濱特爾 (PNR) 2015 Q1 法說會逐字稿

Good morning.

My name is Jody and I will be your conference operator today.

At this time I would like to welcome everyone to the Pentair Q1 2015 earnings conference call.

(Operator Instructions).

Thank you.

Jim Lucas, VP of Investor Relations, you may begin your conference.

Thanks, Jody, and welcome to Pentair's first-quarter 2015 earnings call.

We're glad you could join us.

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 first-quarter 2015 performance as well as our second-quarter and full-year 2015 outlook as outlined in this morning's release.

Before we begin, let me remind you that any statements made about the Company's anticipated financial results are forward-looking statements subject to future risks and uncertainties, such as the risks outlined in Pentair's most recent 10-K 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.

Any references to 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.

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 in order to ensure everyone an opportunity to ask their questions.

I will now turn the call over to Randy.

Thanks, Jim, and good morning, everyone.

Let me begin on slide 4 with a summary of how 2015 has started and how we see Pentair positioned for the remainder of 2015.

As we announced two weeks ago, this year has started off significantly below our initial forecast.

We expected most of our Energy-related businesses to be challenged this year, given the dramatic decline in oil prices in the second half of 2014, but a global capital spending freeze and its impact on our industrial businesses was not foreseen.

We do not see this to be a Pentair-specific issue, as this broad-based decline was across virtually every business, every geography, and every market.

In fact, the only geography of growth we saw was North America.

We believe there is broad economic uncertainty that is contributing to the delays in our customers' spending habits and we have felt this in both large projects and some MRO business.

As a result of the dramatic impact of FX translation and the significantly slower start to the year, we are now taking a cautious position on any expected recovery this year.

So we've gone back to our cost playbook and are working aggressively to adjust our cost structures accordingly.

Our balance sheet remains healthy, and we expect 2015 to still be a strong free cash flow year.

We will continue to invest in M&A where appropriate while executing on costs.

Given the uncertainty, we have rebuilt the plan to drive performance in 2015 to equal 2014.

As a result, we are adjusting our 2015 adjusted EPS guidance to approximately $3.80 per share, making 2015 a pause year.

We believe that Pentair is in attractive markets for the long-term.

We have detailed plans in place to work through the anticipated near-term challenges, and we're executing them.

Now let's turn to slide 5 for a quick look at our key 2015 forecast assumptions.

Given the significantly slower start to 2015 as a result of the global capital strike we're experiencing, we are now expecting our core sales for the year to declined 2 to 3 percentage points instead of growing 2% to 3%.

Given the first-quarter top-line shortfall and its negative operating leverage, we could not adjust our cost structure quickly enough in Q1, but we still expect operating margins to expand roughly 50 basis points for the full-year.

We completed $200 million of share repurchases in January, and we're still focused on our active M&A list in our most attractive businesses.

John will outline in detail the cost actions being taken, both variable and fixed, as we adjust to the start of 2015.

As a result of these actions, we are expecting roughly $40 million in repositioning benefits this year, and a cumulative $100 million-plus in 2016.

Our balance sheet capacity is over $800 million.

Although the external headwinds have worsened, we are focusing on the elements within our control.

This includes getting more aggressive on cost actions, continuing to invest in differentiated growth, and, as I mentioned, select M&A where appropriate.

Now let's turn to slide 6 for a discussion of our first-quarter results.

This first-quarter saw a core sales decline of 4%, as all verticals declined except Food & Beverage.

The one geography that performed well was North America, but we saw weakness in all other key geographies, particularly in fast growth regions.

As previously mentioned, FX was a significant headwind in the quarter.

Given the sharper-than-anticipated volume declines, productivity and price were not enough to compensate, and we saw adjusted operating income decline and margins contract in the quarter.

Cash flow was a typical seasonal usage, but we expect another strong free cash flow year, and expect significant improvements in sequential cash flow improvement.

Now let's turn to slide 7 for a more detailed look at the first-quarter results.

Our 4% core sales decline consisted of 5 points of volume decline, and 1 point of positive contribution from price.

FX subtracted another 6%.

Adjusted operating income declined 15% in the quarter, and operating margins contracted 60 basis points, even though we continue to see Lean, sourcing actions, and standardization efforts in G&A gain traction.

We are accelerating our cost actions to adjust to the reality of the FX environment and lower core volumes, which should reverse this operating margin contraction.

Now let's turn to slide 8 for a review of our largest segment, Valves & Controls.

Valves & Controls has seen a fair amount of quarter-to-quarter volatility in its performance, and the first-quarter saw both sales and orders fall double digits.

North America was the one pocket of strength, particularly in process and with LNG customers.

But all other geographies were down, with double-digit declines in fast growth regions as customers seemed to be delaying, and, in some cases, canceling projects.

For the first-quarter, Valves & Controls' core sales declined 11% and FX translation was a further 8% headwind.

Including significant adjustments due to currency translation, the quarter-ending backlog declined 4% sequentially, following a 7% decline in the fourth-quarter of 2014.

Over half of this six-month backlog decline was a result of FX headwinds.

Given the backlog is generally shippable in the next 6 to 12 months, we feel it is prudent to adjust backlog for FX to give the most appropriate view of the state of the business.

Core orders declined 15%, which we will discuss in more detail in the next slide.

Total orders declined 22% when including negative FX translation.

During the quarter we saw some customers directed delays of scheduled shipments, and this accelerated near the end of the quarter.

We anticipate some delays in expedites and shipments every quarter, but the first-quarter saw an even greater amount of net delays than we are accustomed to seeing.

We did not see a material increase in project cancellations, but we are seeing more customers requesting delayed deliveries, which is not surprising within Oil & Gas, but we have also seen it in the process industries.

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

While our lean, sourcing, and standardization continue to drive productivity within Valves & Controls, it was not enough to offset the volume drops in an already typically slow period.

And FX translation also had some impact in the 31% drop in operating income.

We're still making progress with our change agenda, and gross margins in Valves & Controls expanded as a result of strong productivity.

So we continue to feel good about our efforts underway, including lean transformation and the OMT initiative within Valves & Controls.

While the strong margin gains of the past two years are encouraging, there is much more to do.

So we plan to go even more aggressively after the cost structure and getting results from where we are investing for growth.

Now let's turn to slide 9 for a look at the orders and backlogs for Valves & Controls.

As you can see on slide 9, Valves & Controls' backlog is broken down into four key industries, three of which fall under our Energy vertical -- those being Oil & Gas, Power & Mining, and Industrial -- and one in our Industrial vertical, which is called Process here.

Orders were down double-digits across all four industries in the quarter.

While the impacts to our Energy-related businesses were not a surprise, given the decline in oil prices, Process order weakness was not expected, and declined globally, with North America the lone bright spot.

We're not expecting orders to improve during 2015 as customers continue to reevaluate existing projects and their pipelines for planned projects.

Although backlog has been hurt by the stronger dollar, we saw a decline in our backlog in real business terms, as well.

We will continue to focus on capturing shorter cycle MRO business, which has remained somewhat stronger than projects.

While we do not expect the global capital strike to last forever, we are being cautious and are rightsizing in the current reality that Valves & Controls is likely to see top-line pressure throughout the year.

We continue to believe in the long-term prospects for Valves & Controls and the transformation is underway, but the next several quarters will be focused more on costs while anticipating increasing price pressure on the existing business.

Now let's move to slide 10 for a look at Flow & Filtration Solutions.

Flow & Filtration Solutions saw a 13% top-line decline as core sales fell 7% and FX translation was an additional 6% impact.

All four verticals served by Flow & Filtration Solutions saw a decline.

Residential & Commercial fell 11% as global weakness and destocking in some of our North American distributor channels impacted the top line.

Infrastructure was down 14% as municipalities continued to delay spending, although we have remained more disciplined on pricing and believe we are seeing declines greater than the market.

Food & Beverage was down 2% as the strength in global beer and dairy was not enough to offset declines in agriculture spending.

Segment income declined 16%, but margins contracted only 40 basis points despite the volume, FX, and mix drags during the quarter.

Productivity readout was strong, and we believe we continue to have a long runway for improvement in margins within Flow & Filtration Solutions.

Given the weaker top-line environment, we plan to go after more than just G&A standardization opportunities, and accelerate our rightsizing efforts within this segment.

Now let's move to slide 11 for a look at Water Quality Systems.

Water Quality Systems was a bright spot in the quarter, with core sales growth of 4%.

The growth within Water Quality Systems was not a surprise given that they are over 70% in North America and mostly serve the Residential, Commercial, and Food & Beverage verticals, which have been our two growth verticals recently.

Our Aquatic Systems business started strong, and we believe is well-positioned entering the pool use season.

Our food service business continued to grow globally with core sales up 11% in the quarter.

The right half of the page shows first-quarter Water Quality Systems operating profits and margins.

Segment income grew 3% and margins expanded 40 basis points to 16.1%.

Price and productivity offset inflation and new product development investments continue.

Our outlook for Water Quality Systems remains positive, and we expect to see solid growth and margin expansion for the full year.

Let's now turn to slide 12 for a look at Technical Solutions results.

Technical Solutions saw core sales grow 1%, which was offset by a 6% FX translation headwind.

Energy was up 2% as our heat management solutions business entered the year with strong backlog, including two larger projects beginning to ship.

We will watch orders closely as the year progresses.

Industrial was flat as our equipment protection business was impacted by delays in industrial spending that occurred in the quarter.

Residential & Commercial grew nicely.

And despite a tough comp, Infrastructure also was up modestly, driven by telecom.

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

Segment income declined 8%, and margins contracted 70 basis points to 18.4%.

With the absence of price in the quarter, productivity was not enough to offset inflation, and mix further hampered the income and margin performance during the quarter.

Negative FX transaction costs were a factor in margins as strong growth in Canada, combined with a strengthening dollar, squeezed margins on our US-made products.

Following the end of the first-quarter, we closed a small, bolt-on acquisition within Technical Solutions for our thermal building solutions business, which we believe has attractive growth opportunities.

We have five criteria around acquisitions, and this transaction met all five.

The deal made strategic sense and made financial sense.

We were the right buyers.

We have a detailed integration plan, and we know who will lead that integration.

Although parts of Technical Solutions will be addressed in cost structure as a result of FX and mix, we believe we have an interesting M&A funnel for this segment.

Now let's turn to slide 13 for a review of our key verticals and the expectations for growth in 2015.

Given the difficult start to the year, we have adjusted our expectations across all verticals.

Starting with Industrial, our largest vertical, representing roughly 29% of sales, we now expect core sales to decline 4% to 6% in 2015.

While Valves & Controls continue to see strength in sales and orders with its North American chemical customers in the first-quarter, the rest of the globe saw a sharp decline in orders.

The remaining parts of Valves & Controls' Industrial business also saw weakness, including industrial gas and shipbuilding.

We do not expect the channel and customer destocking to continue throughout the year, but pricing is something that we're actively managing.

Core sales in our second-largest vertical, Residential & Commercial, are still expected to grow 2% to 3% for the full-year.

But the slow start to the year has led us to shave a couple of points off of our expected full-year growth rate.

We believe that our aquatic systems business within Water Quality Systems is well positioned for another strong pool season in North America.

And while a smaller piece of our vertical, we expect improvements in non-residential construction as well.

Roughly 10% of our sales are within our Food & Beverage vertical, which we expect to grow 5% to 7% on a core basis for the full-year.

This is on the anticipated strength of our global beverage and food service businesses.

Food service had a great first-quarter and should stay strong through 2015.

While core sales growth in beverage is also expected to be strong, this is a global business that we expect to be negatively impacted by FX translation.

The strength in Food & Beverage is in both beer and dairy.

Within Food & Beverage we also include the agriculture-related businesses in Flow & Filtration Solutions.

While we are driving differentiated growth in agriculture, it will likely continue to be a drag on growth in our Food & Beverage vertical.

Within our Infrastructure vertical, which accounts for less than 10% of our overall sales, we are now anticipating a modest decline in core sales for 2015.

We knew our Electronics Protection business in Technical Solutions faced a tough comparison to start the year, but we are encouraged to see modest growth in the first quarter.

We expect our Infrastructure-related businesses within Flow & Filtration Solution serving global desalinization, water treatment, and water supply to continue to be challenged.

While it appears that municipal desalination markets have bottomed, we do not expect any recovery this year.

Within North America, the Infrastructure break and fix business is expected to remain mixed, with continued price competition.

We now expect Energy core sales to decline 6% to 8% for the year.

This includes Oil & Gas, Power, and Mining industries for us.

The upstream business has been as weak as we had anticipated.

We now expect a continued pause in shorter cycle downstream business as capital spending delays or reductions have spread to midstream and downstream as well.

We saw continued strength in North American LNG, but the majority of global Oil & Gas was as weak, if not weaker, than we were expecting entering 2015.

Let's now turn to slide 14 for a look at our updated 2015 adjusted EPS guidance.

As we take into account the challenging start to the year and the pause in global capital spending, we are adjusting our guidance to approximately $3.80 per share from a range of $4.10 to $4.25 per share.

The volume shortfalls will not be overcome in one quarter.

We are taking corrective cost actions that we expect to begin to read out in the second half of 2015 and also benefit 2016.

We do not foresee the Industrial pause continuing indefinitely, but until we see customers beginning to spend again, we will remain cautious.

In the meantime, we plan to continue to invest for the long-term.

Not all of our businesses have been impacted in the short-term; and with our strong balance sheet and cash flow, we will be thoughtful as we look at M&A opportunities.

With that, I will turn the call over to John to give more details on the cost actions we are taking, and provide additional color on the outlook.

John?

Thank you, Randy.

Please turn to slide number 15, titled 2015/2016 Cost Actions.

As Randy mentioned, we've faced increasing headwinds in the first-quarter and we are working to align our cost structure appropriately.

To start, we saw a strengthening dollar create both top-line and bottom-line headwinds.

With the euro at $1.07, we anticipate a $65 million operating income headwind for 2015.

If the euro were to move to parity against the dollar it would create another $10 million impact on operating income.

We are not planning for the dollar to weaken.

In fact, we are assuming that this will be the new norm for the year, and are now implementing cost-out actions to mitigate the translation impact on a go-forward basis.

If the dollar weakens, we would expect to benefit, but we are not counting on it.

The cost actions will primarily be in Valves & Controls and Flow & Filtration Solutions, the two segments hit hardest by the global capital spending pause.

We expect these actions will yield $40 million in savings in 2015 and a cumulative $100 million-plus in 2016.

We plan to continue to focus on G&A and variable labor, but we are also expanding our cost actions to our fixed cost structure.

Please turn to slide number 16, labeled 2015 Current Outlook.

This slide looks at the changes that have occurred since we last updated our forecasts in early February.

We experienced lower-than-expected volumes in two of our larger verticals, Energy and Industrial.

And we are now anticipating pricing to be flat for the year, and down for the next three quarters as our Valves & Controls segment is expected to see increasing pricing pressure as the year progresses.

Within the Residential & Commercial vertical, we expect another strong year in North America, while anticipating residential spending around the globe at slower levels.

We believe that Food & Beverage will continue to be a bright spot, where we expect benefits from commercial expansion.

We do not expect the negative operating leverage from lower volumes to be offset immediately, and the translation impact discussed previously has become more challenging.

We plan to continue to drive productivity, and expect the cost savings from our actions to read out in the second half and to help mitigate some of the top-line challenges.

We still expect operating margins to expand approximately 50 basis points to 15% for the full year.

Please turn to slide number 17, labeled Balance Sheet and Cash Flow.

Quarter-ending debt was approximately $3.4 billion, or $3.3 billion on a net debt basis, inclusive of global cash on hand.

In the first-quarter, we returned $258 million in cash to shareholders in the form of dividends and share repurchases.

We completed $200 million in share repurchases during the quarter, and we have $800 million left under our current $1 billion authorization.

Our ROIC ended the quarter at 10.9%.

The first-quarter has historically been a seasonal usage of cash, just as it was this year, but we expect strong cash flow during the second-quarter and throughout the second half of the year.

Please turn to slide number 18, labeled 2015 Forecasted Cash Flow Usage and Capital Allocation.

For the full-year, we are expecting free cash flow of approximately $900 million, or greater than 120% of net income.

We anticipate returning nearly $200 million to shareholders through additional dividends for the remainder of the year.

We remain committed to our investment grade rating and will remain disciplined in our capital allocation approach.

We expect to continue to fund organic growth opportunities, and that capital expenditures will be slightly ahead of depreciation.

We still see select opportunity for M&A in some of our businesses.

If these deals do not materialize as we get later into the year, we will consider incremental share repurchases.

Please turn to slide number 19, labeled Q2 2015 Pentair outlook.

For the second quarter we expect core sales to decline approximately 3% to 4%, and FX to present a 7% headwind.

On a core basis, we expect Valves & Controls sales to be down 13% to 15% based on the shippable backlog and what we expect to be further project delays.

Flow & Filtration Solutions' core sales are anticipated to be down 3% to 4% on slower Industrial and Infrastructure business.

Water Quality Systems' core sales are expected to grow 6% to 7% as we enter the peak period for North American residential, which includes another expected strong pool season.

Finally, Technical Solutions' core sales are anticipated to be up 3% to 5% on the strength of Energy backlog in our heat management solutions business, and some expected increase in Industrial capital spending as the quarter progresses.

We are expecting adjusted operating income to be down roughly 10%, and adjusted operating margins to contract 10 basis points to 15.1%.

Below the operating line, we anticipate our tax rate to be approximately 23%; net interest and other to be around $18 million; and the share count to be approximately 182 million.

Our second-quarter adjusted EPS range of $0.95 to $0.96 represents a decline of roughly 6% year over year.

As mentioned previously, we are expecting a strong quarter of cash flow.

Please turn to slide number 20, labeled full-year 2015 Pentair outlook.

For the full-year, we are now expecting adjusted EPS of roughly $3.80, as the cost actions we are implementing in the second quarter are not anticipated to be enough to fully offset the volume shortfall and negative FX translation impact that hit our first-quarter results.

For the full-year, we expect core sales to decline 2% to 3%, and FX to be around a 6% headwind.

Valves & Controls' sales are anticipated to be down 8% to 10% on a core basis.

Flow & Filtration Solutions' sales are expected to be down 4% to 6% on a core basis.

Water Quality Systems' sales are anticipated to be up 6% to 7% on a core basis.

And Technical Solutions' sales are expected to be up 2% to 4% on a core basis.

We anticipate growth in our Residential & Commercial and Food & Beverage verticals, with Energy and Industrial declines expected to continue.

We expect adjusted operating income to be down 5% for the year, and adjusted operating margins to expand 50 basis points to 15%.

We will continue to right size our cost structure for the economic realities we are facing, but it will take time for those savings to begin to materialize.

We expect overall corporate costs to be approximately $100 million; net interest and other to be around $73 million, and our full-year tax rate around 23%; and the share count for the full-year to be approximately 182 million.

Adjusted EPS is expected to be roughly flat in the pause year we are anticipating.

Finally, we expect another strong year of free cash flow at approximately $900 million, or greater than 120% of net income.

Jody, can you please open the line for questions?

Thank you.

(Operator Instructions).

Deane Dray, RBC Capital Markets.

Maybe we could start with the comments about the global CapEx spending freeze, and maybe take us through the cadence of the months.

And I'm particularly interested in the comments regarding how it may have spilled into some of the MRO spending, and maybe this was part of the destocking comments in the negative pre-announcement.

So could we start there, please?

Yes.

Thanks, Deane.

Basically, if you take the Industrial market that we follow most closely is, of course, our equipment protection business.

And actually Industrial in that business showed some increasing weakness in Valves & Controls as the quarter went.

But we saw a pronounced decline in March in the other Industrial businesses that's sell-through distribution, which we believe is some destocking and uncertainty as to the knock-on effect which we can see in Valves as we saw the knock-on from Oil & Gas into some slowdowns in other projects and delays in other projects.

So we think there is a bit of a knock-on effect and uncertainty that has caused this.

And we do believe this destocking -- we even saw some destocking in the Residential & Commercial side and Flow -- so we do believe that distribution has taken a cautious turn in their reordering and Industrial, and, in some places, in Residential & Commercial.

And then could you expand on the comment on Energy regarding seeing the softness starting to work its way into your midstream and downstream businesses?

Clearly, everyone has been set up for an upstream headwind, and that seems to be playing out a little bit earlier.

But could you expand on the comments and any specifics regarding the midstream and downstream activities?

Well, we in particular, the downstream is bigger for us than upstream.

So to see the Oil & Gas decline that we did, and when we look at the projects we see a slowing in the orders rate across the board, really.

Our hit rates seem to be okay.

But with the exception as we pointed out, Process, which we count as Industrial in North America was pretty good, but we saw a slowdown in Process in the fast growth markets.

We saw a slowdown in refining in the fast growth markets.

And now a lot of that is some specific countries like Brazil, which shouldn't be much of a surprise.

But we do think there is a knock-on effect.

And I think you can see it in Oil & Gas companies who are basically constraining capital.

And any time a company constrains capital it's a blunter instrument than just precisely focused on projects.

We also saw MRO decline single digits, but MRO sales in Valves & Controls generally has been up every quarter, and we actually saw a decline.

Which, to us, feels like obviously you have to maintain things, so it feels like a slowdown in general capital spending to us in the downstream.

We will see what others report and see if they see it, too.

And just last one for me related to the Energy side.

Randy, you made some comments about delays versus cancellations in some of the orders.

And maybe just expand there by your major Energy businesses, how much are (multiple speakers).

Yes, it was a comment about Valves & Controls, primarily.

Our Valves & Controls ship later in project cycles.

And so every quarter, we see projects get pushed out some because they don't want the valves on site until they are ready for them.

But also usually there's some that get pulled in, because projects speed up and slow down.

So we always see a mix of delays and expedites in a quarter.

We basically saw no expedites in the quarter.

I'd say delays were probably 20% higher than normal, but there were no expedites to offset it.

That feels like, to us, just a general slowing on project execution.

We have had some specifics, which I won't get into, people exploring.

We have had a few cancellations, but I can't say that that's abnormal.

Orders that we thought were going to go that the projects get canceled.

But we are very cautious as to -- that was my comment about the customers reviewing project pipelines.

I think mergers in the industry affect that and the customers' industry affect that.

And as they look at adjusting their capital, obviously they're going to take some projects off the list.

Thank you.

Joe Ritchie, Goldman Sachs.

So my first question, clearly Oil & Gas was weaker.

You've got this contagion effect that is spilling over into Industrial.

Randy, you mentioned in your preferred comments that the delays accelerated in March.

And so I'm just trying to get -- I'm trying to understand, I guess, when I think about your organic growth guidance for the year of down 2% to down 3%, comps get tougher.

Organic growth was down 4% in the first quarter.

I'm just trying to get a sense for what gives you the confidence that you'll get some improvement as the year progresses.

Joe, just to clarify -- it's John -- I think some of the comps in Valves & Controls, as you recall, Q3 and Q4 were not great quarters for us.

So we started to see some of the slowdown from the order shortfalls in last Q1 and Q2 start to work its way into Q3 and Q4.

So, some of those comps in Valves & Controls gets a little bit better.

Same thing in our Industrial Heat Trace business; solid backlog that we feel comfortable is going to continue to ship throughout the year.

And then Residential & Commercial has been strong, as Randy said, in Water Quality Systems.

And we also start to see some of the tougher headwinds in our Flow and Filtration Solutions business.

So, I think we've looked at the organic growth, and although we don't see -- if you took a 90-day rolling average of historical sales -- we don't see that improving throughout the year.

We do think that that gives us a little bit easier comparisons in the back half of the year.

Okay.

Do you guys have any clarity at this point on the destock, and when you would anticipate some of the headwinds associated with destock to subside?

We think it continues into Q2 for us.

We look at some of the same bellwethers that you guys do on the industrial distribution side.

I think they saw the slowdown a little later than we did, and they started to correct, as Randy mentioned, and that started to work its way through our March shipments.

We would expect that to continue through April and May.

Okay.

And then one last question on -- and then I'll pass it up.

On the restructuring side, applaud your efforts to take cost out, just given the economic backdrop.

Can you just maybe provide some more clarity on the run rate, that $100 million-plus in 2016, just given the restructuring actions that you have -- $60 million this year?

Does that bake into some of the restructuring actions that you took last year as well?

Because the magnitude of that number, it just seems like a big number, and the payback seems quick.

Yes, no, these are new actions, incremental to the things we are working on already in synergies.

And in fact, as Randy and I met with the business presidents, we are still hopeful and our salespeople are still hopeful that things can improve throughout the year.

We're tired of being hopeful.

As we were trained, hope is not a plan.

And we think our view now needs to react to this new economic uncertainty and take the cost out.

So what you're seeing is G&A, and then some entry into some footprint actions, finally, in our Valves & Controls and other businesses where we can get after some product line moves and get ourselves rightsized and competitive.

As Randy mentioned in his remarks, and I followed up, we now expect pricing to be the new norm in Valves & Controls.

So even the projects that we're anticipating winning, we're expecting to come at lower margins.

So we have to accelerate our competitiveness to continue to bring those projects in at the same drop-through margins that we anticipated before.

Okay.

Helpful, guys, thank you.

Steve Tusa, JP Morgan.

So, just on the pricing dynamics -- and I guess this is just happening in Valves, and the orders just happening little bit faster than expected in Valves & Controls.

Is pricing -- are these orders going to impact 2016 now?

Or is this a reshuffling in the backlog, so it's just becoming more -- it was longer cycle on the way up and it's now shorter cycle on the way down, I guess.

And then from that perspective, price is already fading here in that business in revenues, so how do we think about pricing in the back half there?

Does it actually go negative in the back half of the year in Valves?

Yes, let me talk about that.

We think we are very cautious on orders through the year, which we think will affect Valves & Controls' sales in 2016.

So, we don't see a change really in things going faster or slower.

We think it's going to be a tough year on orders, and we're going to do everything we can to win in a disciplined way, which will put -- switching to the price -- we already see pricing, and you've already heard about what customers are asking in terms of pricing.

It might not just be in Valves & Controls.

One of the things that FX does is if you're -- the example I used in -- which was a surprise, but it won't be a surprise next time -- in terms of the transactional impact of FX.

That was an impact in our Technical Solutions business.

Technical Solutions really did pretty well in the quarter but we had a few surprises, that being one.

That was a Canadian dollar transaction and a US dollar cost, and that hits price.

And as non-US competitors start using their change in cost advantage, price advantage, we expect a challenging price environment in more than just Valves & Controls.

So when you think about -- does total price for Pentair go negative in the second half of this year?

Yes, we do think it goes slightly negative.

In some of our distribution business we still would expect to gain our normal price increases, and we have put those through and they have been accepted.

But we would expect any project -- and certainly areas where we got to bid on a cost to deprice negative in the back half of the year, correct.

Now, one thing, we have good material productivity, and right now that's hung up on the balance sheets.

So we will get more productivity as we go through the year, too, which will help offset some of that price.

But we think it's a more cautious plan to assume we're going to see a tougher pricing environment.

And then I think you said in Valves & Controls next year, just kind of at a high level, 100 to 200 basis points is not out of the question.

As we move through the quarter here and see what you are seeing on your dashboard, is that now maybe a little bit too aggressive?

Could we see more -- we just haven't lucked out with these price declines in a long time in any of the markets we cover, so the magnitude is always kind of tough.

Could it be worse than that, do you think, in 2016?

I don't know, Steve.

To address the previous question, we're getting after the cost in an aggressive way to continue to be competitive.

So we're anticipating a tougher environment on the quotes, and we've got to have more cost competitiveness.

And so we are looking to our suppliers to participate as we are being asked to participate.

And we are also looking at our own cost structure and trying to be more competitive within that cost structure.

So, the goal here is to continue to improve margins even with the decline of the revenue, and we're going to have to be very aggressive to accomplish that.

Okay, one last quick question on free cash flow.

What's the key lever to ramp that cash flow throughout the year?

What's the one or two things that you are really looking at to play out?

Because it's a little bit weaker than expected in the first-quarter.

Yes.

It's rightsizing the inventory and our working capital levels.

Yes, basically we were laying in working capital and inventories to support a higher sales level.

And clearly that needs to be corrected, and we know how.

Okay, so that's a negative for margins going forward then?

Potentially, but that's baked in.

Okay, great.

Thank you.

Thanks a lot.

Steven Winoker, Bernstein.

I want to stick on the pricing and margins theme for a minute.

We're entering this environment, you've had significant material deflation and I think is a tailwind, as well as pricing up until now has been helpful.

Now those are both going against you.

And my question is, given that you don't know how long this will last, the restructuring that you've already taken, and that is going to be fairly aggressive here, how much more can you do there?

Because there seems to be some risk to the margin opportunity going forward.

Yes, Steve, I do want to be -- I want to clarify something.

I think we expect -- we have done really well on material productivity.

We expect material productivity to do even better going forward.

Right.

We can see that in what we call deferred productivity, or as Randy said, what was done in Q1, but is hung up on the balance sheet and will work its way in a positive way throughout the rest of the year.

We're continuing to partner with our suppliers to anticipate these potential pricing headwinds, and the pricing is an anticipated pricing; it's not yet realized.

So we're expecting that the environment is going to be tougher, and we're managing it appropriately, is what I want you to take away.

In addition, we're saying if it continues to get more competitive, we have to be more competitive; and, therefore, the other actions that we're taking to make sure that long-term our margins are still very high.

On the comment about concerned about cost cuts getting into growth, we are very cautious about touching our growth resources.

But what we are doing is -- I am personally redoubling my efforts with our platform leaders and our presidents to make sure that those investments we made are paying off.

Because, frankly, I didn't see enough readout of some of them in the first-quarter.

Okay.

And I think this also leads into the broader question on M&A that you put out there, which is clearly you are on the hunt for attractive M&A at this point in the current environment.

But how are you thinking about that as well, given all the pressures that you are seeing yourself?

What makes an attractive acquisition given the weakness that you are seeing out there?

One thing is that given how difficult and uncertain things are sometimes, opportunities become available that weren't available before.

So it's actually a good time to be looking.

But to your specific question -- how are we sure that we're ready?

That's one of the reasons I put in the comments I did in the prepared remarks on the small acquisition we just made.

This is a good example, our Thermal Building Solutions business is a growth business.

We have some great innovations there and had a great year in growth last year.

We expect them to have a great year of growth this year.

This business bolt-on has augmented our offering, gives us more to put through our distribution channel.

So it fit those five questions.

It fit our strategy well; so our strategy to drive growth, profitable growth, it fit it well.

The financials made sense.

We were able to do that deal with a comfortable set of financials that we know we can execute.

We were the right buyer.

We had the best fit, that's why the financials were the best.

And the last two things, we don't do a deal unless, one, we understand how we're going to integrate it into the Company; and then, two, we know who's going to be in charge of the integration, and we trust them to execute it well.

And so we're going to keep to that discipline and make sure -- we might start at the bottom and say which businesses are ready, which businesses are both strategically ready and capacity ready.

And we always do that, but I think you should all count on us to continue to do that, put that first.

And is the Australia process on track, the divestitures?

Yes.

Yes.

Okay.

All right, thanks.

Scott Graham, Jefferies.

I'm sorry to beat the old dead horse here, but if we could just go to slide 13, where we have the forecast for organic by vertical.

The Energy number has only really been taken down 1 point versus two months ago.

And we're talking about more concerns about pricing and moving into midstream and downstream, which I think many of us did expect that.

But, nevertheless, I'm just wondering why we're only down 1 point incrementally from the two-months-ago guidance, particularly given the order scenario that was laid out on an earlier slide.

Yes, it's a fair question.

Thanks for asking it.

I think there's a couple of things and a couple of factors in here.

While Valves & Controls is experiencing more a challenging energy environment, we're also experiencing some key wins in Technical Solutions, primarily around Industrial Heat Tracing.

So these are downstream and later projects that are productivity related, and we're starting to see a pickup in that area.

So we do have a mix of where the projects are coming through our typical businesses; but, all-in, we have backlogs, and those backlogs give us confidence that this is now the appropriate number that will ship this year.

We also don't think that the MRO decline we saw in the first quarter -- the short cycle MRO decline is going to be as acute as it was in the third-quarter -- I mean, as it was in the first-quarter.

I got it.

Thank you.

And my follow-up would essentially be on the share repurchase.

So, I know we're back into the M&A hunt mode and all of that, which is great, I think.

What I'm wondering, though, is that why would we wait on share repurchases, given this environment?

You say if you don't find anything then you'll buy shares; I guess that was implied for the second half of the year.

You have a ton of balance sheet capacity.

Why would we wait for that?

We feel optimistic.

And we've been working for a fair amount of time, as Randy said, we have what we call platforms or businesses underneath the four segments that are high-performing, both in revenue and also on the operating side.

And we want to continue to feed the core, and we had enough in the pipeline that would give us the feeling that we're going to execute on some of those throughout the year.

If, in fact, we don't feel that those are going to come through and we're not going to execute, clearly we would take a look again at share repurchases.

Right.

We can only use the powder once.

So if we can't use it on M&A, then we'll have it for that.

But if we use it for that, then we won't have it for M&A.

All right, fair enough.

Thank you.

Shannon O'Callaghan, UBS.

Can you give a little more color on the geographic differences in Valves & Controls?

You mentioned the fast growth regions were getting hit the worst.

Maybe a little more specific countries or types of projects you are seeing on there.

And then in terms of North America being the only piece up, was that basically just LNG being the area of strength?

Or was there more positive in North America beyond that?

Starting with that, North America was strong in Process and Industrial, as well; stronger, but LNG was a nice pickup.

We've had a particular focus on North America and we've actually invested in coverage there.

And I think that actually helped.

In Valves & Controls, a few years ago when we first got into it, it looked like our coverage and our share in North America was weaker than it was in other areas.

So that's an investment that I think has actually paid off a little bit.

It's obviously obfuscated somewhat by the overall trends.

But on the fast growth side, both China and Brazil were down significant double-digits in the quarter.

And Brazil, I guess, isn't that surprising.

China was more surprising than we expected, and that was in chemicals as well as Oil & Gas, I mean in Industrial.

Okay.

And then just a follow-up on this global capital strike point.

As you made sense of this over the first-quarter and talked to your customers, what are they most cautious about or uncertain about that's driving the decision-making?

Is there one macro concern that is particularly weighing on people, or one or two things you tend to hear?

Well, I think the Oil & Gas industry is one of the biggest drivers of capital spending in the world.

And I think it's the uncertainty around the knock-on effect.

I think there's a high degree of caution and uncertainty about it.

Well, there are projects that are getting delayed and won't get done, but just concern about what that all means.

We believe that is a factor, and that's why we think destocking -- when we see it in the Industrial space where we're exclusive with distributors, we're pretty confident that there is a destocking effect going on.

But we have also seen delays, not just in Oil & Gas.

We've seen continued delays and deferrals in Power.

And I think that has more to do with the general need for electricity and the fact that the economy generally is just sputtering along in the world, and electricity needs grow with the economy.

We've had a lot of power projects that are just delayed, delayed, delayed.

And, in fact, the percent delays in the first-quarter in Power were -- in the projects that we track -- the percent delays were as high as they were in Oil & Gas.

Wow, okay.

Great, thanks a lot.

I would just add to that.

I think all the investments have to be considered now, and the fact of -- where are the cost basis?

And a while ago, you wouldn't have thought of investing in Europe, and look at the new competitive nature of how the European factories on a global basis are competitive again.

And all of that gives pause to people, to say, where do I put my investment and what is my likely return going to be?

So I think there's a lot of uncertainty out there that needs to be worked through.

I think we feel still good that energy, long-term, is a great investment cycle and we're going to see that rebound.

And we also think the industrial cycle, long-term, will rebound.

We're just not planning for it in 2015.

Got it.

Great.

Thanks, guys.

Appreciate it.

Nathan Jones, Stifel.

There's been a lot of talk about the pricing pressure that you guys are feeling and are planning on feeling.

Can you discuss a little bit more where the opportunities are for you to put pressure on your suppliers in terms of pricing to participate in the pain, if you will?

Yes, I think clearly the global commodity prices are not increasing.

And as Randy mentioned, we don't want to use the word deflation yet, but it feels like we're heading a little bit more into a deflationary environment.

So we put our main suppliers on notice that we all have to work competitively to reduce our cost structures.

And certainly in the long cycle businesses, you usually participate in the quotes going in, and asking everybody to participate with you.

So we have in our supply base, primarily in those long cycle businesses, that we certainly put on notice early.

We tell them where we are in the quoting cycle, and they are prepared.

They are reading the same headlines we all are, and they know it's coming.

So we just all have to be more productive, and we all have to participate to win the orders.

So, a couple things, if I just could add to that.

The decline in oil prices has led to some good declines in prices in resins, where we want to make sure that we are getting the benefit of that.

The change in FX means if, say, we were buying something in dollars today, if we can get it from a supplier who is making them in euros or the Canadian dollar, that that can be a transactional benefit to us.

So, those are the kind of things that we have been working.

As we said, because of -- as that productivity gets deferred through the balance sheet until they ship it.

So, we actually feel pretty good about our material productivity.

We feel good about the actions that our team is taking, even beyond what they've already booked into the balance sheet.

Nathan, I think -- just to finalize this question -- I don't think this is unique to us, and that's my point.

I think the industry in itself is going to go through it together.

And so we're all going to be dealing with the same dynamics.

And I think we are prepared for it, and we're anticipating to be prepared for it, and we're making sure that all our partners are prepared for it.

Okay.

And then my follow-up, you talked about increasing pricing pressure in valves; you talked about the Residential & Commercial part of Flow & Filtration, thinking you saw a greater-than-market decline due to holding price.

Can you talk about where the decision -- or how you think about the decision to hold the price and lose share versus cut price to protect share in various parts of the business?

Yes, to clarify on the point about where we are being very disciplined, that's in water; that's in large pumps, infrastructure, large infrastructure pumps.

It wasn't -- I might have had it blended together with the sentence before it that says Residential & Commercial.

But just to clarify, that comment was about basically our large, engineered flow pumps.

And they had lost some discipline on pricing, we felt took some things at lower margins, so we've changed that and we have more discipline now.

We make those products in Europe.

Those are more competitive.

We make those products in North America and in Mexico -- well, Mexico is good; North America is less competitive.

So we're trying to keep pricing disciplines that reflect our margin goals, but also where we make things in that Infrastructure space.

On the Residential & Commercial side, I would say we haven't really seen pricing pressure.

We feel pretty good about that.

In some of the areas that we are weaker in residential are not in North America.

They are Europe and the Middle East, but we think Europe is actually showing some signs of life in Residential & Commercial.

We didn't see it clearly in the first-quarter, but we saw some promising signs.

So I'd say the pricing is really more of a concern in Energy and in Industrial, not in Residential & Commercial.

Okay.

Thanks very much.

Jeff Hammond, KeyBanc Capital Markets.

I'm all set, guys.

My questions have been answered.

Brian Konigsberg, Vertical Research Partners.

A couple more on Valves & Controls.

Just when it comes to the MRO and the slowing that you noted, are you seeing any of the customer base trying to in-source that service component to try to save costs?

Or is that not economically beneficial for the customer (multiple speakers)?

Brian, I don't think we've -- we haven't seen any kind of trend in that regard at all, because ours is mostly replacement and parts.

There is some service; they can in-source service.

But on the replacement, which is replacing whole valves or servicing existing valves -- or the parts for service valves -- they have to come back to us.

And our service revenue was not the issue.

It was the parts and replacement valves that was down.

Okay, that makes sense.

And also just on the pricing front, are you seeing repricing of existing backlog?

Or is it the pricing pressure really on the new bids that you are pursuing?

New bids only.

New bids only, okay.

And then lastly, are you seeing any trends where, for larger projects, you are seeing the customer base or potentially even the E&Cs substitute -- start to substitute maybe some of the domestic, higher-quality suppliers of Valves & Controls with -- maybe in some of the non-critical applications, with some of the lower cost and potentially lower quality suppliers, potentially out of Asia?

We had seen that even before the decline in oil prices.

We saw some more uses on particularly on with close of the commodity product -- the more commodity products.

And we expect that particularly where companies go to the EPCs for fixed bids.

The EPCs have, for some time, used that as a focus to try to drive profit into their books.

That doesn't always pay off in the long-term if the valves don't work.

But we've seen that in the Middle East; we've seen that in Asia for a long time.

And we expect that will just continue.

That's it for me.

Thank you.

Brian Drab, William Blair.

You talked about the $100 million in cost cuts and the timing of that, and that we're going to see it more likely in Valves & Controls and Flow & Filtration.

But I'm just having -- I don't know how much color you can give.

But I'm having trouble figuring out where do you find that much in cost-cutting when you were so successful in developing cost synergies, and attacking that after the merger?

If there's any more detail around the types of moves you can make, that would be helpful.

Yes, I think the discipline is, we forecast where we're going to be in organic growth.

And we certainly look at rightsizing labor and the variable costs associated with what those declines will be.

And then we also take a look at our fixed cost structures and our plans on where we want to be on standardization, and we accelerate those based upon where we are on our ratios.

When you are declining, you've got to hold margin.

And to hold margin, you've got to take your costs out at the rate of sales, and then some.

So again, we have over $6.5 billion as a Company in sales.

And when you take a look at this as a percentage of the overall costs, we're still relatively modest as far as the cost take-out and the percentage of costs.

And we've been pretty clear that the more we saw on the standardization front, the more opportunities we actually saw in front of it.

And the way we look at it is we benchmark against the best.

You can look at our businesses and you can see two of our GBUs that do not have margins close to the best of their peers.

And that would be our Flow & Filtration Solutions GBU and our Valves & Controls GBU.

So these are not plans that we invent in the moment.

These are long-range plans that we have accelerated.

We have ambitions to get the Valves & Controls business to be the best among the best in margins.

So that's a roadmap that we've contemplated for some time.

It's just a matter of, in this environment, do you accelerate it?

And we've done that before.

Right.

What's the long-term target there, Randy, for that business, if you could remind me?

Well, we've talked in Valves & Controls -- I don't want people to think I'm hallucinating, given the first quarter we just had.

Our Valves & Controls was well above 15% margins.

We got it to 14.5%, with lots more opportunity.

So, we've talked about a number well North of 15%, but I don't want to give that again, because I think it might lack credibility right now.

Understood.

And then, John, what percentage of your cash is abroad versus in the US today?

Well, I mean (multiple speakers) keep in mind, we report outside the United States, so it's not as relevant.

But we have roughly $100 million of cash that we hold at any given time, under $150 million, and most of that is international or outside the US.

Okay.

Thanks.

Christopher Glynn, Oppenheimer.

So, you made an effort to ring fence the price pressure dynamic.

How do you feel about that exercise of being able to ring fence it in the guidance?

Chris, I would say again, we don't think it's going to be unique to us, and we think we're in the forward-looking piece of it.

And I think if you are in these industries and spaces and you're not anticipating it, I think it's going to be a challenge later.

And so, we feel like we have pushed the business to accept the reality of where we are, and to get on with the solutions that would be required to still maintain competitiveness and make the margins that we expect within that environment.

We're hopeful we're wrong.

But I think the worst case is if we're wrong, we feel like there's upside to it.

I wouldn't want to be anticipating it not coming, and then have to rely on the back half of the year to take the cost out.

So I think the fact that we're dealing with it now and rightsizing where we think the businesses are, I think is going to put us in a much better position for 2015 and 2016.

Fair enough.

And then just quickly the MRO side, I think that pressure would be more concentrated in the first quarter.

Can you just elaborate briefly on that?

Well, most MRO is maintenance-related.

You can defer maintenance for a little while, but you can't defer it forever.

These are industries that care a lot about safety, so we believe that the MRO side is one that should be at least zero.

And it wasn't; it was negative.

And it has been positive right up until the first-quarter.

So that's why I view it as the same thing as destocking and distribution; it can't go on forever.

Right, makes sense.

Okay, thanks.

Josh Pokrzywinski, Buckingham Research.

Just back on that comment on MRO, Randy, if you could help me out on a Valves & Controls.

It looks like first half to second half, there's about maybe a 500, 600 basis point acceleration in core growth.

Actually, it looks like the comp gets a little tougher.

So maybe from your earlier comment -- Jim and I can follow up off-line on the math there -- but how much of that acceleration would you call MRO normalizing, versus some of the visibility you have in the backlog?

Just trying to dimension out some of the drivers there.

Yes, I think it's rightsizing the shippable backlog and timing that out.

I think there's the most certainty, certainly as you move into Q2, Q3, and Q4 of what that backlog produces.

We're not expecting a significant order rate in the back half of the year to be helping our revenues this year.

And we think you can't -- unless you are going to cancel the job, you can't push these projects out for a while.

And some of these are so far along that we're pretty confident they're going to ship; it's just a matter of the timing of when they're going to ship.

Clearly we're taking a look at a current run rate.

And you can look at the current run rates that we're seeing in Q1 and Q2, and then take a look at the seasonality bumps that we normally see.

And we're not expecting those seasonality bumps that usually happen in Q3 and Q4, as the full-year capital projects finish out, to be consistent with where they were in prior years.

Okay.

And if you had to think about it, backlog visibility versus MRO normalization -- half-and-half?

60/40?

We're probably most confident about the MRO, which in any given year is, call it, $1 billion of the business.

And we feel like that's within a deviation.

It is certainly going to be close to right around where it was last year, if not slightly better, on a core basis.

And then the projects are coming out of the shippable backlog from that shipment timing.

Got you.

All right.

Thanks, John.

All right.

Thank you all.

All right, thank you.

And Jody, if you could give the replay number.

Thank you for participating in today's earnings conference call.

This call will be available for replay beginning at 11 o'clock a Central Time today, April 21, 2015, through midnight on May 29, 2015.

The conference ID number for the replay is 22709435.

The number to dial for the replay is 855-859-2056.

And this concludes today's conference call.

You may now disconnect.