PNR
#Thanks Jim
We’re pleased that our second quarter performance came in slightly out of our expectations
Sales were in line with guidance, while segment income and adjusted EPS slightly exceeded the high end of our range
We completed the sale of our Valves & Controls business during the second quarter and with the proceeds had significantly improved our balance sheet
Later in the call <UNK> will discuss the balance sheet in more detail and the impact of the Valves & Controls sales closing somewhat later than our initial timeline
We’ve tightened our full year adjusted EPS guidance to approximately $3.50 per share, which is the midpoint of our prior guidance
We experienced higher than planned interest expense in the first half due to the delay in the Valves & Controls close
And we’ve also seen our share count increase modestly
Offsetting these two headwinds was our better first half operating performance
Performance that we believe is carrying momentum into the second half of the year
Also factored into our tightened guidance is the fact that we will incur some incremental redundant corporate costs in the second half, as we prepared to spin-off our Electrical business next year
With an improving top line, continued margin expansion and a stronger balance sheet, we believe the prospects are bright for both our Water and Electrical businesses exiting 2017. Now let’s turn to Slide 5 for a discussion of our second quarter 2017 results
As mentioned, the second quarter performance was in line with our top line expectations and a little better from an income and adjusted EPS standpoint
Adjusted core sales declined 1% in the quarter, but we’re up 1% for the first half
This is important to mention, because the pool season heated up in March this year as opposed to April a year ago, resulting in a tough comparison in the second quarter
Segment income grew 6% and operating margins expanded an impressive 170 basis points with both segments delivering margin expansion greater than 100 basis points and corporate expense coming in a little more favorable than we’d anticipated
We’re pleased with our strong margin expansion, which we were able to deliver despite worse material inflation and price recovery than planned
Adjusted EPS grew 14% to $1, which exceeded the high end of our guidance by $0.01 despite incurring a slightly higher interest expense and share count during the quarter
Free cash flow of $289 million during the quarter was in line with normal seasonality following the cash usage reported in the first quarter
Now let’s turn to Slide 6 for a look at Water performance in Q2. Our Water segment delivered an adjusted core sales decline of 1%
Segment income grew 5% and return on sales expanded a very healthy 120 basis points
Our Filtration & Process business saw a core sales decline 3%, and strength in our residential and food service businesses were offset by ongoing softness in global diesel and muted spending in the beer industry
Food service was the bright spot in the quarter growing high single digits on strength in the convenience and grocery store channels
Floor technology saw a core sales declined 4% as we continue to proven lower margin product lines and focus on driving margin and cash flow improvement
We saw our Residential and Irrigation business grow in the quarter, but this was not enough to offset continued weakness in our engineered pump businesses serving industrial and infrastructure
We saw orders improved for those large pumps for the second consecutive quarter indicating that we’ve reached the bottom in this business
But we’re not expecting the top line to benefit from those improved orders until 2018. Finally, our Precision Spray business which largely serves agriculture bodes another quarter of healthy growth
Following a very strong first quarter Aquatic & Environmental Systems saw a core sales grow 1%, which yielded our first half core sales growth of 7%, in line with the growth rate seen in the past several years in the business and what we expect to continue
As a reminder, the pool business can be impacted by timing of the season, which is what we believe happened this year between the first and second quarter
We continue to look for Aquatic & Environmental Systems to deliver another strong year of growth in 2017. Now let’s move to Slide 7, for a look at Electrical performance in Q2. Adjusted core sales grew 1% in Electrical as the strength we saw in the first quarter carried over into the second quarter
Segment income grew 1% and return on sales expanded a robust 140 basis points due to improved mix and ramping productivity
Within Electrical Enclosures declined 1% and remained a tale of two verticals
Our Industrial business grew mid single digits for the second consecutive quarter and we believe this represents momentum that will carry over into the second half
Offsetting this strength with continued softness at our smaller telecom business, which continue to match the strength within the Industrial business
Core sales in Thermal declined to 12%, as a reminder our Thermal business is facing a nearly $100 million top line headwind in 2017 as three large jobs from 2016 were completed
Excluding these large jobs, which we’ve called out before, we saw Thermal grow on both the projects and product side of the business
The focus continues to be on aligning the business to a smaller order size world and the underlying improvement in the second quarter gives us increased confidence that the business should exit 2017 in a strong position
Our Electrical & Fastening Solutions business saw a core sales decline following 7% growth in the first quarter
The Commercial business remained strong with the quarterly volatility stemming from the smaller infrastructure related business
As we mentioned last quarter, this piece of Electrical has faced a fair amount of material inflation to start the year and we’ve continued to take select price actions to help mitigate some of those higher inflation
We expect the Commercial business to continue to grow in the back half and we’ll look at areas to help reduce the quarterly infrastructure volatility experienced in the past few quarters
Please turn to Slide 8, for an update on our planned separation
Before turning the call over to <UNK> to discuss the financial outlook in more detail, I wanted to provide an update on the separation now what we’ve made in May
As a reminder our Board has approved a plan to spin-off our Electrical business, which we expect to be completed in the second quarter of 2018. We’ve organized a dedicated project management office that is currently driving some 20 different work streams
We’ve made the decision on the organizational structure of the direct reports to the future CEO’s of both companies and the next level work is underway
We expect to have an initial Form-10 filing during the fourth quarter
Finally, we should have further updates on the capital structure of both companies by early 2018. Our second quarter performance was another step towards regularly delivering our forecast of the business
The second quarter performance also highlights, why we believe the long-term prospects of both businesses are attractive
We’re excited for Pentair’s next chapters; we create two industry leading pure play companies, one in Water and one in Electrical
We strongly believe that both companies are well positioned for long-term growth and value creation with the scale and strength to control their own destinies
The increased focus of both companies should help to raise the execution even further and drive higher differentiated growth
Both companies can become appreciated for the jewels that they are
I’ll now turn the call over to <UNK>
I’m just overall, Steve, I mean for both Water and Electrical, I’d say that we’re looking at somewhere between $15 million and $20 million headwind for the full year
Some of that realized in Q1 and Q2 and then Q3 and Q4 related to little less benefit from pricing, and a little stronger impact from inflation on the sources side, both of them together
Yes, Jeff
I mean, I think we started the year anticipating the fact that as inflation rises both of our businesses Water and Electrical have historically been able to take advantage of those situations and raise price in the industry and have that price accepted and therefore mitigate most all of the material inflation
I think we were concerned about one issue this year, which was we’ve never had that experience with a stronger U.S
And we’re seeing the fact that most of the channels that we participate are fighting on price and therefore asking us to absorb and become more productive in serving them
And that’s the way it’s playing out
The good news is there’s a lot more growth and I think we’re all experienced in that growth and we’re able to offset that impact
But it’s generally across the board, Jeff
Yes, Jeff we haven’t – we’re thinking about that
But we’re not in a position to share that yet
We’re running different scenarios and planning for what the capital structure to be at both companies, but we don’t have any information yet
Hey, <UNK>
When you look at, we had such a strong quarter last year and the season started late, it didn’t start until mid-April
And this year it started early
So we had a great March
And that really explains all the difference
When we look at the sell-through in the channel and we look at the activity in the end market, we think that business is every bit as strong as it has been, hence my comments about it
The 7% growth in the first half is more representative of the kind of growth we expect in the industry
So it’s really just timing
They’ll be introduced this season, but they won’t move the needle this season
We continue to be the innovator in the industry
So we’re not going to give up that mantle
It’s really rail related, I mean, if you take a look at commercial and what I would call more traditional industrial is just fine
But the infrastructure, there was an anticipation that we would be spending on roads and bridges
Now here in Minnesota, looks like you what we are, but broadly in the rest of the country, it doesn’t picked-up as much
And then rail spending is off
And that’s for our EFS business, that’s the biggest part of the infrastructure
Hey <UNK>
Hey, good morning
We’re seeing normal seasonality, we see that because particularly Water is so seasonal
The cash flows are following the normal pattern with a negative cash flow in the first quarter a big pickup in the second quarter and then continue to building in the third and fourth
I wouldn’t expect the pattern to be any different
There’s a little bit of mix issue, I mean, it is not the strongest pool quarter
Our Aquatic’s businesses got a pretty good margin
So that’s the only mix issue and the rest is just Q2 performance carryover to Q3.
Hey, <UNK>
Where is the 23 come in front of you? Okay, let’s go
So, I mean, it really is just one item
And it’s the fact that we are now projecting for the rest of the year what we believe the realized price and the realized material inflation will be and that is the only difference between the two forecasts
You’re talking about for the – in Electrical?
Hello, Mr. <UNK>
Yes, both commercial and industrial
Particularly as winter cools-off I guess, winter heats up is rather its better term
That’s really Thermal’s biggest season
And the nice thing is the smaller projects and the products MRO it’s a better mix of business
So, I’m pretty please right now with the progress we’re making in Thermal
So each side, Water seasonal business is obviously the pool
And on the Electrical side the business that really experiences the seasonality of Thermal
And then everything else is steady state throughout the year
So Josh, if you want us to square away – are you an old Navy guy? Square away, it’s pretty good
Anyhow, so as we set up the – we’re really standing up to companies, we have an open CFO job, we have two open CHRO jobs, we want to get these jobs hired, we want to get – so there’s going to be some overlapping as people come and go
But those all go to the P&L
And those are just a couple of examples
But as <UNK> said, our objective is to minimize any leakage if you will at the corporate cost level in another words we minimize any additions once we’re on a separate run rate in the two companies
Good morning
Yes, we expect a better second half for sure
Actually on the telecom side, we had some big projects there, that are just they haven’t reloaded yet and we’re hopefully it will
But they haven’t
So that’s why it was negative in the second quarter
I think in the third and fourth quarter that will be – that it will still be a drag
But it won’t be as bad
And Industrial, despite the more challenging price environment, the volume is good
And that’s a really profitable business for us on the Industrial side
But many of you know is our Hoffman brand, so, that’s the big driver, Hoffman doing better
So we’ll have – we expect to have low single digit core growth in Q3.
No, we think that the pricing dynamic in Q2 continues to move forward into Q3 and Q4.
It’s really – what’s happened in capital spending, across those, it’s normalized, right
In oil and gas, there was a huge decline and basically it was a rough justice
They cut everything and now they are on capital level, so they returned finally to normal
So it’s actually oil and gas and industrial, it’s chemicals, it’s really across the board
Now CapEx is better in petrochemical, the petrochemical side and in some of the other industrial side
So we talk about Hoffman being up in industrial – general industrial
No and it really hasn’t been our focus, as I mentioned, we do really well, when large projects happen
And so we’re not focused on those, and we’ll do well when they come back
Our focus is making sure, we are getting more than our lion share in the smaller projects and I’m really pleased with the progress that we’re making on that
And that’s really around the world
Well, I mean it was a reduction in force and redeployment areas, where business from where there isn’t?
Right now, we’ve got some really great work, defining the strategies in each of water and electrical
And when that whole strategy work is done, we will tell you exactly, what we think the growth rates, that we believe we’ll achieve these two separate companies will be
But I’m not going to pre-suppose that, I’ll let <UNK>
We’re looking forward to talking about
Good morning, <UNK>
It’s a slight use
That’s rounding Rob, it was a little higher in the first half, as we talked about, but it’s rounding
Thanks, Hope
2017 has been another eventful year for Pentair, as we’ve successfully divested our Valves & Controls business
Significantly strengthen our balance sheet, with those proceeds
Delivered our first half commitments and announce that we’re separating our Water and Electrical businesses into two standalone companies
We remain confident in our ability to drive double digit adjusted EPS growth for the year, as our focus remains on delivering the second half of 2017, against our commitments while standing up, two public companies
Thank you for your continued interest in Pentair and we’ll talk to you soon
