Pentair plc (PNR) — Q2 2017 Earnings Call Transcript

Thanks, Hope, and welcome to Pentair’s second quarter 2017 earnings conference call. We’re glad you could join us. I’m Jim Lucas, Vice President of Investor Relations. 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 second quarter 2017 performance as well as our third 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-Q 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. 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 John 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 had 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 of 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 decline of 4% as we continued to 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 improve 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 was continued softness in our smaller telecom business, which continues to match the strength within the Industrial business. Core sales in Thermal declined 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 John to discuss the financial outlook in more detail, I wanted to provide an update on the separation since we made it 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 CEOs 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 for 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 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 John.

Thank you, Randy. Please turn to Slide number 9, titled Balance Sheet and Cash Flow. We ended the second quarter with a dramatically improved balance sheet after using the proceeds from our sale of Valves & Controls to retire a significant portion of our debt. Our ending debt balance was $1.7 billion, which does not include nearly $200 million of cash on hand at the end of the quarter. We had a strong free cash flow quarter in line with seasonal trends. But our first half performance trailed the comparable period last year due primarily to a couple of higher tax payments in 2017. We continue to target free cash flow equal to adjusted net income for the full year. Our ROIC continues to improve and we ended the quarter at 11.1%. Please turn to Slide 10, titled 2017 Cost Out Update. We provided this slide last quarter as an update on our cost out actions, which are now completed. We are now on track to realize over $80 million of net cost benefits in 2017, which is up slightly from the target we presented last quarter. We remain on track to exit the fourth quarter benefits yielding greater than $100 million of net cost out in 2018. The reorganization activities that we began right after we announced the sale of Valves & Controls are now behind us. And we must now move forward with setting up the organization structures for two independent companies. Please turn to Slide 11, labeled 2017 Guidance Update. Slide 11 is an update of what we’ve presented last quarter when our strong first quarter operational beat offset higher interest expense due to the delayed closing of the Valves & Controls sale. While we’ve successfully closed the transaction in the second quarter and subsequently retired a significant amount of debt. The tender process was completed later in the quarter resulting in slightly higher than anticipated interest expense in the second quarter. This was offset by better than expected operating performance. We also have seen our share count increase as the stock has appreciated this year. While the higher than expected interest expense in the first half was offset by higher operating performance, we have one other factor influencing our decision to update the full-year guidance to approximately $3.50 per share from a range that included $3.50 as the midpoint of that range. As we are preparing to stand up two companies to be publicly traded, we will incur some overlapping costs in the second half, as we prepare for the spin-off of Electrical in the second quarter next year. I would remind you however, that our goal remains to have two public companies with minimal incremental corporate costs. Please turn to Slide 12, labeled Q3 2017 Pentair Outlook. We are introducing third quarter adjusted EPS guidance of $0.91 to $0.93 per share, which is an 18% increase at the midpoint of the range. We expect the adjusted core sales to grow approximately 4% for the third quarter, with both segments expected to increase at that rate. We anticipate segment income increasing approximately 5% and return on sales to increase roughly 70 basis points and approaching 19%. The tax rate is expected to be 20%, net interest expense of $13 million, and the share count should be around $184 million. Free cash flow is expected to continue to improve in line with historical seasonal patterns. Please turn to Slide 13, labeled Full Year 2017 Pentair Outlook. While we did see some shifting of top line growth from Q1 to Q2, we’ve seen improvement continue in our short cycle Industrial businesses and our Residential and Commercial businesses have remained healthy. As a result, we expect full year adjusted core sales to be up 2% versus our prior forecast to flat. We expect segment income to increase 6%, ROS to expand roughly 100 basis points around 18% and adjusted EPS to grow approximately 15%. We continue to target free cash flow to be 100% of adjusted net income. I would now like to turn the call over to Hope for Q&A. After which, Randy will have a few closing remarks. Hope, please open the line for questions. Thank you.

Hey guys, good morning. So Slide 20 talks about your shipping days dynamics maybe I’m not sure if you called this out explicitly in the first quarter. But how much do you think it impacted kind of Q2 and maybe quantify how much it will be in kind of Q3, saying it normalizes in the fourth quarter?

Yes. It’s somewhere between a 1% and 2% impact, Steve.

Okay. So that’s kind of contemplated obviously in the third quarter guide?

Yes. It is.

Yes.

Okay. Got it. And then can you just quantify the higher costs in the second half? I mean, I guess from an operating perspective relative to what you were expecting. Did you actually kind of tweak up that operating performance in the second half? What are the sources of that?

Yes. I think, as you take a look at the second half obviously we have some benefits from foreign exchange, it’s dropping through it called low double-digit benefits. And then we have the stronger organic growth, which is offset slightly by the material and more difficult pricing environment. And then operating wise we would have expected to deliver a little bit more income, but we’re planning to have to transition to the two corporate structures and bringing on those costs. And then certainly getting back to hopefully a minimal incremental cost as we spend, Steve, but we have to balance all that, while delivering 2017 and standing up two successful public companies in 2018.

Right. Okay. And then just on this price cost stuff. Can you maybe just give us some color and quantify what you were expecting at the beginning of the year? And then where you are now and what kind of price for that kind of enterprise are you looking at?

Yes. I’m just overall, Steve, I mean for both Water and Electrical, I’d say that we’re looking at somewhere between a $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.

Okay. And then just on the pricing side. For the enterprise, what do you expect for the year?

Just under a point.

Positive price.

Correct.

Okay. Great thanks.

Thank you.

Hey, good morning guys.

Good morning, Jeff.

Just back on price cost, can you just talk about what’s driving maybe a little more challenging environment on the pricing side. Are there certain businesses where you’re struggling to get price or is it just a timing issue?

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. dollar. 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.

Okay. And can you talk about what your plans are for your second half free cash flow. And as you get closer to the spin how you’re thinking about leverage within the two companies? Thanks.

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.

Okay. Thanks guys.

Thank you. Good morning everyone.

Hey, Deane.

Good morning.

Maybe start with Aquatic. You called out the tough comp in the second quarter. We know weather is the big factor there. And the first half looks like you’re on track. Or anything else other than weather that contributed and was a factor in the second quarter for Aquatic?

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.

Got it. You also called out a pipeline of new product introductions. Maybe some color there and would any be launched this season? And would they move the needle this season?

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.

Got it. And then over on Electrical. Maybe if you can expand on the infrastructure volatility. What do you actually seeing is this shorter cycle?

It’s really rail related, I mean, if you take a look at commercial and what I would call more traditional industrial, it’s 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 pick up as much. And then rail spending is off. And that’s for our EFS business, that’s the biggest part of the infrastructure.

Got it. Thank you.

Hey, good morning.

Hey, Scott.

I’m just wondering if you guys can give us a little bit more on the third quarter sales improvement that you’re talking about. Maybe just kind of give us something on the business lines, which you think are going to be the bigger contributors?

Yes. I think just to mention this, this dynamic between Q1 and Q2 that Randy mentioned is roughly $20 million of revenue in pool that shifted amongst the two quarters. And so, when you take a look at Q3 and where we’re shooting for the core organic growth rate, I mean, it’s not – that one item generally explains it and then a little bit easier comparisons in some of our businesses like Enclosures and Electrical and then ultimately water technologies in Water. So it’s really about keeping the same general shipment rate that we saw in Q2 and then just the comparison year-over-year in Q3.

Okay. And then further on that John within Water I know that you guys are – let’s just say, quietly deemphasizing some of the businesses there. Was there a half a point or a point drag or nothing discernible?

Yes. I’d say somewhere around a half a point is a fair estimate. And I mean, Randy has asked both Beth and I to look at the types of things that maybe we could have done as a $5 billion company that might not make sense in a $3 billion and $2 billion company. So we’re both actively looking at our infrastructures and support primarily in fast growth regions and initiatives, and we’re trying to make sure that those projects are eliminated and also that we’re addressing how to serve each of the regions that we serve in a more effective way.

Got you. Last question is on the incremental separation cost, you’re talking about within the guidance. We can see that roll through corporate or is that going to be within the volumes?

Actually most of that will roll through what we have in the Electrical business, Scott. Thank you.

Hey, guys. Ronnie Weiss on for Julian.

Hey, good morning.

Good morning. On the free cash flow big, big cash inflow from the working capital as sales ramp in Q3 and Q4. Do you guys kind of assume the same kind of benefit going through? And just talk a little bit about the improvements being made there.

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.

Got it. And then just on the margins for Q3, guided up 70 basis points, a lot stronger in Q2. Is all of that contributed to some of the stronger material cost headwinds you’re seeing? Or is there some mix issue in there as well. Just talk a little bit about that.

Yes. There’s a little bit of mix issue, I mean, it is not the strongest pool quarter. Our Aquatic’s business has a pretty good margin. So that’s the only mix issue and the rest is just Q2 performance carryover to Q3.

Got it. Thanks.

Thank you.

Hi, good morning.

Hey, John.

Good morning.

Just wanted to know, if we get a little finer point on the full-year Electrical margin. So we’re now at 22%, you talked about a couple of different items impacting that. Just want to know if we can deconstruct those buckets, it looks like there are some overlapping costs that sit there, we had the commodity discussion. Maybe there’s some mix impact as well. But maybe if you can talk about it from that 23% to the 22% in that kind of walk.

Where is the 23 come in from for 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.

Okay. And then just kind of one point of clarification for the models, is the large project impact for the next quarter is $27 million. Is that the right ballpark number we should be using?

You’re talking about for the – in Electrical?

Yes. For the entire, I guess, it’s primarily Electrical for the entire company. Can you walk back through the adjusted core?

Yes. For Q3 that’s right.

Okay.

And then slightly less than $10 million in Q4.

All right, great. Thank you, appreciate it.

Hello, Mr. Pokrzywinski.

Good morning. John, can you just talk about some of the seasonality in – I suspect it’s Thermal in the fourth quarter or just the uptick in the Electrical growth in the fourth quarter. I get the comp as easier, but it still seems like there’s a lot of push out in especially some of these larger energy projects. Can you talk about maybe the 3Q to 4Q walk there and maybe the seasonality of margins that gets attached as well?

Yes, I’ll start it and I’ll have Randy as we color. But I mean, one of the things we’re finally realizing and we saw it happen in Q2 is refining and moving into positive territory on the MRO and the aftermarket and small projects on the Thermal side. So we’ve seen a really good uptick in our Thermal revenue in the heat-tracing side especially related to the downstream maintenance that we’ve anticipated for some period of time. So that’s a big positive and then as we move into Q3 and Q4 that is the season that Thermal certainly benefits from the industry and the anticipation, the cold weather.

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 seasonally 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.

Got you. So this is just a small project MRO phenomenon, there is really – there’s nothing else do you guys have anticipated in the backlog.

No, no.

Okay. And then just one more from me, square away some of the – maybe put a finer point on the corporate headwinds or I guess costs headwinds related to this spend versus where we’re coming out on currency versus where we’re coming out on inflation. I know the walk that you guys gave in the deck, had some higher level comments but it seems like everything I just mentioned be more of a second half dynamic that can really get bridged out per se.

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 two 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 John said, our objective is to minimize any leakage if you will at the corporate cost level in other words we minimize any additions once we’re on a separate run rate in the two companies.

So I guess maybe from a high level, should we think about currency and inflation as being a push then?

Yes, a couple of things. I mean, keep in mind we’re raising our income by $10 million and that’s going to cover shares in the back half of the year. If you think about it, we have some benefit from foreign exchange as I mentioned, that’s low double digits. Call that roughly $10 million, we have some operational benefits and revenue benefits. And then we’re offsetting the combination of the slightly higher material cost and the incremental transition cost of the corporate side. Josh, that’s the positive $10 million in the outlook. So I don’t want to quantify it because we don’t know it, right? But we have to manage it while delivering 2017 and also stand up both public companies in 2018.

Understood. Thanks for the color.

Thank you.

Thanks. Good morning guys.

Good morning.

Maybe just kind of stand on inflation for a second, kind of the emerging themes we’ve been hearing about this quarter is raising steel costs and the inability for a lot of the companies that we cover to pass on those costs. You guys are talking about a little bit more inflation, in the back half of the year. Maybe just touch on that topic and how much of your business is impacted by steel?

Yes, we buy roughly a couple of hundred million dollars of steel, the end markets that utilize the steel, probably somewhere around $1.5 billion, Randy. So, I mean, material is not the highest cost of our – I mean it’s the highest costs, but it’s not the huge percentage of the revenue. But it’s a phenomenon, that usually when inflation comes, we can pass it along. And I think this year, as we said earlier and I made this comment, we’d never dealt with the stronger dollar before and there are competitors on in Europe, who have a better cost position then they did have a year before. And so you’re hearing these things about price transparency and the Internet and everything else, like that. I don’t think our products are really installed in that way or affected by it. But I do ultimately think that we’ve got a cost-conscious end-user. And that challenges being pushed on our channel and we are being expected to absorb the majority of the costs this year. And it’s reflected in our guidance and I think that as we go forward, we’ll look at the opportunities to adjust that appropriately as we head into 2018.

Got it, okay. That’s fair. I guess maybe, my one follow-on question, I don’t think we’ve touched on it yet, is really on the Enclosures business. So you called out good industrial strength, within the quarter, core growth is still down slightly. And you mentioned that you had telecom headwinds are going to alleviate, as comps get easier, after 2Q. So can you just maybe talk about the trajectory, from here, when you expect this business to drive the positive organic growth?

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.

Got it. And just a follow-up, real quickly on that, on the pricing side do you expect the pricing to get better in this business as well, in the second half?

No, we think that the pricing dynamic in Q2 continues to move forward into Q3 and Q4.

Okay, great, thanks guys.

Thank you.

Hi good morning, thanks for taking my question. I just wanted to step back to the Thermal business for a second. And you said Thermal MRO was picking up, can you comment specifically on whether you’re seeing that in a particular end-market, oil and gas versus power-gen or general industrial?

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 a 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.

Okay, okay thanks. And then, on the petrochemical side or in any other end-market, and in any other geography, are you starting to see any large projects in the pipeline?

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.

Okay. And then I did want to ask, because you made the comment that you are doing some work to realign the Thermal business, is that world of small orders, can you comment more specifically on what is being done to drive that realignment?

Well, I mean it was a reduction in force and redeployment areas, where business from where there isn’t?

Okay, got it. And just one last, very broad question as you step back and look at these two separate operating companies and kind of the world that where in today for example for Thermal, it’s a very challenging operating environment. But what do you think; the long-term growth rate is for each of these businesses, at this point across all the cycle?

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 presuppose that, I’ll let John.

Hey, Brian, I just want to clarify one thing, the Thermal environment is actually improving, significantly for us. I mean we have these large projects year-over-year, which we’re calling out. But inside of the actual Thermal business, we’re seeing substantial margin increase. And we’re getting back to record, and in fact, we’ve cleared what we call record highs of margins at this period of business that we’ve experienced before. Again part of that is the focus that Randy shared with you. But if you take those projects out, we’re growing nicely and we’re expanding margin significantly.

Yes. Thanks for that clarification John. I guess I was just referring to the large projects, kind of not being in the picture, anymore. Thank you, got it.

Thank you.

Good morning everyone.

Good morning, Nathan.

Good morning, Nathan.

A couple of questions on the Water business, you talked about softness in the pump business there. Can you talk about what you’re seeing in terms of end market demand in municipal water market, whether you think you are performing in line with the market, better or worse?

Well, I think the market is definitely improving, we’re seeing the backlog begin to build. The break and fix is certainly being invested in and I think we expect to get back to core revenue growth there, as Randy mentioned, towards the tail end of this year and definitely into 2018. Are we performing with the end market? I would say, no. I think there is an opportunity here, for us to commit to where we think, we should be and play consistently in those spaces. And I think we’ve been chasing the opportunities around the world and we need to get back to our core netting and be better at what we do. And I think that’s a huge opportunity for this business.

Maybe you could talk a little bit more about what you need to change there in order to get back in line with the market, maybe where you are playing that you shouldn’t be, where you should be focused?

When you are spread too thin, it can lead to a lack of focus. Randy has been urging the team to concentrate, and I plan to carry on with that emphasis on focus. This business excels in North American infrastructure and global fire, and those are the areas where we should dedicate our time and energy, continuing to excel in both.

That’s helpful and then just a question on the new products pipeline. You talked about that continuing to grow. Can you maybe give us a little more color on what kind of things are in the pipeline? When they are expected to come to market, maybe what kind of impact that could have?

Yes, I think most of – just to give you some color and I don’t want to get too ahead of ourselves here, but a lot of the products that Randy mentioned are related to home automation certainly and the way that we can play within that space and provide the types of things that our end consumers are looking for, utilizing that capability. We’ve always been the leader in pool innovation and we’ve got some exciting new product lines coming out to take advantage of those home automation themes and the way that people want to continue to use their backyard and benefit from that experience. So I think we’ll start to roll that out, certainly around our Analyst Day and limit to our expectations. And I think we’ve got some exciting things in the pipeline.

All right. Thanks very much.

Thank you.

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 announced 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. Bye.