濱特爾 (PNR) 2012 Q4 法說會逐字稿

Good morning.

My name is Dawn and I will be your conference operator.

At this time, I would like to welcome everyone to the Pentair Q4 2012 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and answer-session.

(Operator instructions).

Thank you.

Mr. Jim Lucas, you may begin your conference, sir.

Thanks and welcome to Pentair's fourth-quarter 2012 earnings conference call.

We are glad you could join us today.

I am 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.

On today's call, we will provide details on our fourth-quarter and full-year 2012 performance as well as our first-quarter and full-year 2013 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 of 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 section of Pentair's website.

We will reference these slides throughout our 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.

We will be sure to reserve time for questions and answers after our prepared remarks.

In recognition that there are other calls this morning, we will target to be done in just about an hour.

With that, I would like to request that you limit your questions to one and a follow-up and get back in the queue for further questions so that everyone has an opportunity to ask their questions.

I will now turn the call over to Randy.

Thanks, Jim, and good morning everyone.

Let me begin with our fourth-quarter performance, which is on Slide 3. This marks the first quarter for Pentair since we successfully closed our merger with Flow Control at the end of September last year.

As you saw in this morning's press release, there are quite a number of moving pieces with the size of this merger.

Our objective is to give you needed insights into our company, so we will provide detail on how the merger costs impact the fourth-quarter results, and John will cover some of the larger one-time events in his prepared remarks.

I will discuss our operating results on an adjusted basis to better address the core operating performance of our businesses.

Before I begin to discuss the fourth-quarter results in detail, I wanted to spend a moment explaining why the numbers are presented in the manner they are.

For the full company results, the fourth quarter of 2012 includes Flow Control's results combined with Pentair as compared to the fourth quarter of 2011, which includes of course only Pentair results.

As we discuss the segment results, however, we will present the results on a pro forma adjusted basis as if the results were on an apples-to-apples comparative basis.

You will find reconciliations of this for the segments in the appendix at the end of the presentation.

With that, here are the numbers.

Fourth-quarter revenue increased 103% on a reported basis, but excluding the impact of Flow Control and FX, core revenue was flat in the quarter.

Adjusted operating income grew 59% while adjusted operating margins contracted 240 basis points to 8.5%.

The majority of the margin compression relates to transition costs incurred during the quarter which we discussed in detail at our Investor Day in November.

As a reminder, these transition costs include such things as branding and signage, packaging, inventory, and warranty adjustments.

Adjusted EPS came in as expected but did decrease 16% year-over-year due to the impact of the deal, particularly the doubling in the share count from the comparable period one year ago.

Adjusted free cash flow for the year was over $300 million and exceeded 100% of adjusted net income again.

The top line and adjusted operating income were in line with our prior guidance.

We made good progress in building the action plans to deliver the $90 million in synergies we outlined in November.

In addition, the first $400 million of our share repurchase will be completed by the end of January.

So overall, we are underway as expected.

Let's turn to Slide 4 for a review of Water & Fluid Solutions segment performance.

Water & Fluid Solutions sales were up 1% as reported and on an organic basis as FX was only a modest headwind in the quarter.

As a reminder, Water & Fluid Solutions represents the legacy Water segment for Pentair plus the WES business from Flow Control.

Overall, price delivered the growth in the quarter as volumes were flat.

The Residential/Commercial vertical, which represents roughly half of the segment, grew 2% in the quarter, as we are seeing continued signs of a North American Residential recovery.

While the growth in the fourth quarter in North America was modest, distributor inventory levels are relatively low and overall demand seems to be getting healthier.

Western Europe continued to be a challenge, particularly due to distributors maintaining lean inventory levels and having minimal order activity as of the end of the year.

Within Food & Beverage, which accounts for approximately 15% of Water & Fluid Solutions, we saw continued low single-digit growth in the Food Service sector while several Beverage projects were postponed at the end of the year as many of our customers were watching their capital spending at the end of the year.

Infrastructure, which is nearly 25% of Water & Fluid Solutions, was down 3% in the quarter as an absence of global desalination projects has hampered our European Infrastructure business.

In the US, however, we have continued to see healthy gains in our backlog which was up 5% in the fourth quarter following double-digit growth in the prior two quarters.

As a reminder, we have not seen much of a rebound in project activity, but the "break and fix" category continues to improve.

We believe our strong backlog position in North American infrastructure bodes well for growth in the first half of 2013.

The right half of the page shows fourth-quarter Water & Fluid operating profits and margins.

Water & Fluid adjusted operating margins contracted 250 basis points to 7.5% as we accelerated transition costs in the fourth quarter to position us better as this year begins.

Absent the transition costs in the quarter, price and productivity continue to offset inflation.

In summary, Water & Fluid Solutions exited 2012 with some potential tailwinds emerging in North American Residential and Infrastructure.

We expect the actions taken in the fourth quarter will put the segment in a good position to build momentum on operating margin expansion in 2013.

Let's turn to Slide 5 for a review of our Valves & Controls segment performance.

This is the first quarter for Pentair's Valves & Controls segment.

Overall, we are pleased with the results delivered following their strong last quarter as part of Tyco and their first quarter as part of Pentair.

Revenue grew 3% organically on solid volume gains.

The energy vertical grew 2%, mostly on strength in Oil & Gas.

But in the Industrial vertical, the topline was up modestly as several projects were delayed, which was a recurring theme we saw in many of our project-related businesses in the fourth quarter.

We have not seen any cancellations, but as I mentioned when discussing Water, customers seem to be holding on tightly to their capital in the fourth quarter.

We would expect many of these projects to resume in the first half of 2013.

The right half of the page shows fourth-quarter Valves & Controls operating profits and margins.

Valves & Controls operating margins were down 40 basis points to 7.6% owing to mix and the acceleration of transition costs that were mentioned at the beginning of my remarks this morning.

In summary, Valves & Controls' first quarter as part of Pentair went well as the fundamentals for their business remain intact and the Integration & Standardization efforts made good progress, particularly with regards to training on PIMS.

Let's move to Slide 6 for a look at the orders and backlog for Valves & Controls.

Not only is this our first quarter with Valves & Controls as a segment, but this also marks our first time discussing orders and backlogs for the segment.

As you can see on Slide 6, the Valves & Controls backlog is broken down in four key markets, three of which fall into our Energy Vertical -- Oil & Gas, Power, and Mining -- and one in our Industrial Vertical, which is the Process business.

Backlog grew 2% to a near record $1.4 billion where Oil & Gas backlog remained strong globally, but orders declined in a mid-teens rate due to project delays and a tough year-over-year comparison.

Mining, while the smallest piece of Valves & Controls, saw a strong double-digit growth in orders.

The Power business saw a decline in orders, but the outlook there points to a pickup globally as 2013 progresses.

Finally, backlog within Process remains relatively steady while orders grew modestly.

Let's move to Slide 7 for a review of Technical Solutions.

Technical Solutions comprises Pentair's legacy Equipment Protection business and Flow Control's Thermal Management business.

Sales for the segment grew 1% lead by strength in Energy and seasonal strength with Thermal Management's business as distributors stocking occurs prior to the weather getting really cold.

Industrial declined 1% as inventory destocking continued for many of Equipment Protection's customers.

In addition, this quarter marked the end of a large project within Thermal Management.

The right half of the page shows fourth-quarter Technical Solutions' operating profits and margins.

Technical Solutions' operating margins were flat at 17.4% owing to positive contributions from price, productivity and mix which helped mitigate transition costs in the quarter.

While we expect the topline to remain challenged in Industrial, there remains good runway in margins and we expect overall improvement in Technical Solutions as the year progresses.

Let's turn to Slide 8. For the full year 2012, sales grew 28% on a reported basis largely due to the contributions from Flow Control for all of the fourth quarter.

Adjusted operating margins contracted 60 basis points for the full year to 11.1% as the aforementioned transition costs in the fourth quarter were spent to help better position our businesses to deliver on our targets in 2013.

Adjusted EPS were relatively flat for the full year, given the dilutive impact of the share count doubling following our transformational acquisition of Flow Control.

For the full year, adjusted free cash flow, as I mentioned earlier, was just over $300 million and exceeded 100% of net income.

We believe the strong backlogs in Valves & Controls and the Water & Fluid Solutions Infrastructure business are encouraging entering 2013.

Further, we believe continued strength in global Energy and a rebound in North American Residential also offer positive indications for growth to accelerate as 2013 progresses.

Let's turn to Slide 9. This slide is a comparison of the topline growth components in 2012 on a pro forma basis as if Pentair and Flow Control had been together for the entire year and what we expect the growth components to be in 2013.

As you can see, we are expecting a little less contribution from volume in 2013, but FX should be less of a headwind, and we are anticipating some topline synergies to begin to be realized in this new year.

Overall, the growth components remain similar from 2012 to 2013.

On Slide 10, we wanted to offer a similar look at operating income growth as we presented on the prior slide when looking at the topline growth components.

The key take-away on this slide is that we expect our base businesses would be up for the full year, but the real boost will come as we deliver on our targeted $90 million of synergies.

The result is well over 100 basis points of anticipated margin expansion as synergies read out.

Let's move to Slide 11 where we discuss our 2013 expectations.

In November at our Investor Day, we laid out our initial expectations for 2013, which we are affirming today.

For the full year 2013, we are expecting sales to be up 3 to 5% to approximately $7.6 billion.

As mentioned previously, Energy and North American Residential are two of the verticals where we see continued positive trends.

Fast Growth Regions are still growing and we are excited about several areas such as the Middle East where our presence has grown as a result of bringing these two organizations together.

While we expect Western Europe will remain a challenge, we should see some easing in the foreign exchange headwinds from 2012.

We continue to target $950 million in adjusted operating income or roughly 20% growth and adjusted operating margins approaching 12.5%, driven in large part by the fourth-quarter repositioning actions and the synergies we have discussed both at the Investor Day and in today's call.

As highlighted in the prior slide, we expect our base businesses position to deliver near double-digit operating income growth and synergies will drive additional upside.

Our adjusted EPS guidance remains in a range of $3.10 to $3.30, or 22% to 30% growth for the full year.

In addition to strong operating income growth, we are forecasting a 25% tax rate and continued benefit from our share repurchase activities.

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

Thank you, Randy.

Please turn to Slide number 12 labeled "Reported to Adjusted 2012 Items." As a result of the merger and integration activities, Q4 and full-year 2012 results include "a little bit of noise." Therefore, we want to provide some additional clarity around those items so you can better understand our adjusted operating performance.

As a reminder, as Randy mentioned earlier the key financial numbers by quarter and by reporting segment are included in the press release for 2011 and 2012, excluding the impact of these items.

Our adjusted EPS for 2012, which reflects three quarters of legacy Pentair loans plus one quarter including legacy Pentair in the Flow Control acquisition, were $2.39 for the year.

Acquisition related costs, which include deal costs, customer backlog and inventory step-up plus a few other items, were a loss of $1.41 per share.

This was in line with our previous estimates.

I would like to remind you that we expect the inventory step-up in customer backlog to continue through the first two quarters of 2013.

Restructuring totaled $0.35 of EPS with the majority coming in Q4.

To date, we have identified approximately 85% of our expected $75 million of repositioning actions for 2013, and we expect to take the few more actions in Q1 that would close the gap on the 2013 expected benefit.

These actions will primarily be around functional standardization and back office consolidations.

The next item to discuss relates to trade name impairments associated with our brand migration strategy and greatly reducing many of the complications that occur by trying to maintain numerous brands, many with limited perceived value, yet require a lot of cost to promote to maintain.

This is a non-cash charge, and we are happy not to be carrying these smaller brands in our portfolio as we accelerate our marketing and branding efforts around fewer, more impactful brands.

During the fourth quarter of 2012, we elected to change to a more preferable method of accounting for pension and post-retirement benefits.

Historically, we recognized actuarial gains and losses annually as a component of stockholders equity, amortizing them into operating results over future periods.

We will now immediately recognize these gains and losses and operating results in the year in which they occur.

These gains and losses will be measured annually as of December 31, and will be recorded in the fourth quarter of each year.

For the fourth quarter of 2012, the Company recorded a charge of $142 million for actuarial losses.

This change in accounting principle will be applied retrospectively.

The impact to prior periods is summarized in the schedule attached to the press release.

This was done in conjunction with the pre-funding of $193 million to our US pension plan and moving to a risk mitigating investment strategy within the plan.

We are now fully funded in the US domestic plan which has currently invested 92% in fixed returns.

We believe that based on current borrowing rates, the transformational deal we did, and the importance of removing the uncertainty to our employees and retirees, this was the appropriate time to implement this change.

With this now behind us, it allows us to focus on what we do best, running the Company.

Finally, the last major adjustment was the extinguishment of the private placement of public bonds that allows us to create a more advantageous capital and tax structure while completing the merger.

While all of these adjustments drive us to a reported GAAP loss for 2012, they were combined with completing an exceptional merger with Flow Control and we believe all position us nicely for the future.

Please turn to Slide number 13 labeled "Integration and Standardization Update".

Let me start by reiterating that we are definitely on track to realize the expected $90 million in synergies for 2013.

Please focus on the left side of the chart.

We are trying to give you a perspective of how we will realize these synergies throughout the year.

A couple of key points in this slide.

First, the anticipated savings ramped throughout the year for a couple of reasons.

One because of the way the operational synergies need to flow through inventory, they are not expected to be realized until the second half of this year.

Two, even though the majority of notifications to employees on the repositioning have taken place, bus of those employees will not be leaving the organization until the end of the first quarter and into the second quarter.

Additionally, we are accelerating some investments in the first quarter of 2013 around tax planning, small manufacturing plant and building closures, and ERP consolidations.

These actions have a little bit of headwind, net of savings, within the first quarter.

However, you can see that we expect our exit rate in Q4 to give us a nice acceleration into the first couple of quarters of 2014.

Please turn to Slide number 14 labeled "Balance Sheet and Cash Flow." Being mindful of time and wanting to leave enough for your questions, I will just hit a few of the highlights on this cash flow page.

First, obviously a large adjustment of $339 million.

This is detailed on the lower left section of this slide and consistent with the adjustment to EPS that I shared with you earlier.

Second, our current debt level of $2.5 billion was exactly where we felt it would be and is inclusive of approximately $330 million of stock buybacks executed in the fourth quarter.

As of today, we have approximately $260 million of cash on hand mostly located in foreign entities and we will be focused on efforts to utilize this cash more effectively in 2013 and 2014.

Please turn to Slide number 15 labeled "Q1 2013 Pentair Outlook." Now on to the first quarter of 2013 where the focus will turn to execution of our committed goals.

You'll probably need a little time to absorb the pro forma numbers that we have included to better understand the new seasonality of the Company.

We have excluded from the pro forma numbers three main items.

First, we have removed all sanctioned country revenue and profits from the base of 2011 and 2012 for Valves & Controls to provide a better year-over-year comparison.

This excluded revenue was associated with sales produced by an acquisition completed by Valves & Controls in 2011.

These jobs were delivered upon until shipments to these customers were declined prior to the closure of the deal.

This resulted in substantial charges to income in Q3 of 2012, and we have removed all impacts of that from the results.

Second, we have restated all of the segments for corporate allocations and new depreciation and amortization consistent with 2013 and forward expectations and assumed corporate calls in 2011 and 2012 to be equal to the Pentair go-forward costs in 2013.

We have also moved any large projects, jobs and divestitures that have no shipments in 2013 and beyond at Technical Solutions for clearer comparisons of organic revenue growth in the future.

Third, we have adjusted the tax rate in 2011 and 2012 at the expected 25% rate for 2013 and put the share count in 2011 and 2012 at 214.5 million shares, which was the share count on the date of closure.

We hope you find the way we have restated the numbers to be helpful and focusing on our operating performance and "removing the noise."

After all that, we expect Q1 sales will approximately be $1.8 billion for the total Company, which will be up around 1% year-over-year on an organic basis.

We expect Valves & Controls sales will be off slightly compared to the first quarter last year where they were up over 20% year-over-year.

Water & Fluid Solutions should get some tailwind help from North American Residential and other recovering markets.

And Technical Solutions is still navigating choppy markets after a difficult end to 2012.

We remain cautious about our markets in the start of the year, and feel that, operationally, there is a lot for us still to learn about the new businesses.

We believe this approach helps us focus on what we can control, cost, and hopefully markets deliver sales upside in 2013.

We expect adjusted operating income will be up slightly versus 2012 pro forma, reflecting that we have about $10 million of headwinds associated with the items I mentioned earlier regarding cost to get to synergies and only around $5 million of expected synergies to be realized in Q1.

Overall adjusted operating margins should be about flat and adjusted EPS should be flat to up slightly on a pro forma basis.

We are expecting interested be between $18 million and $19 million and we are expecting the average share count in the quarter to reflect 207 million shares.

The tax rate, as I'm mentioned, should be around 25% for the full year and quarter.

Please turn to Slide number 16 labeled "Full-Year 2013 Pentair Outlook." For the year, our expectations are consistent with what we told you at our November Analyst Day.

Our revenue outlook growth assumptions remain up 3% to 4%.

However, you might notice that the overall revenue is slightly lower, reflecting removal of a large job and divestitures shipped or sold in 2012 and 2011.

The $790 million in pro forma 2012 adjusted operating income is consistent with the starting point we shared with you at the analyst meeting.

It means we need to deliver about $160 million of operating income year-over-year to hit our $950 million commitment.

As Randy mentioned, this is about $70 million from the base, consistent with 2012 pro forma performance and $90 million of synergies, of which $75 million is expected from repositioning actions that are already complete or will be completed by Q1 of 2013.

We are affirming our full-year 2013 adjusted EPS range of $3.10 to $3.30, and we are focused on delivering detailed growth action plans to demonstrate a higher level of organic growth and detailed productivity plans to not only meet 2013 expectations, but we will continue to invest and deliver on our $5 goal for 2015.

Please turn to my last slide, Slide number 17, labeled "Q4 2012 Summary." We closed out Q4 as expected.

Markets were sluggish, but we planned for that.

We executed against our commitments and believe we are well positioned to deliver going forward.

PIMS will be the way we ensure consistency around organic growth, productivity, standardization, and common values and language in the larger company.

It will give us a stability around actions and culture required to know that we are delivering consistent high-performing and repetitive results.

Standardization of the back office is a requirement to reduce complexity and simplify and improve the customer and employee experience.

We are well on our way to roadmaps and we are encouraged by the early progress in the first quarter as a combined company.

I will now turn it back to Randy.

Thanks, John.

Please turn to Slide 18.

To close, let me tell you why we are better positioned entering 2013 just to wrap everything up.

While the fourth quarter had a lot of moving pieces resulting from the acquisition, we were also busy accelerating actions in the quarter to deliver cost benefits and growth synergies in 2013, and we are really on track.

PIMS adoption by Flow Control has exceeded our expectations to date, and we see a lot of opportunities to not only improve in areas such as delivery and cost, but also driving working capital improvements.

We continue to see some wind shifts as some tailwinds emerge, particularly in the North American residential market where it appears we are no longer bouncing along the bottom after six years of that and are now rebounding at a moderate pace.

Infrastructure has grown its backlog and we continue to see strength in Energy and Food & Beverage.

Our balance sheet remains strong and our focus in the near term will be on the share repurchase and dividends.

Some businesses we have, such as Aquatics and Thermal Management, which are already well down the standardization path, have earned the right to grow through bolt-on acquisitions.

As other business units progress down the standardization path, they too will have bolt-on acquisitions reenter their mix.

But the principal focus in 2013 for the whole Company is delivering on our -- and executing our plan for integration, standardization, growth and as always, we are going to remain disciplined in our capital allocation strategies.

Operator, we are ready for questions.

(Operator instructions).

Scott Graham, Jefferies.

Good morning.

One question and one follow-up.

You guys made a comment about the Power arket being sluggish right now, but expecting an improvement as the year progresses.

Could you give us a little bit more color on why you think that?

And then I have one quick follow-up.

Yes, and Power is an important market, particularly for Valves & Controls.

And there was a real slowdown in building of power plants, and they are big in Asia and they are big all over the world.

And we are seeing an increase in activity, in bidding activity, in that space which gives us some encouragement.

Okay.

Great.

And you indicated that some of the branding and other transition costs that you were accelerating and the fourth quarter, did that come in as expected as you indicated from your analyst meeting and your last quarter guidance?

Yes, it did.

Very good.

Thanks.

Jeff Hammond, KeyBanc Capital.

I just want to understand this pension change a little bit better.

What is the annual cost savings and what is reflected in your 2013 guidance around that change?

Jeff, let me step back.

As you know, when you do a large merger like we did, these losses are put to purchase accounting on the target company and we were the accounting acquirer.

So we were going to take all of the market to market and put it in purchase accounting for Tyco.

It seemed like a logical thing to do and we hinted at the analyst meeting we were going to do this.

And in conjunction with putting those losses behind us, we have fully funded the plan and moved to a fixed strategy.

So as we looked at 2013 guidance on a go-forward basis, it always reflected the benefit of this.

I can't predict what it would be or wouldn't be because I don't know how the market gains would have worked out and what that positive or negative was.

For legacy Pentair on an annual basis, we were looking somewhere maybe around $7 million, $8 million operating income a year of headwinds associated with these.

So the guidance is unchanged because you were contemplating it.

But what is the year-to-year delta of the change?

It is just hard to say.

I would have said the $7 million to $8 million is reflective of maybe what we might have avoided in the short run.

But as the benefits pick up, we also avoid the benefits in the long run.

So really don't know how to predict that.

The change was becoming the fact that we are fully funded, we are moved to fix, we should have a relatively small adjustment every year that we take in the mark to market because we no longer are subject to the uncertainty related to the investments within the plan.

But that went to equity anyway.

Okay.

That's helpful.

And then quickly on the growth rates, you are looking for 1% growth in the first quarter and 4% in the full year.

And I understand the cadence on the cost savings, but on the top line, what are you seeing that give you confidence in this reacceleration as we move through the year versus the weaker 1Q?

The fourth quarter we saw slowdowns in projects.

We saw some strength in some of our Residential, but not all of it.

So we are more cautious.

That would be one reason we see 1% in the first quarter is we don't think it is just throwing a switch from the fourth quarter to the first quarter as the projects blew up.

But we haven't seen cancellations and there's really good fundamental growth in the economy and particularly in Residential.

We think Energy, particularly Oil & Gas, looks good.

We think North American Residential looks good.

In the Food & Beverage space, we saw a lot of projects that just got delayed and whether it's fiscal cliff or whatever reason, companies, they didn't cancel these projects.

They just delayed them.

And so as the world gets a little more certain, we think that they may be coming back and we will welcome them when they do.

Thanks.

Christopher Glynn, Oppenheimer.

Good morning.

Just one more on the pension being fully funded, that sounds great.

I think you said 90% fixed income in the composition.

I am wondering if that's -- the returns on that are enough to maintain fully funded status.

It is certainly a great question.

Once we get to 100%, we hope it will be, and really what we are dealing with is that your discount rate movement should reflect the bond purchases.

And we have done our best to try to hedge it, but you could never be 100% hedged.

And to match it as closely as possible.

With interest rates where they are today, it was just a great time to borrow the money and fund it.

We had a lot of questions becoming a Swiss company and technically Tyco buying Pentair, a lot of our employees and retirees asking questions about what about my pension.

So it's a nice improvement in the employee relations too.

As you know, it doesn't affect you on a rating agency basis.

I think what we didn't want to do was have to manage this as a potential hurt or benefit into the earnings stream going forward.

I think now it allows us to focus on the operational performance of the business and deliver on the $5.00 per share that we are driving to in 2015 and the way that I think you would expect us to.

And the transitional costs, called out a couple hundred basis points, gets $35 million or so.

So pertaining to that, just wondering if we could allocate those dollars roughly by segment and is the transitional costs all accounted for now in the fourth quarter?

Yes, we tried to get as many of them into Q4 as possible.

I don't know if we can ever be certain that we included it all, but I can tell you we won't mention it to you in Q1, meaning the businesses, what they couldn't get into Q4, have to absorb them in their plans for next year.

They are broken out in the back, but I will say that I don't think, in those numbers, we fully captured all of the Thermal and Valves & Controls because I don't think they were aware of the process in which we look at what's in their results versus what's in corporate.

They are focused on branding primarily.

They were focused on things related to our confidence level on customer collections and also our ability to think of potential warranty issues and to address those.

And that makes up the majority of it.

And as I mentioned before, you can see the difference in the back.

Great.

And you said you won't be calling them out going forward, John?

It would not be my expectation.

It would not be Randy and our intention to share with you transition costs in Q1

Our whole objective here was to get as quickly to a normal pace.

We are an operating company.

So we'll get back to being an operating company as quickly as possible.

Chris, to remind you, this was signage change on Tyco.

This was accelerating the migration away from the Tyco packaging and brands.

This was addressing within the legacy Pentair Water business the small brands that we weren't funding anymore and that is what we got after.

And we gave our businesses a six-month head start to try to get all of that behind them and it is our intention and view that that is done.

And then lastly, I think you are intending about $20 million more structuring in the first quarter.

Restructuring is very small in the fourth for Valves & Controls.

So, is that where the first quarter charge is likely to locate?

Without calling a particular segment out, I think there is more potential cost structure which really was a result of where the costs were between corporate and the segments.

And we believe on the functional standardization journey there is opportunities there.

The other area is that we are finishing and completing our fast growth market alignment and deciding what sales office and what region will best be serving the overall Pentair.

And we see an opportunity around real estate consolidations and the likes in those regions that we also expect to get completed here in Q1.

Great.

Thanks for the color.

Steven Winoker, Sanford C. Bernstein.

Thanks and good morning.

First question.

So I guess you hit your 100 day plan on January 9, right?

That was the intention.

And I'm reading the words in your dialogue about benefits, leading sourcing benefits delayed to second half.

Just give me a sense for what was delayed as expected and what was not expected.

Yes.

Let me address the narrower part of that question and get back to the broader one.

We have very low turns in our new businesses.

And any time you have any kind of labor-saving, anything that goes through cost of goods sold has to go through inventory.

So actions taken don't show up.

If you have four turns, you have got to wait at least a quarter.

If you have got two turns, you have got to wait six months before a cost-benefit flows through to the P&L.

That's number one.

But that shouldn't be a surprise, right, Randy?

That part was not a surprise.

No.

That is why we are on track to hit our $90 million.

Yes.

Basically as I look at it halfway through the year, we actually did better on financing.

We are in better shape on tax.

We are in great shape on corporate costs.

We've got a lot of momentum on the $90 million.

I think $75 million and the $90 million is really in hand already.

And the other $15 million we know how to go get.

So, I wouldn't want anyone to think that we think we are delayed on anything because I don't believe we are.

And then the broader question, I guess is that addressing as you step back and look at your 100-day plan?

Just to reiterate what Randy said, I always had the sourcing and the lean savings back-end loaded in the plan.

And then the other thing that's earlier in the year is we do have a couple of small plant closures that we are working on which as you know provides a small headwind.

And the tax rate is very important to us, especially for 2015.

So we are going to spend the investment required in first half of this year to position ourselves for making sure that we realize that lower Swiss tax rate long-term.

Other than that, from a timing perspective, everything, as Randy says, is on track and we control the destiny on the cost-out on the repositioning.

Yes, so we feel good about where we are.

Everything in our control is on track or ahead.

The only thing that isn't as good as I would have liked would have been the end markets.

Right.

And to that point, your price productivity and mix ended up 40 basis points less than volume and inflation on the Op margin impact, right?

And I was trying to reconcile that with the growth number of $3 million up, so it is all FX I take it on the volume side?

Or just maybe help a little bit as you think about volume and inflation being offset by price productivity and mix, maybe go into the components a little bit.

That might have been a lot more than you thought.

Yes, I think some of that productivity is being distorted by a little of the transition costs.

I think, going forward, we do think inflation continues to be sub 2% in the first part of the year, first half of the year, and then just get slightly above 2% in the back half of the year.

We are planning on about 1 point of growth or 1 point of price, I'm sorry, for the full year.

I think we hope to do better than that.

If we get more MRO activity in the Valves & Controls business and more standard product in Thermal, I think we will do better than that.

It is the projects that tend to compress the pricing.

I think we are in line with what we are saying, and I think what we're saying and what Randy is sharing with you is that there is a piece that we can control.

And we are pedal to the metal on that, doing everything we can and then some to make sure that we send the right message internally around cost control, making sure we get the repositioning done and making sure the market alignment is lined up.

We are hopeful the markets are better.

And there's reason in the business units for them to believe that they are.

We would just like to make sure it's guaranteed versus something we are planning for and that doesn't come.

Maybe to sneak one last in, on the business unit portfolio side, as you look at the new portfolio and you are considering not just where you will add bolt-ons over time as the business units earn it, as you point out, on the flip side, without maybe calling out the specific units, are you actively pursuing processes or early-stage processes in terms of pruning the portfolio where it makes sense?

Yes, I think we mentioned at the Investor Day that we actually talked to all of the businesses.

The level of materiality for a business is $50 million now.

If it can't be $50 million or more, then I really don't want to waste any strategic or capital interest on them.

So that is part of our strategic review this year.

There's a couple that we have underway now, smaller businesses, $20 million, $30 million that are in process of being sold now.

And I expect that, once we get a full round of strategy reviews through with the seven business units, that we may identify some more.

Great.

I will pass it on.

Thanks.

Brian Konigsberg, Vertical Research.

Now that you guys have a quarter under your belt, you guys are able to delve into the businesses and go to market more as a cohesive brand, or you are attempting to do that.

Maybe you could talk about the early indications of abilities to cross-sell, where are you seeing the opportunities, anything that has emerged to date or things that might be more of a challenge than you previously expected.

We talked before about one Food & Beverage product line where we sold a combination of the Pentair legacy products in Food & Beverage along with some Keystone valves.

And it was a real win-win.

We ended up getting twice as much volume on that project.

Maybe they would have been one separately, but for sure they were one together.

In those process industries like Food & Beverage, they are project work.

We don't yet have -- and this is the next step -- to put in a process so that that happens regularly.

So, that gets into who gets the sales credit, how does it get covered, all of that.

That's work that actually Todd Gleason and the growth team will be working on with each of the GBUs.

We think energy is another place where we've seen some good cross-selling.

We have got some leads in process technologies, basically separations technologies as a result of the Valves & Controls people.

Again, some early wins.

And how do we institutionalize those in terms of process.

I think we validated that there is a lot of cross-selling opportunities, saw some exciting cross-selling opportunities in the Middle East as well around what I would call Middle Eastern-ized products from the Far East that with the capability we have there we can launch.

And so, again, it is taking those ideas and then institutionalizing them to drive the growth.

That is our focus.

And, John, if I could just ask real quickly, just on FX, so you guys have actually reduced the expected headwind for 2013.

But you still see it as a 1 point challenge to revenues.

With the euro at 1.35, why do you expect to see an FX headwind at all?

I would have thought it would be a tailwind at this point.

Yes, just to clarify, it rounds to 1. It is actually 50 basis points and all we do is take the euro as one of the currencies at the end of the period and forecast it forward.

And you're right.

The euro won't be that much of a tailwind.

There were times when it was slightly higher than that.

But there's other currencies in the portfolio too.

And being $2 billion exposed to vast growth market, there's other currency fluctuations that make up the remainder of that 50 basis points that we are referring to.

It's more.

But you're right, a lot more modest than last year and right now not a huge headwind as we head in the year at this particular position.

Yes, and if could sneak one more quick one in.

I note you talked about pension and you talked about the funding and the employee relations.

But weren't the interest rates actually starting to creep up here?

You just spent $192 million funding that back up.

Why wouldn't you just want to grow out of that?

I think that that is a strategy.

We certainly considered it.

There were other points in the scenario, especially over the last three years, that you could have looked back at and said that same thing and it didn't exactly go in your favor.

But I want to remind everybody the real reason we did it is half the Company was Tyco.

We were going to have to adopt this anyway by putting it into purchase accounting.

And then we get into a situation of trying to create a path where everybody is on the same plans, everybody is in the same position.

There's no favoritism within how we look in those plans.

And it just made sense to adopt moving forward.

The other thing is, in putting branding behind us, putting the restructuring behind us, now pension is behind us.

And it is not something that this Company needs to concern itself with anymore on these North American domestic plans and it's certainly not something our share owner has to think from year to year is that going to be a tailwind or a benefit.

I don't think any of us can predict where that is going to go.

If the interest rate is going to go up, and our returns are going to go up, those are natural hedges to other things that occur, right?

So this is all part of a constant look at what's the appropriate capital allocation strategy for the Company.

And if you think about it, we had to hold back $200 million of any form of investment to cover this, from the way the ratings agencies looked at it anyway.

So that was almost like dead money.

So when you are not earning anything on cash, it seems a lot easier to fund it, put that headwind behind you and move on with what we feel we do best, which is the operational results of the Company.

Got it.

Thank you very much.

Josh Pokrzywinski, MKM Partners.

Good morning.

A couple of clarification questions here.

First, in the Analyst Day presentation, you guys talked about the share count at 203 million squiggle for the year and now we are at 205 million?

Am I missing any kind of offsetting guidance or is that just a bias now to maybe a couple of pennies lower in the range?

I think our range is still intact with that.

Obviously, those are the types of puts and takes that are going to occur.

We can't predict what the buyback is going to be.

We are still on pace to buy back the $400 million in addition to what we bought before.

And there's going to be fluctuations on what the purchase impact is and where the share price puts the dilution.

But all the assumptions are the same other than the math that creates what the endpoint is.

That's fair.

Can you walk me through the progression in Technical Solutions?

Obviously, exiting the year at a pretty healthy margin rate given where you are planning on starting.

How should we think about the cadence of that?

And then as we look out into I'll say 2014, but pick any normalized year, should that be more linear going forward?

Yes, I think, first of all Pentair had a seasonality that I think our share owners and certainly us got used to.

And being 40% exposed in North American Residential in legacy Pentair, we saw a pretty big kick up in Q2.

And we still have that same amount of money.

It is less a percentage of the Company, so Q2 will be a season that continues.

What we have learned about the new businesses is sort of as follows.

Valves & Controls is a capital dependent business.

And their strong quarters are in the second half of the operating year as those capital expenses of their customers, and as Randy mentioned, get agreed upon and they get let.

One thing I would add though, it's capital, but it comes in various tens of thousands of transactions.

Sure.

And so it is a lot to these projects.

So they tend to be more backend loaded and that plays out in the seasonality.

Thermal, which is a business that we love, has a very strong Q3 and Q4 in our system.

And that is primarily because they are cold weather dependent.

And they stock up the distribution channel and there is a seasonality to that business.

And finally, WES, which is the other business we acquired, is Australian market.

And as we know, the seasons in Australia are different than what they are here in the United States.

So, I don't think we picked up anything that helps our Q1 seasonality.

We certainly picked up businesses that help Q2 and Q3 and Q4, and I think that needs to be understood.

And then as I mentioned earlier, we have got a timing of the repositioning savings in the way we have to recognize the sourcing benefits that we know, as Randy mentioned, but have to flow through inventory, and those tend to be backend loaded here.

Got you.

Understood.

And then one last one.

On installation, I know it came up at the analyst day, but it still seems like a pretty big year-to-year drag in 2013.

I'm sorry if you already addressed this.

How much of that is material cost versus employee inflation that you can see coming?

Yes.

We are analyzing somewhere around 3-ish percentage on employee costs and that's various by country and region obviously.

And areas like China and India are seeing enormous inflation, but overall that is what the employee base is.

I think we have planned material inflation somewhere in the 1.5% to 2% range.

That is slightly higher than we have been experiencing and realizing.

And candidly, who knows?

I think this is the way we planned for it and then we go out and every negotiation we deal with individually.

There is an expectation that there will be modest inflation in the back half of the year, higher than what we are experiencing in the first half.

As the economy does better.

Sure.

But I would imagine the offset to that though is that price is probably a little bit better as well.

At least this cycle so far, however you want to define a cycle, I guess, that the upside surprise is that price has done a lot better job offsetting inflation than maybe it did in the past.

That's true.

That's correct.

The other thing I would say is I think Randy, and I and hopefully you guys will give us credibility for this, we are very fast learners.

But there is a lot to learn about the new businesses.

And we need to understand them.

We need to understand their patterns.

We need to understand the commitment level, the project execution, the timing and delays.

And that's in our particular outlook as well.

Understood.

Appreciate it.

Thanks.

Deane Dray, Citi Research.

Good morning.

There's been a lot of questions about the pension move.

Maybe I missed this, but is this the same international pension standard that Honeywell moved to four years ago?

It is.

Great.

Because from our perspective, the timing on this seems right for you guys.

The fact that you are fully funded, that is the big plus.

And this whole move to going to fixed in the assets is the move that everyone else is trying to get done.

So kudos to you to having done this now and the timing looks right.

And just a couple of operating questions for me.

This is the typical time that we would be asking about Pool, but I'll say it is Aquatics.

What is the early buy?

Was there any activity there?

And you made a comment about inventories being low, but just if you could flesh out those comments, please.

Yes, the inventory comment, Aquatics is doing quite well, had quite a good early buy, which I think portends well for the season.

The comment about inventories was really looking at the Pump and the Filtration channels.

Those are the ones that we have been looking for some rebound in Residential.

Haven't quite seen it in Pump yet, but seeing it now in Filtration and Treatment.

So, that was what those inventory comments were about.

I think we feel good.

As Randy mentioned, they grew double-digit again in 2012, Aquatics did.

It is actually a record buy.

And I think the overall Pool channel feels fairly optimistic about mid to high single-digit growth again next year.

It is an affluent buyer and these are in warm weather states where it is almost a must to buy them.

So I think that part of the industry we feel really good about.

As we are tracking the housing starts and as Randy mentioned on Filtration and Pump, we are mindful of urban build versus more rural and suburban and the impact that has on well and water softening components.

At the same time, we still have a significant opportunity at point-of-use Filtration.

That comes with all purchases.

And the exciting thing for Aquatics is it looks like certainly Florida and Arizona, two of the biggest pool markets in the country and two of the markets that were slammed the most in the housing downturn, have began a recovery which means that will be on top of the innovation, the innovation thrust that has been driving the growth in that business.

So we feel good about that one and about where they are in Aquaculture as well.

That is all good to hear.

And then maybe I missed this in earlier comments, but what was the impact from the Sandy storm, specifically on both the Sub Pumps and the retail side, some of the bigger Dewatering Pumps?

And can you quantify what the impact was?

Yes I will be specific to the Pumps because it is the only place we can really measure and track it.

But we thought we saw a $10 million to $12 million uptick on the Pumps that we sell into the Northeast on revenue.

As you know, those aren't our highest margin Pumps, but it was nice to see some lift, and so that is how we framed it.

Great.

Thank you.

Hamzah Mazari, Credit Suisse.

Good morning.

I just had one question.

On the Valves & Controls business, do you guys have a sense of how much better the margin profile is of what you are currently booking in that business versus maybe a year ago?

And maybe if you could also address how much of that business you think is AfterMarket.

Any color you can give would be helpful.

Thanks.

Yes, I think this is well known that the bookings on the large orders in Oil & Gas across the industry don't bring the margins that the rest of the segmentation, as Randy mentioned, bring.

So, as those become less of a -- less of a component of the overall backlog, the overall margin should get better.

But there is still future margin pressure from the large oil and gas jobs that have been booked in the past.

And we are mindful of that and measuring to that.

The MRO activity is picking up, and it represents, when we think about Aftermarket service and book and ship business, it represents right around 50% of the overall shipments within a year.

Great.

Thank you very much.

Brian Drab, William Blair.

Good morning.

Just a question on the revision of the 2012 revenue.

So it looks like, originally, you were expecting 7.5% and you revised that to 7.3% roughly and fourth quarter was in line.

So it you said you excluded some big projects.

Maybe I missed it, but can you give a little more detail around which segments those projects were in?

Yes and, again, this is a pro forma.

There is a large project in Technical Solutions north of $100 million that shipped in 2011 and 2012 which we removed.

There's no shipments planned for that project at all in 2013 or any large projects in 2013 for that matter.

We also removed divestitures from Technical Solutions and that will make up the delta that you are seeing.

And on the Valves & Controls side, it was primarily just related to, as I mentioned earlier, the sanctioned country revenue.

And disposition.

Okay.

On the Technical Solution side, that wasn't in the legacy business was it?

That was in the Thermal Control business?

It was in the Thermal Management side.

So, I'm curious.

Is the -- what -- how you can -- or why you had to adjust for that.

Because that business typically is a business where you are going to see large projects as kind of -- that is just inherent in the nature of that business isn't it?

Yes, but I think, as they come and as they are large, obviously we will share what they are and where we are going with it. --

We are not in a position to talk about that project.

We weren't involved in it.

Anything going forward we will be able to talk about.

And we just didn't want to mention it four quarters in a row, to be candid.

Yes.

Okay.

We would have had to say, without this project, here is where it was, so in the ability of looking at the pro forma numbers.

We also took out the operating income associated with those projects as well so that we would be able to concentrate on the revenue required to hit the targets and therefore the conversion on the operating income side.

Okay.

And then one other thing that I may have missed in your discussions, but the inventory step-up and customer backlog.

Your forecast for the fourth quarter at one point was $80 million.

It came in at $180 million if I am looking at the numbers correctly.

Is that -- can you talk about that change?

Maybe categorize things differently?

Yes, I think there might be a categorizing difference in there.

There is a higher degree of impact on Valves & Controls.

As you know, we have to take all of the projects and basically strip all of the margin out of all of those.

So that one came in a little bit higher and that makes up most of the component of that change.

I will follow up more with Jim later.

Thank you.

Garik Shmois, Longbow Research.

Just a couple of real quick housekeeping questions for me.

Can you provide an update as to how much new US Residential now represents for your business?

Roughly 20% of combined revenue.

That would be in new Residential as opposed to?

I'm sorry, that would be probably closer to 5%.

5%.

Okay.

Thank you.

And then a question on the buybacks.

You are on track for $400 million through the end of January.

I'm just wondering if you could provide a little bit more color on how you are viewing buybacks through 2013, maybe the cadence of buybacks as you move through the year.

Is it going to be more seasonal in line with cash flow, or could it be more linear?

The way we were thinking about it is more valued average, so probably doing it more ratably over the year is what is planned here and what I think is likely.

Thank you.

David Rose, Wedbush Securities.

Good morning.

This is actually a follow-up to a prior question on the inventory.

If you could, my understanding was that the inventory and backlog would be amortized through Q3 in 2014 respectively, backlog through 2014.

And given the increase in backlog for Q4, how does that dynamic change then?

I understand the call that you are now going to be finished by Q2, the step-up and the backlog.

That's our goal, yes.

We are trying to aggressively get it all out and get it behind us in the first half of 2013.

We will update you if we feel there's leakage into Q3 right now, but the real issue is to try to put the noise behind us and move on to a set of numbers that represent the full drop through to EPS.

Was there any inventory obsolescence that we saw in the fourth quarter then?

Yes, there was a little bit of that.

Ballpark?

I mean was it meaningful?

$3-ish million probably.

Okay.

Then lastly, if you could, on the Fast Growth Markets, you have some pretty low numbers compared to what historically you have been excited about.

So maybe you can provide a little bit more color in terms of the dynamics within those Fast Growth Markets, Latin America, China, India. --

I think we think we have a significant opportunity.

We are focusing on six Fast Growth Regions.

And if you go around and you think of Latin America, I think where we are being a little more modest is Randy has given direction to the team and we are actively working to have higher levels of sustainable revenue growth around larger, more impactful projects and/or product lines.

Yes, initiatives.

I think what we'll see is a focus and a prioritization on those particular vertical markets, some of what Randy highlighted, Energy, Power, Mining, Oil & Gasas, industrial process, where we think we can bring an aggregated sale to the end customer base and begin to position ourselves into a lot more of a sustainable business model.

That's some of where we have gone with a particular product and there's been not a follow-on or a localization of that product.

So I think we are going to see a lot of strategy work done here in 2013.

And I think we have positioned our Fast Growth Markets to still be a contributor, but we want to be profitably contributing.

And I think we have the ability under the Pentair sales offices to do so.

I would just add, the number's right now are the summary of what the GBUs say.

They don't say and not about what the market back ideas are and that is a big objective as we put these businesses together in the Fast Growth Regions.

We have 2,600 employees now in China.

What do we want to be in China?

We are further along actually in the Middle East on that thinking, where we are probably now 1,500 employees.

And we are further along there.

Clearly the opportunity in China and Southeast Asia is huge.

The number is not yet informed to buy our strategic intent.

Thank you.

Jeff Hammond, KeyBanc Capital.

Just to be clear on the guidance change on revenues, so that the $100 million lower revenue, I guess the $7.6 billion versus $7.7 billion, that is purely a function of prior-year comps?

Yes.

The year-over-year expectations are the same.

And obviously as we dug in and got to know some of the components of the revenue, Jeff, there is clearly some revenue that will not repeat primarily of the divestitures and the sanctioned country.

And then as mentioned earlier, we stripped the large project out.

The numbers are there with and without it.

And you guys can certainly look at it however you feel it best serves you.

We just.

We wanted to focus on going forward and talking about the cadence of building the revenue and growing, we wanted to make sure you had the basis to which we are launching from.

Okay, but if you applied the 30%, 35% incremental to that, what is offsetting that within the unchanged guidance?

I don't think there's a lot there other than some of the components of that revenue weren't all that profitable, which I don't think the 30%, 35% would reflect all of that.

And I think one of the things that I mentioned that we have taken out is also the $20 million impact of the sanctioned country write-offs associated with no longer providing those products to that customer.

I think that changes the base a little bit there, too.

Thanks.

There are no further questions at this time.

We will now turn it back over to our presenters for any closing remarks.

Thank you all for listening.

This concludes today's conference call.

You may now disconnect.