operator: Hamzah Mazari, Credit Suisse.

Hamzah Mazari - Credit Suisse: The first question Larry is just on what inning do you think we are in terms of the cost restructuring and do you think the heavy lifting is halfway through on SG&A or is that done and going forward is it going to be more operational in nature when we look out to next year, calendar year '14? If you could just shed some color there?

Lawrence D. Kingsley - President and CEO: It is. I think you actually summarized it pretty well. We are tracking nicely to the original plan. So we will achieve our stated fiscal year '13 savings that are certainly skewed more to SG&A and then it inverts as we go forward and it becomes more operational savings we improve our aptitude there in terms of how we are operating the business. I think, I feel pretty confident that we are going to track nicely to the total $100 million that we committed to. The question becomes then, how does productivity, continuous improvement drive us forward? We've got plenty of opportunities, so relative to your what any are we in question, to the specific commitment, we are tracking to fourth or fifth inning on the SG&A side, it only is second or third relative to the total commitment obviously. But I feel pretty confident about getting there and then plenty of opportunity beyond that from a continuous improvement perspective.

Hamzah Mazari - Credit Suisse: How are you thinking about the balance sheet currently, do you think you guys need to lever up more or are you waiting to save dry powder for future acquisitions? How should we think about this strategy with regard to balance sheet and creating value from using that balance sheet?

Lawrence D. Kingsley - President and CEO: Yes. Now, we definitely are under-levered. There's no question about it and we will without a doubt take advantage of the great balance sheet that we've got and we will certainly become much more acquisitive. We've talked with you before as you know about the fact that we desire to be strategically acquisitive. We have implemented all the right processes and the people and we are now spending more of our senior team's time chasing some of these strategic acquisitions. Now, I think to put in perspective, even though it's a bit of a messy M&A marketplace in this middle market that we operate still, if we'd had our thinking, our team and our processes in place for a longer period of time, we'd be acquiring now. As we ramp up, we are going to be very disciplined about what we go after and making sure that we like it and we like it financially and strategically. The reality is that it's still going to take a little bit of time, but the balance sheet is far from anywhere close to optimal in terms of profile. I can quantify that for you but you can do that yourself too.

Hamzah Mazari - Credit Suisse: Just last one for me. On the FX – and anything, any processes you're putting in place to better hedge FX or may be moving production to try to better naturally hedge some of the FX headwinds.

Lawrence D. Kingsley - President and CEO: Again, relative to my prepared remarks, FX is moving all over the place right now; it depends on which currency pair you're speaking of. We have put cash flow base hedges in place. We wouldn't be thinking about anything more exotic than that. We operationally are thinking about how to make sure that more of our cost structure in Europe is euro denominated or in a currency that more closely tracks the euro than the pound has historically, and that require some changes both in terms of material and labor, structurally to get there. It'd be a little early to disclose what our thinking is there, but it's moving along pretty nicely.

Operator: Richard Eastman, Robert W. Baird.

Richard Eastman - Robert W. Baird: Larry, could you quantify the ketchup shipments in the quarter. I presume they occurred in the aerospace business as well in that medical business. But could you just quantify approximately a dollar number?

Lawrence D. Kingsley - President and CEO: The number in terms of absolute pass due reduction from a customer perspective is in the $12 million range versus some of the modeling that was out there, obviously we shipped a bit more than just what that customer pass due number would indicate. You're right, there was a pretty good chunk that was in aerospace, it was $5 million or $6 million and then its distributed pretty broadly otherwise.

Richard Eastman - Robert W. Baird: Then just one additional question. When you're looking at your systems orders in the quarter, I think relative to core local currency sales guidance for the fiscal year '13, the thought process was that consumables could be up maybe mid-single digits and that equipment might be flattish. Again when you look at the orders on the systems side will we be able to kind of generate a flattish systems number or is there some hesitancy to be able to do that with the bookings?

Lawrence D. Kingsley - President and CEO: Well there is a little bit of hesitancy and that is factored into the comments that I just made and also the comments I made specifically with regard to China. It's not necessarily by any means anywhere close to all China. We have talked historically about the fact that the business model we aspire to is one where we are installing systems that are the path towards the annuity stream associated with consumables. You can't always ensure that but you need to design it such that that's the opportunity. What we don't want to do with installed systems for the sake of systems and we talked historically about the change in thinking and strategy probably impacting sales by 1 point or so, could be a bit more than that. The other thing I would tell you though it's not so much us it's just the marketplace and that is – you can look at it by market segment and by geography and it gets pretty granular pretty quick, Rick. Water being the most exaggerated example where that's fundamentally a systems business and it's a funding challenge right now. People are not willing to or can't come up with against existing execution plans, the funding for some of those systems, but we are seeing cross the board, where big capital decisions are necessary, at a minimal, we are seeing delays. I would tell you that's a global phenomenon, not just a North American one. Let me revert back to your prior question, Rick, if you're trying to solve for what medical was up as much as it was, maybe that was another kind of element to your question. The medical business did ship if you will ahead of our assumptions a bit in the quarter not so much as a past due reduction or backlog reduction focus but as a means to help the guys at Haemonetics get to self-sustaining. So it's very healthy blood media shipments that are within both the sales and order numbers to get Haemonetics up to the point of self-sustaining.

Richard Eastman - Robert W. Baird: That again is a pull-forward from the second half, presumably?

Lawrence D. Kingsley - President and CEO: Yeah, it is from a rate perspective.

Operator: Brian Drab, William Blair.

Brian Drab - William Blair: Congratulations Lisa on the next chapter and it was good working with you. Just a couple of questions. The incremental operating margin in the quarter was about 23%, I guess, 20% depending on whether you look at it year-over-year or sequentially, but either way a little below what you had talked about as the, either the level that we should see currently, Larry or, and well below what we are going to expect after we get some of the structural cost improvements in place, but if you talk a little bit about that, what were the specific reasons for that in the quarter?

Lawrence D. Kingsley - President and CEO: Basically, it's a couple of components that's -- the absorption impact within gross margin that impacted us to some degree, and that falls within what I think I've described historically about when you're in a flattish or a lower growth organic environment. You got to get beyond the natural inflation rate to get to the point where your incremental margins model to that 35% plus profile. So I would assign some of it to that. We also saw SG&A increase quarter-to-quarter, as a function of the typical annual cadence when merit pays when board comp pays and things like that. I think we talked about that last quarter. Then the other good news piece is R&D investment, which is as we talked about in my prepared remarks this is up significantly by design. So, yes, I think it's a bit of mea culpa, but I would agree, we're not printing incremental margins to the degree we need to right now. Some of it by design, some of it by way of just the particular quarter situation.

Brian Drab - William Blair: Then regarding Industrial orders. Could you talk about how Industrial orders were sequentially because I'm looking at the first quarter press release and slide presentation, so Industrial orders at that time were down a little more than 13%, now they're down a little less than 10%, if things improved a little bit sequentially how did they move sequentially?

Lawrence D. Kingsley - President and CEO: Really again, back to my comments to Rick. You got to look at it to have a meaningful conversation by individual market or application within the segments and by geography to try and draw the some model assumptions out of it, but the net-net is that the organic rate progression if thought about from a sequential perspective is not demonstrably different. Slightly better but still fairly murky visibility and I'd say that similar to a lot of other folks are in the making in the way of comments right now. It may improve. As inventory fleshes we may see a return to better order rates and particularly that process technology sub-segment of the PI segment. But I would not include that in my back half of our fiscal year forecast at this point, which is again what we said in our prepared remarks.

Brian Drab - William Blair: Then if I could sneak in one more. I think that if I heard you correctly, you said the repurchase is not going to have as large an effect on EPS for the year as originally expected. Your repurchase in terms of dollars spent is on schedule I would think or even a little ahead of schedule, is it just the share price ticking up that's creating that discrepancy?

Lawrence D. Kingsley - President and CEO: No. The assumption is a little bit less than what we talked about at the beginning of the fiscal year in terms of allocation. Also there is a little bit of impact associated with the kind of average price calculation.

Brian Drab - William Blair: So can you just remind me for the full year we are expecting to spend $400 million, is that the number?

Lawrence D. Kingsley - President and CEO: $300 million and yes, we are probably in the $250 million-ish assumption range now.

Brian Drab - William Blair: You are just expecting that you have executed the full $300 million at this point in the original expectation?

Lawrence D. Kingsley - President and CEO: Essentially yes.

Operator: Jeff Zekauskas, JPMorgan.

Jeffrey Zekauskas - JPMorgan: Can you give us a general description of what's going on in the Microelectronics market, that is, are there customers that are winning and customers that are losing or is the overall market trust trending down, what's happening with the weakness there?

Lawrence D. Kingsley - President and CEO: It's mainly a function of what's going on in the PC unit volume production. Our customers are primarily fabs, but we're also in the memory and storage world and we are also on board electronics, consumer electronic products to a lesser degree. It's not improving is the bottom line Jeff. We do think that it is bottomed out and that it's not going to get a lot worse, but fab utilization rates are relatively low and it's not a matter of whose fab has got that much more production rate now. We've talked in prior quarters a bit about relative market or customer position in the individual fabs, but that's less of an issue right now frankly versus just overall capacity utilization. There were a couple of bright spots within our Microelectronics Group during the quarter. Our photolithography applications are performing very nicely. We are very strong. A couple of other smaller areas of application where we think we've taken some share, but generally speaking and we have a pretty good beat on this now globally. I would say that it's not going to be a sub-segment that's going to perform for the rest of the fiscal year. I think you'd have to then correlate my comments to the global big players and how they view utilization rates to either prove or disapprove which I think, but it's pretty consistently stated right now across the board.

Jeffrey Zekauskas - JPMorgan: Then lastly, can you talk about the Industrial climate in the United States? You spent some time talking about the municipal markets, and how they were difficult. But in general, sometimes we look at macroeconomic data, it seems that Industrial order is strengthening, but when we look at yours it seems that the tone is decidedly softer, is that a correct characterization? What do you see as the sources of the softness excluding the municipal market?

Lawrence D. Kingsley - President and CEO: Municipal market, I think we all understand it is what it is, and we will deal with it, is best put. As far as the other Industrial segments, again, it's a broad range. Without going through it, microscopic detail, we're seeing decent global fuels and chemicals project activity, but less in the U.S., more outside of the U.S. We are seeing some of the bigger OEM equipment segments begin to at least talk about expectations of demand pattern improvement, but still flushing inventory in various forms of WIP within their own books today. That's a U.S. and a global statement. I mentioned the alternative energy segment where things are very slow and that's both U.S. and global statement with respect to areas like (twin-turbine). We do not have a existing position or a position historically frankly in power generation to a large degree. So there have been others talking about strong gas turbine unit volume sales for the last couple of quarters. But with questions frankly looking forward we don’t participate in that. So we just haven’t seen that relative growth opportunity. If you look at the in-plant machinery which is a broad set of applications, where it's essentially liquids-based filtration, machine tool applications in production, it's a bit of a mixed bag. There is some good but there is some good that aren't so great. So again I do think that the macro indicators for the U.S., North America specifically will continue to improve. They we will continue to flush inventory out of the system in some of the segments that still have it and we will see you the response accordingly and the opportunities accordingly. But as we look at current order rates and kind of the book in turn time associated with what's typically our Industrial business pattern, we are taking a fairly conservative view I think but appropriately so for the rest of the fiscal year. That's again a North America comment as well as a global comment.

Operator: Jon Wood, Jefferies.

Jon Wood - Jefferies & Company: Would like to delve into the cash flow a little bit and specifically can you call out the impact of the discrete tax items and restructuring items in the quarter. I think last call we talked about $140 million to $160 million or so in kind of those discrete tax items; is that still the assumption for the year?

Lawrence D. Kingsley - President and CEO: Yeah, the short answer is, yes. To give you a sense for it, so it is the two elements of the tax payments associated with the audits and then the payments associated with blood divestiture. Year-to-date, and Brent or Lisa, correct me if I am wrong, but I think we are talking about $80-ish million, $83 million associated with tax and that would support the combination of those two. So that's first half and then there was another $20 million or so associated with the cash -- portion of the cash outlay associated with the restructuring expenses for the first half. So do that math, that's what, $105 million, and we know we have about $35 million in the back half associated with the tax payments, and then probably the remainder of that's going to be restructuring associated.

Jon Wood - Jefferies & Company: Then Larry, back to the – so the share repurchase assumption has gone from $300 million to $250 million for the year, correct?

Lawrence D. Kingsley - President and CEO: Yes.

Jon Wood - Jefferies & Company: Just vis-a-vis your commentary about the balance sheet being underlevered. Just describe what's the issue there? Is it accessibility of the cash being foreign denominated or is the acquisition pipeline that much better? Just give us some context on your balance sheet commentary related to the decision to take down the share repurchase allocation by a touch or so?

Lawrence D. Kingsley - President and CEO: There's a big picture answer and then there's a next five months answer. The big picture answer is we want to use the balance sheet to acquire. Our intention is to grow the board and management are aligned, that's our first priority in terms of capital allocation. We think that we've executed a pretty good component in terms of share purchase associated with the year. Could we spend remaining $50 million? Sure. But we're just trying to give you a sense for how we're thinking about, how we're modeling things as year-to-date and full-year assumptive basis. Relative to the other components of your question where the cash is, yes, most of its foreign nominated, but that's not inhibiting acquisition necessarily. As a matter of fact the good chunk of our acquisitions are in the places where we have direct access to that cash without any penalty. So, it really comes down to ramping up the process associated with acquisition and we're willing that's again board and management to be appropriately patience to get at the best acquisition set. What we will definitely do so.

Operator: Derik De Bruin, Bank of America.

Rafael Tejada - Bank of America Merrill Lynch: It's Rafael for Derik. First question I had, was just on the comment made in the prepared remarks, basically, discussing some new product introductions. Larry, I was just hoping that you could provide us with a little more color on the type of products that you're looking – introduce in 2013?

Lawrence D. Kingsley - President and CEO: Many of them will be introduced in 2014, more than 2013. Three areas of focus right now, we have invested in talent associated with new development around our core media Membrane technology that will be applied across several segments making very nice progress there and believe that we'll be coming to market with some of, if not the best in unchallenged technology out there to serve some of the more demanding applications for both PI and Life Sciences going forward. Two, improving device design, so better filtration design that means being able to make devices that have better flow dynamic and characteristics associated with them and that are able to be produced at better costs. So continually enabling us to productize at the best possible cost and to achieve the best possible performance and that is a value added value engineering exercise that we still need to continue to execute in both R&D and in manufacturing going forward. Then we are also and I spoke to this in the prepared remarks, we are investing as a function of our ForteBio acquisition in the way of BioPharm – principally BioPharm associated instrumentation and we have given the guidance out at ForteBio responsibility for a broader set of products beyond what they came in with. In other words what we acquired because they will become our instrumentation center of excellence on a very broad basis and they are doing a super job both defining what are good acquisitive opportunities but also leading organically how we bring new products to market in that segment. So, those three and then a couple of others that are yet to be talked about, will come as we move into '14. But rest assured I feel very good about the fact that they will allow us share gain opportunity irrespective of the strength of the markets we serve.

Rafael Tejada - Bank of America Merrill Lynch: Just also had a follow-up on I guess on the difficult funding environment that's been discussed throughout the call. Basically wanted to get a little more detail on the potential impact that the U.S. sequester could have and is that something that's already baked into current guidance?

Lawrence D. Kingsley - President and CEO: At the end it's a short answer and it honestly doesn't really impact us all that much, certainly not in the short-term. The programs that we are on, that are – would be military aerospace, by and large are already funded in there, ones that we are executing against and they are in the aftermarket, in many cases. So it's not a matter of impacting us. Long-term, depending on where things go, they could have some impact.

Rafael Tejada - Bank of America Merrill Lynch: Just one more question, also discuss some of the currency fluctuations, just wanted to get a little more insight on the exposure to the yen for the Company?

Lawrence D. Kingsley - President and CEO: Sure. So we have – roughly 10% of our sales are yen denominated and of those sales, some of the cost of goods is dollar-borne based. So the yen has moved to about 13% down relative to the dollar. That's again a translation and transaction component impact, but the yen has moved a little bit back over the last couple of days, I think. So we'll see how it goes. For now, you can do the math around 10% of sales, roughly a 13% degradation when we were doing our modeling and I don't know off the top of my head, how much of our cost to goods is dollar denominated to have that added impact associated with the transactional piece. But it adds to the challenge a little bit.

Operator: Jon Groberg, Macquarie.

Jon Groberg - Macquarie: I will hand my best wishes to Lisa on her next challenge. So Larry, can you talk a little bit more about China. You mentioned this kind of shifting course to be more consistent with the global industrial. I think you mentioned trying to make sure that the systems that you sold were -- have the opportunity to sell consumables, but can you maybe as you did the due diligence as to what was going on there on the Industrial side? Why it maybe wasn't working? What you found? What changes you made? How long you think it will take to improve things?

Lawrence D. Kingsley - President and CEO: Let me step back, give you bigger picture view of things. So, we actually had similar concerns we didn't really talk too much about them with respect to India, and we're on to the next phase and very successfully so in India, smaller market for us. We have spent a fair amount of time in Asia and I have personally since being with the Company, I was just over there a couple of weeks ago. We knew that I would classify our approach in China specifically, as more opportunistic and strategic. We have the stated strategy that I mentioned just a couple of questions ago around making sure the systems lead to consumables. In China, I don't think that we were disciplined strategically on how we're executing that. I think the team on the ground in China was running fast and furious to get orders and they were. We were generating decent growth. If you go back eight or nine years, you'll look at a CAGR of 12% or 13% top line. We have talked historically about the fact that we have not achieved the margins that we would like to on that kind of growth and that kind of business profile at this point, given its size. I would say the added catalyst to -- have us think about it now was more a function of the markets that we have stronger positions in, some of which have turned south, harder than others such as steel production. Some of the big equipment spaces that we like some of how we're positioned, but not all of how they are positioned and we need to think and this is a Home Office issue as much as it is a local team issue but we need to think about strategy and what we want for the future in China which really comes down to which markets do we want to be positioned in. What's the best channel structure to get there? Who are all the right people to get it done? How do we make sure that we take the benefit of the learnings of what we've done successfully not just in India but globally and go after it very aggressively? Again my comments are entirely with my context of Pall Industrial because we like our profile and we like our strategy and I like their model quite a bit on the Life Science side. So what we did as a function of all that thinking is we have made some changes. We have got some dynamic new leadership in place. We have got some folks who I feel very good about and their ability to address all of what I just spoke to. But it takes a little bit of time to shift gears. We are talking about little less emphasis in systems, more emphasis on those sub-segments that afford us the annuity opportunity, a disciplined approach to get there, good value selling skills to execute, all the right products. Then really what I want to move to is a more self-sustaining model in China where we can define product need in China. We can develop certain products in China. We can have direct linkage between our good operations team there and the sales team to get it done. So we will continue to perform pretty well in the meantime but what we want to aspire to here is as I said, is a growth rate that's now consistently double-digit and it's yielding the right bottom line results.

Jon Groberg - Macquarie: Just a quick one, how much of the Industrial, Pall Industrial does China make up in terms of revenues or how big of a business is it?

Lawrence D. Kingsley - President and CEO: It's all in for the Company its $7 million, for Industrial, Brent, it's…

Lisa McDermott - CFO and Treasurer: It's about a $135 million, Pall Industrial.

Lawrence D. Kingsley - President and CEO: Yeah. Two-thirds.

Jon Groberg - Macquarie: Then if going back to Canada, it sounds like a little bit of a shift from buybacks here to acquisition, I know it's something you've been very transparent about but given the slowdown in buybacks, you mentioned moving towards acquisitions. Why should we expect just in terms of size of the first deal that you guys go after?

Lawrence D. Kingsley - President and CEO: Not big. Most of them that we like are, they are in the $20 million to $80 million of revenue size, and we certainly like some bigger ones than that, but we need to exercise our integration skills a bit before we make those bigger bets.

Jon Groberg - Macquarie: Larry, would you, just out of curiosity as you are looking at those businesses, I know in the past you have talked about doing these bolt-ons and growing, but would you rule out anything a bit more transformative over the next couple of years for Pall in terms of the size of deal that you might do?

Lawrence D. Kingsley - President and CEO: No, I think it's less likely but if a really sharp deal and I don't like the term transformative per se, but a really sharp deal that availed a much larger addressable market became available, we would certainly as a Board and management team, take a look at it.

Jon Groberg - Macquarie: If I can sneak one last one in, how has ForteBio done? You mentioned that you are giving it more responsibility, but so maybe kind of on a year-over-year basis, how did they do?

Lawrence D. Kingsley - President and CEO: It's doing well. It's growing nicely. I am not going get into disclosing too much, but it's very well under the double-digit organic, it's accretive, it's executing its product plans, and it is becoming that foothold for us to do more around it organically inquisitively.

Operator: David Rose, Wedbush Securities.

David Rose - Wedbush Securities: Most of my questions have been answered, so I just have quick follow-ups. On the system sales component, you've talked about product rationalization; you mentioned 1% impact, about a point impact from system sales being eliminated, is that correct?

Lawrence D. Kingsley - President and CEO: Talked about it historically, yes.

David Rose - Wedbush Securities: In terms of the product rationalization during the quarter, what would your estimate be in the total impact of sales?

Lawrence D. Kingsley - President and CEO: Any number I'd give you would be wrong I think. More of the current impact is as the function of the environment. Again, what I spoke to in the way of the concerns that many have right now with applying big capital projects, and just a stall, it's more stall than anything else. I think you have to look at our systems performance over a long period of time. If you take a look at for instance, the way we described just on the Life Science side of the house for example, the flip flop between Food and Bev and BioPharm between sales and orders in the quarter. If you were to draw a trend line or a conclusion of either sales or orders you'd be wrong, you could be wrong in a big way. You have to think about the total performance year-on-year. So I'm going to ask you a favor and reserve on that until I think we are better, we're beyond this fiscal year, we've got a better view of what we are in terms of which systems we continue to prune out.

David Rose - Wedbush Securities: Then going to the cash flow statement, the disposition of assets, was that part of continuing or discontinuing operations, the $6 million?

Lisa McDermott - CFO and Treasurer: I am sorry can you repeat the question?

David Rose - Wedbush Securities: Did I calculate it right that you have disposed of about $6 million in assets during the quarter and I was wondering, if there were some revenue component tied into that?

Lawrence D. Kingsley - President and CEO: No.

David Rose - Wedbush Securities: Then lastly is, maybe this is just a stretch, but do you have any sense on what the new products in terms of the R&D spend will do for top line growth next year? I am sure you have some…

Lawrence D. Kingsley - President and CEO: No.

Operator: Tracy Marshbanks, First Analysis.

Steve Schwartz - First Analysis Securities Corp.: It's Steve Schwartz sitting in for Tracy today. Larry with respect to the Life Sciences, on Slide 8, you note that you had unfavorable mix but pricing was up. Can you talk a little bit about what's going on with mix there and particularly with respect to pricing and what's driving that?

Lawrence D. Kingsley - President and CEO: I am looking at Slide 8 to make sure…

Lisa McDermott - CFO and Treasurer: While Larry is looking and hopefully you can hear me okay. With respect to mix, we saw there is 20% plus growth in medical and as Larry mentioned namely OEM including the blood media sales for the supply agreement that we had that has relatively compared to our 50%-ish gross – much lower gross margin. Plus we had decent growth in Food & Beverage which also comparatively speaking to the Life Sciences gross margin has lower gross margin. So that's the mix comment. Larry if you want to talk to price or I will take price as well.

Lawrence D. Kingsley - President and CEO: No, we got some price in the quarter, a little less than our stated goals that we've spoken about. Depending on the sub-segment, the range is about 50 bps to as much as a 150 bps and that would be applicable to the Life Sciences as well a total Company.

Steve Schwartz - First Analysis Securities Corp.: Just as my follow-up, on your slide for the regional performance, you're showing that EU orders are up nicely year-over-year and perhaps a little bit surprising I think, given the economic environment there, but do you see a sustained turnaround because I think that certainly portends that your business is going to get stronger going forward, no?

Lawrence D. Kingsley - President and CEO: Two specific issues there. I wouldn't characterize our view of Industrial in Europe is radically different than I've heard from others. I do think we've taken, we've taken a little bit of share in Europe on the Industrial side, but really what's driving that organic orders number is, one, the fact that we've talked before, our BioPharm is a global business, but many of the big global players are European. So you always see generally more orders transacted in Europe than are ultimately end market demand associated with Europe. Specific to the quarter, there were a couple of big BioPharm new customers that we won that are big global customers, that we saw initial orders out of Europe, but frankly the demand will be Asia. It will be even projects that are constructed physically for plants in Asia to serve Asia, but the transaction from a Pall books, their customer book's perspective is in Europe.

Steve Schwartz - First Analysis Securities Corp.: Okay, so for export. No, that's helpful, did not think of it that way exactly. Thanks for taking the questions and best wishes, Lisa.

Operator: That does conclude our question-and-answer session for today. It is now my pleasure to hand the program back over to Mr. Kingsley for any further comments or closing remarks.

Lawrence D. Kingsley - President and CEO: Just want to thank you all for joining and your interest in the Company. Again, I want to thank Lisa for her outstanding contribution to the Company. So, we'll look forward to talking to you through the course of the quarter and at the end of the quarter. Thanks very much.

Operator: This does conclude today's conference call. You may now disconnect.