濱特爾 (PNR) 2016 Q4 法說會逐字稿

Good morning, my name is Matthew and I will be your conference operator today.

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

(Operator Instructions).

Thank you.

Jim Lucas, Vice President of Investor Relations and Strategic Planning, you may begin your conference.

Thanks, Matthew.

And welcome to Pentair's fourth-quarter 2016 earnings conference call.

We are glad you can join us.

I am Jim Lucas, Vice President of Investor Relations and Strategic Planning.

And 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 2016 performance as well as our first-quarter and full-year 2017 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 Investors 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 in order to ensure everyone an opportunity to ask their questions.

I will now turn the call over to Randy.

Thanks, Jim.

2016 was an historic year for Pentair as we marked our 50th anniversary as a Company.

The year was memorable for many other reasons, but unfortunately the challenges with the Energy and Industrial markets made for memories that we are looking forward to putting in the rearview mirror.

We were disappointed to have to lower our fourth-quarter guidance, but we delivered against the revised expectations.

When looking at 2016 on a full-year basis we did have some good memories to point to.

Including ERICO sales grew 6%, segment income was up 11% and adjusted EPS grew 8%.

And we had a very good free cash flow year with a 109% conversion of adjusted net income.

Now on a core basis sales were down 1% and segment income was up slightly, which was in line with results from other Industrials.

Water Quality Systems was the strong performer for us once again.

We have improvements to make in Flow & Filtration Solutions and Technical Solutions, and those improvements are underway.

As we change the structure to be simpler and more streamlined post Valves & Controls we are moving from three segments to two.

We are combining the former Water Quality Systems and Flow & Filtration Solutions into one Water segment as this will allow us to better execute our Water strategy and lead to more predictable long-term growth.

As an update, we believe the sales of our Valves & Controls business remains on track for close in early 2017.

We continue to make good progress on aligning our cost structure with the reality of a slower growth world as well as repositioning the Company with the divestiture of Valves & Controls.

Finally, we are introducing formal 2017 adjusted EPS guidance of $3.45 to $3.55, which represents 15% growth at the midpoint of the range.

This guidance assumes the sale of Valves & Controls closes by the end of the first quarter of 2017.

John will walk through the guidance in more detail later in the call.

Now let's turn to slide 5 for a discussion of our full-year 2016 results.

For 2016 total sales grew 6% with core sales declining 1%.

As I mentioned previously, segment income grew 11% and operating margins expanded 80 basis points.

Adjusted EPS grew 8%.

We are most pleased with our robust cash flow performance after being somewhat disappointed on this important metric last year.

In 2016 we generated free cash flow from continuing operations of $609 million which represent a 109% conversion to adjusted net income.

Total free cash flow, including discontinued operations, was $770 million.

Overall, despite the top-line challenges in 2016, we were pleased with our income, margin and cash flow performance during this year of change.

Now let's turn to slide 6 for details on Pentair's Q4 2016 performance.

As we foreshadowed in October, we knew the fourth quarter would have its share of challenges.

As expected we saw many distributors in our short cycle business take a pause on ordering in the quarter, particularly in October.

We saw trends start to stabilize in December and order rates overall improved as we exited the quarter.

Core sales for the fourth quarter were down 7%.

We had 6 percentage point impact from four fewer selling days.

We knew this was going to occur, so it's important to point out that we do not see the fourth-quarter growth rates as a trend because of this impact.

We made good progress during the quarter in executing our cost out initiatives and we expect them to begin reading out as the new year unfolds.

Now let's turn to slide 7 for a look at Water Quality Systems' performance in Q4.

Water Quality Systems reported core sales growth of 2% or up 8% when excluding the impact of fewer selling days.

Aquatic & Environmental Systems led the way with nearly double-digit core sales growth on the same basis.

The Aquatics business delivered growth against a very tough comparison and continues to make good progress in adding new dealers and introducing a steady stream of new products.

The Water Filtration business was down modestly when excluding the impact of fewer selling days.

The Residential side of Water Filtration was focused on reducing complexity during the year with a renewed focus on its go-to-market strategy to improve growth, which was somewhat muted for the full year.

On the Foodservice side of the business we saw a broad-based pause globally in new installations, particularly internationally.

We were, however, encouraged to see an improvement in orders in the fourth quarter.

Now let's move to slide 8 for a look out Flow & Filtration Solutions' performance in Q4.

With Flow & Filtration Solutions we have been focused on reducing complexity and driving margin improvement.

We made some progress in 2016 and we see some signs of stabilization and improvement in areas like agriculture and North American Infrastructure.

For the Water Technologies business fourth-quarter core sales, excluding the impact of fewer selling days, declined 7%.

The business faced a number of challenges in the quarter as Commercial and international orders slowed along with continued declines in irrigation.

This was further exacerbated at the end of the year as distributors slowed their orders.

Core sales for Fluid Solutions grew in the quarter adjusting for the fewer selling days.

The Precision Spray business grew for the second consecutive in a soft agriculture market.

This business has consistently demonstrated its ability to deliver differentiated growth through geographic expansion and expanding its customer base.

On the Beverage side of the business we saw strong orders in both beer membrane filtration and biogas.

Finally, Process Filtration once again faced a challenging comparison and core sales were down, in line with expectations.

But encouragingly we saw orders increase for the second consecutive quarter.

Now let's turn to slide 9 to discuss how Technical Solutions performed in the fourth quarter.

Technical Solutions is the remaining segment with the broadest exposure to Energy and Industrial and not surprisingly faced a number of challenges in 2016.

For the fourth quarter our Enclosures core sales were down modestly, excluding the impact from the fewer selling days, as we saw a number of telecom order deferrals.

But we were encouraged with future improvements of the daily order rate and short cycle North American Industrial orders.

Thermal Management faced two challenges in the fourth quarter: the end of three large jobs in the Canadian oil sands and for the third consecutive year deferrals and short cycle MRO sales; in Engineered Fastening Solutions, which represents our 2015 ERICO acquisition, the impact of the fewer selling days and the slow start to the quarter with sales in the short cycle distribution side of the business.

On the Commercial side of the business we saw distributors pause activity in October, but orders returned to more normalized levels in December and exited the year on a positive note.

On the Infrastructure side of the business we continue to see several jobs deferred but signs are pointing to potential improvement in 2017.

Now let's turn to slide 10 to discuss the purpose of our organizational change.

With the pending sale of Valves & Controls, we looked at the organization holistically to address stranded costs and simplification.

As we continue our journey to become a more predictable organization we are combining our two Water businesses into one Water segment.

Our Technical Solutions business is being renamed the more appropriate Electrical segment.

PIMS has been the cornerstone of how we do business for over 15 years and will continue to be the common thread that links the entire organization.

As we move from three segments to two and from eight strategic business groups to six, we expect to be able to streamline our cost structure.

Finally, we believe a leaner, more nimble organizational structure will help us deliver -- develop our talent pipeline better.

There will be more line of site to growth opportunities and clarity on investment priorities.

Now let's turn to slide 11 to look at the streamlined segment overview.

This slide provides a snapshot of our two segments and six strategic business groups.

In the appendix of today's document we have included the past eight quarters' historical data as well as a description of each business to help you understand the combined Water segment as well as the renamed Electrical segment.

As you can see, we have two sizable businesses with strong returns.

Our Water segment generated $2.8 billion of sales in 2016 with a return on sales of 18%.

We are one of the largest players in Water and we expect combining what was previously two businesses will help improve collaboration and focus our Water strategy more clearly.

We have three businesses in Water with scale.

First, a nearly $1 billion Filtration & Process business that we believe is well-positioned in Residential, Commercial and Industrial applications.

Second, Flow Technologies is also nearly $1 billion in size where we have a broad pump portfolio positioned in agriculture, Infrastructure and Residential and Commercial applications.

Finally, we have a very successful $900 million Aquatic & Environmental Systems business that continues to fire on all cylinders.

Our Electrical segment is just over $2 billion and is one of the most profitable businesses in its space with a return on sales of 21%.

All three businesses are well-positioned.

Our $900 million Enclosures business is a leader in the North American electrical distribution channel and also has a good electronics business serving global markets.

Our $700 million Thermal Management business is a world leader in electric heat tracing with strong offering in Industrial, Energy and Residential and Commercial applications.

Finally we believe our $500 million Electrical & Fastening Solutions business, which most of you as our ERICO acquisition, is very well-positioned in Commercial, Industrial and Infrastructure applications.

These two segments are already nicely profitable and focused on prioritizing the best opportunities to grow more consistently.

Now let's turn to slide 12 to discuss how we plan to improve Pentair's performance longer-term.

Pentair has gone through a variety of changes throughout its 50 years and we believe the Pentair that is entering 2017 is well-positioned to optimize opportunities across the organization to get back to creating shareholder value.

Pentair has done a lot of things right through the years with some years more successful than others.

As we simplify and streamline the organization we are recommitting to drive the right priorities focused on the right opportunities to make Pentair grow again.

As we move from three to two segments we believe it will allow us to deploy expertise to drive performance more effectively and lead with our PIMS processes in lean, growth and talent.

The smaller senior management team, including both segment leaders, will all be driven to optimize Pentair's performance, not just individual businesses or segments.

We are functionalizing G&A to optimize efficiency across the enterprise and further improve cost.

One thing you may have noticed is a new name and a new role within the senior leadership team.

John Jacko has joined us as our new Chief Marketing Officer.

While Pentair has made good progress through the years with lean as the cornerstone of PIMS, our track record on growth has been spotty at best.

Some of our businesses, such as Aquatics, have built a predictable model of growth and we need to enter that the same discipline across the entire enterprise.

We have identified Commercial excellence as a breakthrough process and John Jacko brings a richness of capability and experience that will help us strengthen these competencies.

This includes richer insights into our markets and better growth strategies.

It also includes product line management, sales deployment, sales compensation and maybe most importantly marketing.

We believe adding a senior growth leader coupled with two aligned segment presidents will allow us to further improve our growth outcomes.

As a focused team we will work more effectively to optimize our performance, drive more consistency and deliver on our commitments.

I will now turn the call over to John to discuss our first-quarter and full-year 2007 outlook.

Thank you, Randy.

Please turn to slide number 13 titled Full Year 2017 Pentair Outlook.

As Randy mentioned, for the full year 2017 we are expecting overall Pentair EPS to be around $3.45 to $3.55 on an adjusted basis.

This guidance assumes the sale of Valves & Controls closes by the end of the first quarter of 2017.

We expect to achieve this guidance on core revenue of down 3% and margin expansion of 120 basis points driven by simplifying the organization and the resulting cost out from those efforts.

Please turn to slide 14 labeled 2017 Forecasted Revenue.

Slide 14 walks our revenue from the reported $4.89 billion of revenue in 2016 to our expected revenue of approximately $4.7 billion inclusive of the large jobs and foreign exchange headwinds.

Starting on the left, we expect volume, inclusive of one dairy job in Water and three large oil sands jobs in Electrical, to impact revenue by about 4 points.

Excluding the impact of the large jobs we are expecting volume to be down around 2 points.

We are anticipating 1 point of favorable pricing and about 1 point from tuck-in acquisitions already completed.

These two acquisitions consist of a small tuck-in to our Electrical & Fastening Solutions strategic business group and a biogas recovery acquisition in the Filtration & Process SBG.

So, exceeding the impact of the year-over-year currency, we expect revenue to be down around 2%.

Inclusive of another $75 million of revenue headwind at around $1.05 to the euro, we expect overall reported 2017 revenue to be down around 3% versus 2016.

Please turn to slide 15 labeled 2017 Forecasted Segment Income.

On slide 15 we are walking 2016 reported segment income to expected 2017 segment income.

Starting with 2016 we expect about $20 million of total headwind of the net of volume growth, $8 million from the acquisitions, price and large jobs.

We expect $135 million of gross cost out from both material and labor and we expect to generate $60 million in net benefit after the impact of about 2% of inflation in material and wages.

This drives about a 5% segment income growth year-over-year versus 2016.

After the impact of about $10 million of FX we are at $870 million of segment income at the midpoint, which is up about 4% year over year on a reported basis.

Please turn to slide 16 labeled 2017 Forecasted Adjusted EPS Walk.

Slide 16 walks EPS from 2016 to 2017.

Starting from the left you see there is about $0.15 of headwind from the large jobs in FX and about $0.30 or a 10% expansion from net cost out in growth and price.

Another 10% or about $0.30 comes from the expected closure of Valves & Controls by the end of the first quarter and the resulting three quarters of interest benefit from paying down the debt, or about $0.09 to $0.10 per quarter.

This takes us to our $0.50 at the midpoint or up about 15% versus the $3.05 in 2016.

Please turn to slide 17 labeled Anticipated 2017 Sales and Income Seasonality.

Slide 17 shows the expected 2017 seasonality of our revenue, segment income and EPS versus 2016.

You can see that revenue and segment income are in line with contribution percentages in 2016.

The only difference is EPS, which is skewed by the interest benefit in Q2 through Q4 and no contribution of this interest savings in Q1.

Excluding the interest operational EPS would be in line with 2016.

Please turn to slide 18 labeled Q1 2017 Pentair Outlook.

Slide 18 shows you our expected earnings per share estimates for Q1 of about $0.61, which is flat with the comparable period one year ago.

You can see that we expect core sales to be down around 4 points or down 1 point excluding the impact of large jobs.

We expect ROS expansion of 20 basis points driven by the headwinds from the large jobs and the fact that we are yet to receive the full run rate benefits of the cost take out which we are expecting in Q2 through Q4.

Overall adjusted EPS for Q1 is anticipated to be flat year over year.

We are expecting our tax rate should be 20%, which is consistent with 2016.

We expect net interest expense of $35 million as we will not yet have any debt pay down benefit.

Finally, we expect shares to be a little higher at 184 million, which does not yet reflect any benefit of the approximately $100 million in buyback that we anticipate to benefit us in Q2 through Q4.

As a reminder, cash flow in Q1 is usually a usage given our normal seasonality of cash flows.

Please turn to slide 19 labeled Balance Sheet and Cash Flow.

My final slide shares with you our current balance sheet and cash flow performance.

As Randy mentioned, we had another strong year of cash flow at $609 million or 109% of adjusted net income for our continuing operations businesses.

You can see our debt levels before our anticipated net proceeds from our Valves & Controls divestiture.

We expect to use the proceeds to immediately reduce our debt levels.

I would now like to turn the call over to the operator for Q&A after which Randy will have a few closing remarks.

Matthew, please open the line for questions.

Thank you.

(Operator Instructions).

Steve Tusa, JPMorgan.

Can you just walk through the $135 million in productivity savings for next year?

It is a pretty significant bump up.

What is the visibility around that?

Yes, so, good visibility first of all Steve.

I mean the simplification of the organization is driving a tremendous amount of opportunity to take incremental cost out.

But if you think about it, we are expecting to get $59 million or $60 million of material productivity against an inflation number of $45 million to $46 million.

So we are starting to be squeezed a little bit on the benefit and material productivity versus inflation.

But we expect our net cost out actions from the people cost minus any delta on inflation and/or compensation to yield us close to $45 million on a net basis.

Okay, that makes sense.

And then on just the interest expense, the run rate exiting the year is definitely lower than what we were expecting.

Are you guys paying -- is the refi of the debt kind of in line with what you guys have talked about previously?

Or is there more debt pay down?

Anything changed on that front?

Yes, it is just as we collected cash in the quarter we trickled down the debt a little bit, Steve.

And so, we expect to be maybe slightly lower in Q1 and then we will see the significant benefits in Q2, Q3 and Q4.

Okay, great.

Thanks a lot.

Deane Dray, RBC.

Maybe just start with the 4Q tone of business.

One of the things you talked about heading into the quarter was don't expect any sort of normal seasonality, no budget flush and kind of see more of the same deferrals of MRO and so forth.

So how did it play out from a broad level in terms of what you would typically see in a 4Q?

Across a number of the businesses, as I mentioned in the prepared script, October was soft and then we saw a return to more normal levels.

Except in a couple of different segments where basically distributors weren't remotely close to getting rebates so they were particularly slow.

The deferral in Thermal is not surprising given that, while people are optimistic about Energy, it has not really improved the spending particularly in the larger companies.

But I would say that rates are stable and we're not assuming a bounce back in our forecast on 2017 until we see something.

So that is how -- I guess that's -- I don't know if would add on?

Okay.

And then in the change to the core revenue outlook, previously minus 2 to positive 2, you now at minus 3. You discussed at a high level the impact of the jobs.

So maybe just kind of next layer of detail, how did this play out in the quarter?

Have you ring fenced this in terms of its impact with regard to being at the lower -- below the low end to core revenues?

Yes, I mean I -- just to cut through it, I think our core revenue, if you exclude the projects, is down about 0.6%.

And let's round it to down 1%.

That is generally where we were this year.

And so, what Randy is saying is we don't see an improvement off of the run rates that we are at.

I think we are as optimistic as anyone that we will start to see some improvement in the Industrial spending and also some return to normal spending on the downstream MRO activities.

But right now our forecast does not assume any of that.

We have been head faked on it before, we are not going to again.

And just last question for me.

Conceptually going to one segment in Water, you have got these SBGs, so it is Filtration and Flow and Aquatics, but each of them has such a different growth potential, different end markets, different technologies.

Will we still get line of sight and clarity into the SBGs on a go-forward basis?

What you have margin targets within them?

Just kind of give some color there, please.

Of course we will.

What we see is more coherent strategy, particularly on much, much better coordination on the technology side between say the residential filtration all the way through to the process industry.

These are technologies that can be applied and much more seamlessly and we can flow resources to the best growth opportunities.

So, yes, we will have separate targets.

For example in Water Technologies, it is still a margin; we can improve margins there, that is the focus there.

And on the Filtration side it is driving growth -- like we already have good margins, we want to drive growth like we are getting in Aquatics

Thank you.

Steven Winoker, Bernstein.

Can we just start -- I guess I am about to lose visibility of Flow & Filtration margins with the re-segmentation.

So where do you see yourselves in terms of the margin improvement initiatives that are going on?

I can obviously see what happened in the quarter.

But it doesn't really probably tell the full story given what's 5% productivity versus price and all that.

Maybe just -- and price.

Can you talk about that a little bit?

Yes, I think one of the things that we want to do in Water is we want to make sure that we can rise up and invest appropriately across the entire Water space.

And when you subdivide into segments you lose that ability to generate the cash then deploy the cash back to the best growth opportunities.

And there are good growth opportunities in the old Flow & Filtration space.

At the same time there was margin needs and the need to get the complexity out of it, as Randy said, the pump side of the business where there has been significant competition globally in that space.

So, when we take a look at these margins, and when we get to Analyst Day we will certainly give you guys directionally where we are.

But the real opportunity here is to say how do we disproportionately invest in the longer term.

So these are all high-margin businesses, with Aquatics being the highest margin.

And Flow being the lowest margin.

But I think ultimately we think that they've all got 20% plus margin potential.

On the pricing side, we are getting a little bit more price and we expect to because of the commodity inflation that we are seeing.

And so, where we have the distribution-related businesses we are seeing that work its way into somewhere around the 1% range.

And then where we are in projects or we're against global competition, because of the challenges of the currency we are not getting any price and we are obviously taking a look at those jobs and making sure that we understand the currency impact in competing on that basis.

Okay, and on the reorganization, you talked about simplification and cost out as being one of the benefits of this.

But I didn't see any kind of restructuring built into the 2017 plan on that front.

Maybe some idea of how you are thinking about that?

Well, a lot of the cost we are taking out -- we had operating people at corporate in three segments.

It is basically the cost and the productivity that John talked about earlier.

That is the real benefit of it.

And we are taking out structure, which we believe is going to make -- is going to improve our focus and our ability to execute.

Yes and, Steven, it is about (multiple speakers) of total restructuring cost is the estimate and that would have been spanned over the last Q3, Q4 and into Q1 of 2017.

Okay, perfect.

And just lastly on ERICO, that was I think really hoped to stabilize the portfolio.

Here is a quarter where it was down 4% excluding day's impact on Engineered Fastening.

I know you talked about some of the dynamics there, but was this surprising to you or how do you think about that and the dynamics of that segment?

They really saw an acute softness in October and it recovered.

And we don't know whether we saw that in three separate businesses that were unrelated to each other.

So we think it was more channel softness that then firmed up again and there is more optimism now.

So, yes, we didn't expect that and we are back to where we thought we would be.

Okay, thanks.

Julian Mitchell, Credit Suisse.

Just a question, there is a lot of talk throughout the release of the large jobs impact and you also mentioned the sort of merits of predictable growth in your prepared remarks.

So should we assume that there has been or there is a potential change in focus underway away from bidding on a lot of large jobs activity?

And maybe give us some sense overall under your definition of large jobs, how much of that $4.9 billion sales base last year came from them?

Yes, so, good question.

I think when you take a look at the roughly $90 million to $100 million of job impact that we are expecting in Technical Solutions, which is now Electrical, that is all in Thermal.

And in fact we were actually up slightly in 2016 revenue versus 2015 and 2015 and 2014 were flat.

So we have run historically roughly this $100 million to $125 million through the pipeline of always having larger jobs.

With what has happened in the global oil and gas investment space, that landscape is clearly changing and I will let Randy talk to that.

Yes, I mean, we are excited to win those jobs even as the Energy markets turn down.

They had a longer tail.

Now that they have gone down there just aren't a lot of those large projects in a hostile environment.

It is basically cold environments is where the Thermal big projects are.

And there aren't as many developments there.

So we are not focused there, we are focused on making sure we get all of the MRO in Thermal we can.

And focusing on that more profitable -- that was one of the challenges in our margins in Technical Solutions was those project margins versus MRO.

And we want to -- we are more focused on driving the MRO.

So while the top line gets affected by the lack of projects, we don't think the bottom line is as affected.

Understood, thank you.

And then my follow-up would be around just the margin opportunities on the sort of two new segmentation bases.

Should we assume I guess that the Water margins expand in 2017 at a much faster rate than Electrical just because there is less of a large jobs impact?

And maybe talk a little bit about medium-term margin expansion across the two segments on the new basis.

Well, actually Electrical, we expect margins to snap back.

They went backwards in 2016 versus where they have been.

So what is the split?

Well, yes, I mean we are looking at the same general margin expansion in both the businesses is low hundreds of basis points expansion.

I think we get there two different ways.

I mean we have a little bit more growth contribution in the Water side.

And in the Electrical side we have the benefit, as Randy mentioned, between not having the margin squeeze of the projects and we also have a fair amount of cost take-out planned relative to the volume rightsizing.

As we go forward, I mean clearly the biggest margin opportunity is going to be in the Water side, certainly in the focused areas that Randy mentioned earlier.

And we are going to see the growth contribution in the Electrical as the markets begin to recover, generate some substantial drop through as our higher margin businesses already.

Great, thank you.

Shannon O'Callaghan, UBS.

So, just on the marketing hire, can you give a little more color on sort of why now and why create that new role now?

I mean it -- the growth challenge has sort of been something that's persisted for a while.

So why make the move now and what do you expect it to deliver?

Well, we have actually been working on the move for a while trying to find the right person that had experience and capability in marketing and had actually done it in Industrial.

So John has worked in a number of companies including Honeywell and Kennametal.

And his track record is very, very helpful.

So, he is going to work with our two presidents, Beth and Carl, and me, to make sure that we have deployed people in the right place and that we are driving stronger execution on the marketing programs of the Company.

Okay.

And then John, on the decisions around what to do with the proceeds from Valves & Controls, it looks like you are pretty much mostly delevering a little bit of buyback.

Can you just talk about the thought process of why you chose that route and then thoughts around re-levering and ideal leverage ratio?

Yes, I think first of all just introducing some modest buyback is important to us.

I mean taking care of the creep and also just making sure that we are consistently doing that on a basis.

So we are talking about $100 million, it is a modest amount.

And as far as paying the debt down, we expect that we will bring the debt levels down.

We have strong cash flow generation that can fund bolt-on acquisitions.

And if we need to borrow a little bit more we have got plenty of capacity to borrow under all of our current capacity lines to find the bolt-on or tuck-in acquisition path that we expect to embark upon.

Okay, thanks, guys.

Mike Halloran, Robert Baird.

So on the productivity side, just back to that, $135 million.

Can you just bucket out where that is coming from kind of highlighting what portion of that is stranded costs and where the opportunities sit, how that looks like?

And the other piece is obviously from the earlier comments Flow & Filtration remains a focus, but just a little more granularity.

Yes good question, Mike.

I mean I think we were focused on the stranded costs in the beginning.

But what we really are looking at is enterprise wide reduction.

So how do we get the best optimal finance costs across the entire organization?

How do we get the best HR costs across the organization.

So what we have done is taken a look, as Randy mentioned, and functionalized the G&A aspects to the corporate executives and we have driven about a 10% expectation reduction off of those.

And happy to say that we made good progress against those.

And embarrassed to say it was easy.

But I think we were doing a lot of cost to support the Valves & Controls organization, the global nature, and post Valves & Controls we have a much simpler organization to support.

So there is a huge opportunity there.

Other things -- we are moving 52 selling teams to six.

Obviously some big opportunity from a structure standpoint there.

So we didn't have at the SBG level the selling organizations, those exist today.

And so a ton of opportunity especially after -- in the non-scaled regions in the fast growth areas.

Same with marketing, same with technology, same with all of those structures.

So that gives you a little bit of an insight to, as Randy mentioned, the simplification of the organization structure.

But more importantly the accountability of the organization structure and the ability for us to have visibility to who is performing, who is not and then how to partner with them to achieve it.

Thanks, that is helpful.

And then just a clarification from earlier.

It sounds like you guys are saying no fundamental improvement from current run rate assumed in the 2017 guidance.

Do I have that right?

In other words pretty normal sequential pattern assumed through here, is that the thought process?

Yes.

As you look at the waterfall that John showed you don't see a lot of lift from growth.

And that is where we would expect higher execution in sales and any recovery of market would read out.

Great.

Appreciate the time, guys.

Take care.

John Walsh, Vertical Research.

So, I guess just going back to an earlier question Deane asked around the Q3 framework.

I mean clearly you would have had visibility into the projects back then.

We are hearing from other companies' kind of leverage in the Industrial world that things are getting better.

It does sound like things obviously got better for you through the quarter.

But are there any other kind of comments on why we are no longer looking at towards the high end of that or what would have to change to kind of get back to that framework?

I think in our original thought process and the framework we did see and expect a little uptick in some of the core markets.

And in this particular guidance range we are assuming that those don't occur.

We are hopeful, like everybody else, that they will; but right now in this guidance framework we are not assuming that they do.

Okay.

And then I guess a question about the new segmentation.

I guess thinking about it from a structural tax inefficiency way, is there any inefficiency from actually splitting Water and Electrical from a tax perspective?

Don't know.

Don't know.

Okay.

All right, well, thank you for the color.

Scott Graham, BMO Capital Markets.

Two questions.

One on organic sales, the little bit of lower guidance that you are putting out here today.

Is that -- I know you just indicated that you are no longer expecting an uptick.

But is part of the reduction maybe that you put pen to paper on these projects and said -- really kind of crystallized that for you in realizing that those are going to be non repeats?

Because that is a minus 2 for you.

Is that part of it as well?

Scott, I mean candidly I will share with you that a big piece of what we are trying to figure out on a longer-term basis is the impact of a stronger dollar globally and the global competition and how that affects our growth views.

And then there is a lot of global change that has occurred in the last three months -- a new presidential administration, there are some tax -- emerging tax strategies there but none of that has been identified, none of that has been decided.

So what is the impact on that going to be to Industrial investment?

And also, what is going to happen in Europe and are there going to be contra views to any decisions that our administration makes?

So we see a lot of uncertainty from an investment standpoint in the first half of the year that I don't think we have the ability to call.

So what we are forecasting is what happened in Q4 continued to exist until there is some type of change.

John, that is a really good answer, thank you.

Particularly the FX which I wish more companies would call out.

The other thing that I wanted to ask was about the impact of the organic decline vis-a-vis the $20 million worth of -- in the waterfall.

Is the $20 million enough or is there so much pricing or is the pricing component here enough where the minus $20 million kind of works?

I mean obviously you are assuming that that is what works.

But I guess with just a minus 3-ish organic the minus $20 million looks like it could be a little bit deeper.

Yes.

So the projects themselves didn't yield very much return, right, so they are usually quoted on more of a gross margin rate.

It is formally equal to a segment income or operating margin rate.

And we did have some overruns in some of those jobs that forced those down as we took you through in Q3 and Q4.

So the price is a big factor as you got about 1% price increase helps that drop through quite a bit.

Okay, that is great, thanks a lot.

Nigel Coe, Morgan Stanley.

Good color so far.

So it seems that from your comments that channel distributor ordering activity is weak in the first half of the quarter, a little bit of maybe some channel clearance.

Just the inference would be that December was stronger and therefore, given that I think you said, John, down [0.6%] core sales ex large projects ex days.

So therefore that metric, would that be a positive number in December?

Just think about the exit rate as we exit the year.

Are you talking about December 2016?

December 2016, so just thinking about once we cleared out the channel impact would we be back to growth in December?

Yes, a little bit, yes.

Okay, that is clear.

But you are assuming that the run rates for the quarter, not December?

No, I think we've got to take a look at the quarter itself as the run rate and we are carrying that forward --.

Less the days.

Less the days, yes.

Okay.

And then just back to the cost reductions.

Obviously it is a big part of the bridge.

How much of that -- just to be clear, I mean, how much of that target is driven by the formation of the Water segment, so going from two to one in that segmentation?

Yes, I would say we think that there is an opportunity somewhere in the $15 million to $20 million range regarding that.

Okay, okay.

And then just finally on the debt reduction, just to be clear.

So the vast, vast majority of the proceeds being used to take down debt.

Obviously that includes some of the higher cost debt.

Any sense yet on the breakage cost of doing that?

No.

But as -- clearly as the interest rate rises it does make the cost lower for Pentair.

So obviously looking at that every day.

But we have not given guidance on what that impact is yet.

Okay.

And then just one more if I may.

On the large projects, is the bulk of that washed through by the second half of the year?

Yes, there is about -- I would say through Q3 the bulk of it is worked through.

Q3, okay, thanks.

Or around there.

Yes.

It is on page 14.

Okay?

Jeff Hammond, KeyBanc Capital Markets.

Just with -- you mentioned the presidential change and some of the moving pieces.

Can you just talk about quarter adjustments, tariffs and how your manufacturing footprint kind of aligns with that?

Are you getting your Mexico footprint and how some changes there might impact your thinking?

It is all speculation now.

We are keenly watching them and listening.

We have plants all over the world.

So we are cautious and prepared to react whichever way it goes.

Okay.

And then it just real quick.

I don't know if I missed it, did you give a corporate expense number for the year?

We did not, but we should assume that it is right around $100 million.

Okay, great.

Thanks, guys.

Nathan Jones, Stifel.

John, could you just be a little bit more precise with what the total anticipated debt reduction is post the closure of the V&C deal?

It is roughly around $2.6 billion.

Okay so pretty much all of it is going in there.

I think you had talked before about planning to deploy a good chunk of that capital into either M&A or share repurchase.

Can you talk about the decision or the change in that decision and the focus more on debt reduction now?

I think we always intended to, A, reduce the debt.

And then B was to reestablish a more normal recurring buyback, which is what I said was $100 million.

And then we believe we are going to have a rich pipeline of opportunities which we call tuck-in or bolt-ons, which tend to be the smaller, much more strategic and highly accretive opportunities.

And we will lever up to do the ones that are prudent and create shareholder value.

But we don't want the money sitting on our balance sheet waiting on that.

Okay, fair enough.

And then I think in response to Steve's first question, you talked about $45 million of cost out in 2017.

When we talked about this a few months ago that number was a fair bit higher.

Is that number a fair bit higher on a run rate basis and it takes some time to work up to get that $45 million?

And what is kind of the run rate that you would assume for simplification/cost out of the organization post the divestiture of the Valves & Controls business?

Yes, just a couple clarifications.

We showed $60 million of net productivity, so think of that as $15 million of net material and $45 million of net labor.

We do have labor inflation globally and that is the difference between the numbers we previously talked about and these are net numbers versus gross numbers.

And the other was gross, right.

Okay.

And then just on projects in cold areas.

With the US government now looking like they are going to go ahead and approve Keystone and Dakota Access, what kind of opportunity would that be for you guys?

I think eventually it probably will help the oil sands be more competitive -- eventually when completed.

Is there any numbers you could frame around that?

Could not.

It would be speculative at this point.

Okay, thanks, guys.

Christopher Glynn, Oppenheimer.

Just on the re-consolidating of Water, you split it at one point after the Valves & Controls acquisition.

So just wondering what the idea was in previously splitting that that didn't hold or maybe that was always an interim structure for a specified goal.

Chris, we did it then so we could have focused leadership over the different parts.

We were more complex; we picked up three businesses when we did Flow Control and we just felt like it would get more focused leadership that way.

What we found is as we simplified and selling Valves is a big piece of the business.

As we looked at simplifying the organization, I think we said it was like $27 million of stranded cost, we said there is really more we can do and there is way we can streamline.

And also as we looked at growth and we looked at where resources were in Water we really felt that we wanted to remove the barriers -- organizational barriers so that we could flow -- John mentioned earlier all of the different sales forces.

We're overstaffed in some sales forces, understaffed in others.

We need to be able to make the organization more facile in moving those investments around.

So that essentially is the new thought.

Okay, that makes sense.

Was there any notion at any point that Flow & Filtration was under any kind of strategic review?

No.

Okay, got it.

We made progress on margins there, and some of our best growth talent was on the other side.

So we have made it easier to move folks.

Sounds good.

And there are no further questions at this time.

I will turn the call back over to the presenters.

Okay, thank you very much and thanks for all of your questions and your attention over the last hour.

We believe our move to two segments better positions us for more predictable long-term organic growth while also improving the cost structure of the organization post Valves & Controls.

We look forward to completing the sale of Valves & Controls by the end of this quarter at which point we will be able to significantly strengthen our balance sheet.

We will see an improvement in EPS from lower interest expense.

But just as important we'll be able to get back to our disciplined capital allocation strategy focused on bolt-on acquisitions and stock buyback.

Thank you for your continued interest in Pentair.

Good day.

This concludes today's conference call.

You may now disconnect.