Pentair plc (PNR) — Q3 2019 Earnings Call Transcript

Thanks, Dorothy. And welcome to Pentair's third quarter 2019 earnings conference call. We're glad you could join us. I'm Jim Lucas, Senior Vice President of Investor Relations and Treasurer, and with me today is John Stauch, our President and Chief Executive Officer; and Mark Borin, our Chief Financial Officer. On today's call, we will provide details on our third quarter 2019 performance as well as our fourth quarter and full year 2019 outlook as outlined in this morning's press 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 Form 10-Q, Form 10-K and today's press release. Forward-looking statements included herein are made as of today and the Company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances. Actual results could differ materially from anticipated results. Today's webcast is accompanied by a presentation, which can be found in the Investor Relations 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 John.

Thank you, Jim and good morning, everyone. Please turn to Slide 4 titled, executive summary. We are pleased to deliver solid third quarter performance. In particular, our return to segment income growth and ROS expansion, building on our performance from the second quarter. We are maintaining our full year EPS guidance. We've seen price cost stabilize and we are encouraged to see further signs of top-line stabilization in our important aquatics business. We continue to invest in our two key strategic growth priorities: advancing pool growth and accelerating residential and commercial water treatment. These investments are centered on building out a consumer experience inclusive of our brand, channel, innovative products, and services. We continue to believe we are well positioned to return to core sales and income growth in 2020. I'll talk a little more later in the call about our optimism about long-term strategy and prospects. I'll now turn the call over to Mark to discuss our third quarter results and updated full year outlook. Mark?

Thank you, John. Please turn to Slide 5 labeled Q3'19 Pentair performance. For the third quarter, overall sales increased slightly and we saw core sales decline 2%. Segment income grew 1% and adjusted EPS increased 7%. We'll provide more color on individual segment performance shortly. Below the line we saw an adjusted tax rate of 15%, net interest, other expenses of $7.7 million and our average shares in the quarter were $168.6 million. The tax rate in the quarter reflects our long-term strategy spread across a lower income base in 2019, resulting in an expected full year adjusted tax rate of 17%. Finally, free cash flow was just over $150 million and in line with normal seasonal patterns. We were pleased to see segment income grow and ROS expand despite the softer top line and we believe this is a reflection of price cost stabilizing following the headwinds of significant inflation we discussed in prior quarters. Please turn to Slide 6 labeled Q3'19 Pentair Segment Performance. This slide lays out the third quarter performance of our three segments. As expected, our Aquatic segment experienced a 5% core sales decline against an extremely tough comparison. Following rather abnormal weather during the first half of the year, it appeared that weather in much of the country was more normal during the quarter, resulting in improved sell-through. Aquatic saw segment income decline 9% and ROS contracted 60 basis points but still came in north of 25%. As we have repeated throughout the year, we remain focused on exiting 2019 with channel inventories more in line with historical levels. Filtration Solutions reported core sales growth of 4% with solid contribution across all business lines, particularly within the smaller food and beverage business as we shipped out some of our improved backlog in both beer and sustainable gas. The integration of both Aquion and Pelican remains on track and both businesses performed in line with our expectations. Segment income grew 17% for Filtration and ROS expanded 50 basis points to 16.5%. In Flow Technologies, core sales declined 5% during the quarter. We continue to see strong headwinds in our Ag business, both OEM and aftermarket. Despite the soft top line performance, segment income grew 4% and ROS expanded 170 basis points to 17.1%. As a reminder, Flow Technologies was hit hardest by tariffs and broader inflation in the segment half of 2018, and the comparison in the quarter was its easiest of the year. While we continue to see mixed results across the three segments, we are most encouraged by the signs of stabilization and price cost as well as only one more quarter of tough top line comparisons for our products. Please turn to Slide 7 labeled Balance Sheet and Cash Flow. Our balance sheet continues to strengthen and the third quarter delivered another seasonally strong quarter of free cash flow. During the third quarter, we had one bond mature and we have another maturing in the fourth quarter. As a reminder, we successfully issued a 10-year note during the second quarter. Between our healthy free cash flow and improved leverage ratios, our balance sheet remains well positioned to fund both organic and inorganic growth opportunities. Please turn to Slide 8 labeled Q4'19 Pentair Outlook. For the fourth quarter, we anticipate core sales to be roughly flat. We expect Aquatic Systems to be down approximately 1% to 3% as we continue to focus on ensuring that channel inventories return to more normalized levels by the end of the year. We expect core sales growth in both Filtration Solutions and Flow Technologies to be essentially flat. We anticipate segment income to be up approximately 6% to 8% as we expect price cost to further stabilize and we continue to drive productivity. We expect adjusted EPS to be in a range of $0.64 to $0.66 per share. Below the line, we expect corporate expense to be approximately $14 million to $15 million. We expect our fourth quarter adjusted tax rate to be around 17%. We expect net interest and other expense of roughly $8 million and shares to be approximately 169 million. Please turn to Slide 9 labeled Full Year 2019 Pentair Outlook. For the full year, we expect core sales to be down roughly 1%. We expect total sales to be essentially flat with roughly 2% contribution from our two acquisitions offset by 1% headwinds from FX. We anticipate segment income to be down around 3%. We continue to expect our full year adjusted EPS to be approximately $2.35 per share. Other items embedded in our guidance include expected corporate expense of $60 million to $63 million and adjusted tax rate of 17%, net interest and other expense of $35 million, and an average share count for the year of roughly 170 million shares. While there are undoubtedly many moving pieces to our 2019 pack to expected flat EPS, we continue to be encouraged by signs of top-line stabilization and further price cost improvement. We are encouraged by the performance our businesses are delivering in light of the top-line challenges faced this year. I would now like to turn the call back to John.

Thank you, Mark. Please turn to Slide 10, labeled Executing a Consistent Strategy. We continue to be focused on driving our long-term strategy and we believe there is a lot of evidence that the focused investments we are making are the right investments and driving results. Most people would agree that global water quality is a challenge. While many companies are participating in offering solutions to this global issue, we've chosen to focus primarily on the residential and commercial markets. There is little argument that consumers can benefit from taking ownership of their water experience. They can do it to their own taste and with solutions that meet their individual needs and preferences. Pentair has a variety of solutions to help consumers treat, move, and enjoy water. In fact, Pentair is one of the few total solution providers to residential customers. Also, when we aligned on our strategy nearly two years ago, it started with our leading Aquatic franchise. With over 5 million pools installed in the US, and over half of them being over a decade old, there is a large and installed base to serve. We've built a strong business focused on new product development and strong dealer loyalty. The introduction of the Variable Speed Pump nearly a decade ago created awareness around energy savings and the results have compounded with other product categories from LED lighting to hybrid heaters. We believe the continued adoption of automation, which is small today, roughly 275,000 pools versus an opportunity north of 2.5 million pools in the US, creates a new avenue of growth where we have a leading position. Within the residential filtration market, the acquisition of Aquion and Pelican earlier this year moved us from being leading component suppliers to now being providers of systems and solutions. We've learned quite a lot in our short time owning both of these businesses, and we believe there are many paths to create value as we help consumers solve their water challenges in their homes. On the commercial side of the business, we've historically enjoyed a strong position in the food service area. Increasingly, we are focusing on total water management with customers and we believe this presents an opportunity, better positions us with many of our existing and potential customers. Within the commercial office water space, customers are increasingly looking at opportunities to decrease the use of plastic bottles, and we have a number of technologies today that can serve this space. We believe there are opportunities to further expand in this area. Outside of the residential and commercial verticals, we have a number of technologies we've developed around nano and ultrafiltration. As we develop new IoT products, we see even more opportunities to solve customer challenges. For instance, within the beer industry, we have approximately 150 plants globally that use our digital BMS system, which enables our customers to become more sustainable, lower cost, move from static to dynamic live reporting, and improve overall operating performance. We've transitioned this technology into the sustainable gas industry and we believe there are opportunities to expand this technology to other parts of our portfolio over time. We also continue to believe there are multiple paths to drive consistent, sustainable growth, especially in our core residential and commercial businesses. Our recent acquisition allowed us to move closer to the consumer. While we have built a stronger aquatic business, we believe that by better focusing on the consumer, not only the dealer, it will enable us to maintain an already healthy growth rate in one of our best businesses. We believe that we have the right portfolio, the right strategy, the right culture, and the right technologies to further our position as a leading water treatment company. With a strong core to build from and a healthy balance sheet to support both our organic and inorganic opportunities, we look forward to demonstrating our strategy to our shareholders in Q4, and in 2020 and beyond. I would now like to turn the call over to Dorothy for Q&A, after which I will have a few closing remarks. Dorothy, please open the line for questions. Thank you.

Hi guys, good morning. Hey, can you just break down a little more like what’s going on in the Flow business? The revenues were way off versus our model, but the profits kind of held in. I know this dispersion in the margin profile of some of those businesses, so that was one. I think, in the first quarter that was tougher to kind of figure out. What’s going on in that segment? I think the other two are pretty straightforward. What’s going on in this segment?

Yes, Steve, let me speak to the revenue miss and I’ll let Mark give the details. But during the end of Q2, we saw a little positive in some of the Ag orders. Right out of the gate in Q3, we just saw that Ag did not recover at all. We had anticipated a little more recovery sequentially in Q3, and it just did not happen. So now we’ve adjusted heading into Q4 next year because we don’t see Ag recovering at all. A lot of the global data would suggest that, and we’d probably figured it out right now. But there was a little bit of a bounce in Q3 that we had expected that didn’t happen.

How big is Ag? It isn’t that relatively profitable? Shouldn’t that have had a more negative impact on the margin? What am I missing on that front?

Yes, Steve, it’s Mark, and it’s a great question. What we saw positive signs here were two things really: you’ll see price cost getting better. As I said in my prepared comments, Flow was hit hardest by the inflation pressure so we see price cost turning positive in Q3. And then also productivity. We touched on that in Q2 that, although we didn’t see the productivity reading out in Q2, we saw signs that gave us a high degree of confidence that we would start to see that in Q3, and that’s really what happened. So, you’re right that being down in Ag from a mix perspective would push margins down and income down but, we benefitted from better productivity and improved price cost. And Steve—

And how big is Ag for you guys?

Ag would be somewhere in the $200 million range.

Per year.

Okay, and then one last one just on the Aquatics. Pool made some pretty positive comments that their channel is clear. Can you kind of validate that comment or are there other considerations when thinking about next year? I would think you guys have some easy comps here coming up in the first half of ’20, or is there something else that we should keep in mind when thinking about kind of the trajectory in the next year?

Yes, Steve, so I think you’re right. I mean we do track a lot of our largest customer’s earnings calls and we agree that inventory is definitely getting more normalized here. Our goal is in between now and the end of the year to ensure that it gets into that normalized pattern. I do think though that the pricing this year is relatively more normal which will not suggest that any of the channel would react to the buy heads we saw last year with a much more elevated pricing level. So, Mark, I don’t know if you want to add anything more?

Yes. I agree, I mean, we’ve said we continue to believe that by the end of the year, we’ll exit with normal levels and we think of 2020 more in line with a historically normal seasonal stabilized perspective.

Good morning, everyone. Just maybe thinking a little bit about where the returns organic growth comes from in 2020. I think we have probably been in the pool business thinking kind of understand why that should return to growth. But I mean, if I'm having a look at the last couple of quarters' results; organic sales have been down with positive impacts from price. This quarter, you're down 3 points to price, and volume down 5. Outside of the pool business, with what I would imagine are moderating price tailwinds and some negative volume trends here, where would you expect the growth to come from in 2020 outside of pool?

Well. I mean it’s a good question, and I thank you for asking. But, first of all, we beyond pool, we also had some channel inventory in both Filtration and Flow. That was built up for some of the same buy ahead patterns that happened in last year's Q3 and Q4. So this year's Q3 and Q4 have those difficult comparisons and then Q1 and Q2 of next year have much easier comparisons across Filtration, Flow, and Aquatics.

Okay. So some tough comp issues this year for the same reasons as pool latest ones next year. That makes sense. Can you maybe talk a little bit more about some of these? You talked about focused investments being the right investments and driving results. Maybe talk a little bit more about where those investments are and what kind of results you're seeing them drive? And maybe specifically a little bit more about building out the channel for the commercial and residential filtration.

Yes, so we have three specific growth priorities in both pool and residential and commercial filtration. It’s really about having, I’ll start with commercial first, the best commercial systems and capabilities. We’re really excited about the technology that we’re building to sell at commercial office water opportunities, as you know, people are seeking carbonated water and they’re also seeking flavored carbonated water. So really excited about the investments we made on the technology side, while we’re more than a year away from launching that product, I think our product is really a better solution that we think the market will benefit from. We are also, through both the acquisitions and also internally within Pentair, having the best residential systems. Smarter, more innovative valve technology, smarter water softener systems technology, hooking those to automation, and then having the service piece to the Pelican acquisition to complete that last mile. We’re really excited about the progress of that in-home sales capability, and the build-out of what we call our mobile resource centers, which are our brands that we go out and sell with. So huge progress there. On the pool side, we continue to see technology advancement, new technologies around filtration, and new technologies around automation. So we’re excited that that penetration rate will show up. When you look at the sell-through rates of pools in both Q2 and Q3, they’re back to the high single-digits again. So once we get through this inventory channel issue and the pool business normalizes, I think we’re very positive that we’ll see that return to growth next year.

On the commercial water filtration product, the flavored and bubbly water, have you guys done enough work to kind of talk about what you think the size of that opportunity is for you?

I think it’s really fragmented. I think the overall momentum is there. We want to make sure that we have the systems that can give you chilled, heated, and sparkling water, and our other peer filtration is a big part of that overall component. We want to be talked about in the space, and we want to ensure we have the right systems that can solve any solution that a commercial customer has.

Hey guys, good morning. John, I just wanted to clarify something you said earlier on Steve’s question regarding Ag, Flow. I think you mentioned that there were some headwinds kind of exiting Q2 about Ag, that didn’t materialize in the quarter. I was under the impression that once Ag that when we have that bad weather in the first half that like any recovery in Ag was taken out of guidance. So I'm just a little confused about can you kind of square that for me?

Yes, there are two forms of Ag. We have a precision Ag spray business and that we did address earlier and that is a very-very high margin offering. The other part of Ag is more of the pivot Ag spray in the irrigation side of the business, and that’s specifically what I was referring to.

Okay, so this is the irrigation, not the precision. Okay, cool. Okay, can you talk about maybe some of the impacts you’re having with some of just the internal costs that you shared? Because clearly, I mean, particularly in Flow, I mean you’re seeing the margins come through on a weak growth number, so maybe you talk about some at a high level maybe there’s a couple of examples you can kind of take us through or sort of some things that are being done differently today than maybe a year ago, across the enterprise maybe?

Yes, sure. One of the things we talk a lot about is we separated with optimization and really looking at where did we have complexity and how can we get after complexity reduction. The Flow Technology segment was certainly one of those businesses where we saw a high degree of that skew rationalization, things that inherently drive up cost and drive down margins. The team really got after that as we exited 2017 and throughout 2018, and we started to see those activities and actions pay off here in 2019. We’ve also talked about some of the factories where we had some challenges. We’ve been investing in automation and other technology to replace and improve some of the older equipment and machinery that’s used in those factories that are also starting to read out in the early stages.

And one last for me on if we look and it’s too early to talk 2020, but if we just think about the situation where there is inventory cleaned up through your partners, and we can start ramping a little bit. When I think about free cash flow, there’s nice performance here in the quarter. Is that going to be, how much of the headwind do you see that being into ’20 as things kind of ramp up and start producing at higher rates?

I think we still have opportunities to really focus on cash flow and we continue to view cash flow targeting at approximating adjusted net income, so we wouldn’t change that point of view even though as we grow to your point, there may be some working capital type things that we need to invest. But there are opportunities in other places that we would manage and balance out to have that long-term target still maintained.

Hey, good morning everyone. So a couple of ones first, just on capital usage here, any thoughts to bring back being more aggressive on the buyback side again? And then secondarily related to that, how’s the M&A pipeline look? What's the willingness, ability to bring something in and how are the evaluations looking out there?

Yes, I mean I think clearly we’re focusing on execution right now, Mike, and part of that was making sure that we’re delivering on our commitments in Q2, Q3, and Q4, so that’s our first focus area. I think there are growing opportunities to invest in the platforms that I mentioned. We’re continuing to look at those tuck-in acquisitions, I would say, that feed more of what we’ve done already. But you can never time those. We have no idea where they’re going, and we just want to make sure that we’re protecting the balance sheet heading into next year and giving ourselves flexibility to do what we think is going to drive the most amount of value.

The pipeline on that side, John?

Good.

Could you share your thoughts on the price-cost aspect? It seems like you are suggesting that this will become more favorable in the future. Can you discuss the various factors affecting pricing? Has it leveled out compared to the commodity side? How are you approaching this as you look towards next year?

Yes, the way to approach this is to note that we faced significant price-cost challenges as we exited last year and entered this year. In particular, during Q3, I mentioned a favorable situation due to increased prices and moderating inflation. As we progress, this year-over-year price increase will settle into a more typical level compared to the unusually high price hikes we experienced in 2018 that carried into 2019. So, it's more about stabilization rather than an outright benefit. We are mitigating what had been a substantial headwind. Additionally, it's important to remember that inflation isn't limited to material or commodity costs; we are also dealing with labor inflation, which isn't expected to diminish. This will continue to influence our outlook for 2020.

Hey, good morning guys. Just on can you just talk about what is informing the lower growth rate in filtration and then just as you look forward here a lot about our macro-slowing and just where are you seeing some signs of slowing in your business outside of that Ag space?

Sure. As we mentioned in Q3, we observed significantly improved performance in the food and beverage segment of the filtration business. However, that slows down a bit in Q4, which is part of the overall situation. We continue to see stabilization and incremental improvement in the important residential and commercial sectors. This applies to both the systems and components businesses where investments from acquisitions were made. Overall, our outlook is more moderated considering their performance in Q3, and as we look ahead to 2020, we anticipate a similar level of performance while starting to see the impact of the investments John discussed, leading to improved core sales growth.

Okay, and then just on pool. What are you assuming and what are customers telling you about kind of the normal early buy situation? And then just if we look into 2020, certainly you've got some easy comps and typically this business grows mid-to-high single digits. Should we think of 2020 as kind of an easy comp and you can get back to those levels or above? Thanks.

So on the first question from an early buy perspective, we're seeing kind of a consistent early buy pattern. Last year was a little bit unusual because of the blend of the impact of the price increase. But what we're seeing this year is more in line with kind of the historical trends. In terms of next year, as we said, we're exiting Q4, and you see that the Q4 guide is what I would think of as back to a little bit more level of normalization improved income performance, flattening of the top line, which had been decreasing, and as we think about 2020, we're going to really focus on getting back to what we believe would be performance in line with our long-term objectives.

Thanks. Good morning, everyone. Hey, very well, thank you. How about, can we put a little finer point on the working down the excess channel inventory and pool? If we had been thinking it was around a $60 million excess, just based on commentary about expected 4Q normalizing. How much should we think about that $60 million having been worked down so far?

So as we talked, we worked down some of that inventory in line with sort of our expectations and we continue to see that coming down further in Q4 and exiting the year at levels that are in line with more historical seasonal patterns.

Okay, and then on pool, John, you talk about some of the new product development in filtration and pool. And automation is just to set expectations, might you have some new automation offerings for the 2020 season?

Yes, we do already. I think we're learning how to sell it better. We believe everybody can benefit from that automation capability. It's a different type of sale though. We have that we believe the right products that can really help the user along, and we have to tweak our ability to sell technology. It's not like selling a product. It's more like selling a service or capability. We learned a lot this year. I think we're encouraged by the progress we're making in Q3 and Q4. Those products can really accelerate as they head into next year.

When you say sell a service, is that something that Pentair would benefit from on a recurring basis or is that a pool dealer that would be part of their revenue stream?

Well, clearly the vision would be that everybody would benefit, right? At the end of the day, most people buy technology on a more rented basis because they believe whatever they have is going to become obsolete. We’d have to line the channel that way, Deane, but ultimately, we think that's going to be the right answer. We're launching in this quarter the new Pentair Home App, which basically is a broad umbrella that takes all of the suite of products that Pentair offers and allows you to be connected to that Home App. We’re hopeful that as the consumer sees more and more things that are available to either connect with Alexa or Google Home or Apple or whatever your devices that you start to see the benefits of monitoring your water quality, and then starting to buy some of the products and services that would attach to that.

That's good to hear. And just last one for me when you talk about the commercial office water opportunity, are you thinking and still we agree that it's still very fragmented? Are you thinking of a rental opportunity or would this be equipment sales or both?

Today, it's about having the right systems and likely selling them, Deane, as you know the market does rent them. The end solution providers do rent units. Don’t know yet if that's the space that we want to be in. But we introduced carbonated water some 8 to 10 years ago. We were probably early in the market. We have all the technology and we deliver that for food service and so how do we bring that into a commercial office environment in a productive way, if that's what people want. As you guys know, there's a lot of fickle drinkers. The first one is tough, getting tea and coffee. Most tea and coffee needs to be filtered, so you don't scale the units or cause damage to those units. Our filtration plays a big part in that. If we expand that filtration into other forms of water, we think there's a huge opportunity for Pentair. Look, this is forward-thinking; we believe we have the technology where it's probably not a 2020 launch, it's probably somewhere in 2021.

Good morning, guys. Quick question on price cost. I guess, with working down channel inventory and kind of generalized market weakness, some of that related to weather earlier in the year. I would imagine it's harder to get price certainly, probably more room for incentives than to try to raise prices in the channel. Is that something we should expect to start expanding more rapidly from this point now that we've kind of cleared the season, cleared the channel overhang from an inventory perspective?

I believe the best way to view this is that, as I mentioned earlier, it represents a more normalized level of pricing. A significant portion of the overall pricing we observed came from the pool business, which had an unusually high price last year due to inflation. This year, they implemented a price increase in September, which follows the usual timing for such adjustments. I would characterize that as reverting to a more historically normal level, and we see something similar in our other businesses. We did not observe any unusual reactions to price this year related to channel inventories, and we are simply returning to a more normalized level since last year's elevated prices were primarily influenced by additional inflation.

Got it. And then I guess as it pertains to the aquatic season, just as we kind of round it down there in the third quarter, obviously you had a slow start with weather and particularly in some of the warmer regions that would have been bigger contributors in the first quarter. Did any of that get made up later in the year just with the season, maybe stretching out longer, not even weather related, but just thinking of folks are always going to be busy kind of May through August, but maybe they do an extra job in September. Is that something that you guys noticed and maybe sets up, accomplish and think about and sell through next year?

Yes, I think some of it will. I don't think, first of all, the comp is meaningful enough. But yes, those pool builders will continue to work as long as they can in those areas. They'll fill in jobs in the slower season that they would have otherwise not done. But they will also probably likely celebrate the holidays that exist in Q4. So you're not going to see that same level of build that you tend to see in the more summer seasons.

Good morning. Could you provide some color on what you saw geographically? I believe last quarter you talked about Europe and China being positive. Did that continue? And any expectations as we look forward towards the end of the year?

Sure, it did continue. Earlier in the year, we mentioned some weakness in Europe, particularly in filtration. As we moved through Q2 and Q3, we started to see improvement. Europe is now back to moderate growth, and China has also returned to a reasonably good growth level.

And then just a more longer-term question on aquatic. How should we think about the impact from the Variable Speed Pump Legislation that goes into effect in 2021?

We believe in 2021 it should help our overall sales. Variable Speed Pumps for us today are probably just over half of our total pumps sold. They do sell at a higher sell-through value. We do believe as the transition happens, those of us who've been through these transitions before always have to question when those dates are going to really happen and will there be slippage and also how does the inventory work its way through. We’re not putting anything into 2020, obviously, and we’ll see if there’s a relative bump in 2021, but overall should be positive to our business.

Thank you. Good morning. Maybe just following up on that geographic point, you had emphasized some of the weakness in Ag. We've talked a lot already about residential trends in the US in the past few months. Just wondered if you could give any detail around what you've seen in some of the more commercial or industrial markets in the US? If there's been any particular shift in demand from month-to-month since July?

Nothing significant from a month-to-month perspective. Our 80% of our businesses overall is driven by the residential and commercial end markets and as we move through the balance of the year, we've talked about sort of the inventory impact, but beyond that the underlying demand has remained positive and we continue to see that kind of reading out through the balance of the year.

Thanks. And then on your sort of segment Income Bridge I guess on slide 5, when we're thinking about the productivity portion of that in aggregate, it looks like it's probably a maybe a $20 million tailwind or something for the year as a whole. If you could just sort of clarify that sounds about right and then when thinking about next year, do we think about some of those measures that you've accelerated around productivity pushing that number up or is that a pretty good run rate for the current demand environment?

Yes, I think what you're seeing in Q3 is more in line with the level that we would anticipate. And I think to remember kind of what makes that up. There are multiple elements. There’s material productivity, which we're working on trying to mitigate some of the inflation headwinds. There's operating costs productivity that would think about that as you’re looking at opportunities to reduce G&A costs. Then there's factory productivity, but then what's offset that is also the investments we're making in the growth areas around R&D and selling, marketing investments and technology and things like that. As we think about this year and into next year, we will continue to look for increasing levels of productivity but utilizing some of that to continue to invest in the areas where we see the biggest growth opportunities.

Thanks very much. And one last quick one for me. Looking at the filtration operating performance, you had pretty healthy sales growth there in Q3. The incremental margin was around 20% or so. Is that a reasonable sort of placeholder for that business with its current mix or do you see anything sort of one time within that figure?

I wouldn't call it one time, but with this, this is where we do have the residential systems and also the consumer services and we are significantly investing in those businesses, right. So we're very encouraged by the top line growth we have and we continue to add back digital marketing, advertising, branding and R&D spend to really accelerate the long-term growth there. So I think this is a more normalized pattern as we head into 2020, benefiting from the growth and then reinvesting a portion of that income back into fuel more growth.

Hi. Thanks, good morning. I want to ask a geographic question and understand the comments about the EU filtration kind of moving up from moderating growth in China doing okay, now. I wonder if we could just get a little bit more detail about why that as we look at macro numbers, Europe continues to get worse. China, the GDP numbers continue to weaken. What's going on with your sectors or the market share that's helping those regions?

Yes, so let me talk about China first. In our China business, we said before in China, Southeast Asia overall is residential and commercial filtration primarily. Think about that being just north of 100 million dollars on an annual basis. The growth rates we're talking about are really about starting from a relatively low base in a very enormous market in which we have a dedicated China team and we have a dedicated factory and dedicated R&D lab. We invested a lot in new product growth and marketing. We’re winning in a space that may or may not overall be growing, but we have a lot of runway left in that area. In Europe, Mark gave the overall numbers and that is appropriate. Within those overall numbers, there are things that are doing well in Europe, and those that aren't doing so well in Europe. As we look at some of the global industrial product lines, we definitely saw slowdowns. When you take a look at some of the more installed base, residential and commercial aftermarket businesses, they are doing okay, but in no way would we call it a robust market environment.

Okay. Can you help us with the size of the EU industrial business?

Yes, I think it's roughly $100 million.

$100 million total for the year?

For the year, right. Not in a quarter.

Okay, great. Then just switch gears over to the R&D, hearing about the investments in 2020, or is it similar levels of R&D, but more focused around some of these growth opportunities, or should we expect some kind of a step up in R&D spends?

Yes, I think you're going to expect a step up. I've said many times that we have the ability to invest a lot more in R&D. We'll feel better about that investment when we feel marketing has done the work to produce the roadmap of where our R&D will be best utilized. We're really excited about our automation platforms and we have a global innovation center around automation, one Pentair solution that would work across the enterprise. We're really excited about that roadmap, and then around our treatment, and water treatment Innovation Center, we're really excited about the nano and ultrafiltration technologies out of the CPT acquisition and our X flow business, expanding those into both residential and commercial, very excited. As I mentioned earlier, building systems capability that takes that technology and gives the overall solution. Those are the double downs for me and the team, and I'm going to accelerate that investment in 2020 and probably 2021. We're encouraged and excited by the products coming out of that investment.

Hey, guys, good morning. Thanks for taking the questions. Maybe just first one on price going back to that topic to clarify a bit. I know 2019 was a bit of normal with the three points here and I know it's early for 2020. But do you think it's reasonable to assume we just settle back to somewhere around the point in price for next year, like we've seen in past years, or was the pricing this year late enough in the year where there's still some spillover into the early part of next year?

Yes, I think about it a slightly higher than that, 1% that we've seen, so prior to 2018 for the few years prior to that, it had been right around 1%. But that was I call that like historically low, so something in the 2% range is probably a little bit more in line with what would be historically normal. With a rounded range on that 50 basis points. Okay. I mean, I think it's too early to say. The businesses that went out in September, as Mark said, we were out in that range and we saw those pricing stick, and we’re generally well received by the overall customers, and there was a more normal, and then we'll see how the others do.

Okay, great. That's helpful. And then just a second question going back to Flow for a second. I know you, you kind of walk back to core growth outlook for that segment through the year and you sort of did the opposite last year and walking it up through the years. So how do you de-risk the view here for Q4 just given how lumpy it's been all year, and then as you think about 2020, is this a segment you'd expect to grow year-on-year along with the overall business? Thanks.

I can't call it de-risk. I can just tell you that it represents the last multiple quarter trends, and it doesn't produce any incremental upside sequentially from things growing off of how they did the previous quarter. There is some year-over-year benefit as you look at Q1 and Q2 in this business next year. We'll see how confident we are when we come up with the guide of being able to drive organic growth in Q3 and Q4 of next year.

Hi, good morning, guys. Hey, I just wanted to come back to Aquatics. You talked about some of the technology and growth priorities you have there and pool. As we think about those incremental costs and price moderating, but also some relief on ROS and other spending. What's the right incremental margin range we should be thinking about next year as you maybe see a more normal top line?

This business has a fairly sizable drop through. It's sales-wise material and a really efficient manufacturing process. So good drop through. I'm not going to give you an answer because this is a huge value contributor to Pentair. I want to invest in this. I think we have some really exciting technologies in the pipeline here as well. I think our opportunity is being further down the aftermarket cycle with the services channel and making sure we’re the company of choice for consumers and that services play. Making sure that we go back to our roots, I'd still say we are the technology leader, but we used to be significantly more advanced than we are today. We believe we have those technologies in the pipeline and need to drive them through a new product development phase, and that will be an investment thesis for 2020 as well.

Okay, great. And then shifting to restructuring, it took I think $6 million this quarter and $7 million last quarter. Are you budgeting more spending in Q4? And then just thinking about the payback? Did most of that get realized in the quarter? Do you see some of that rolling over into 2020 and from a saving standpoint? Thanks.

We don't include in our guidance an expectation around restructuring, but I would anticipate there would be some incremental restructuring again in Q4. The investments and restructuring that we've made this year really wouldn't read out now, but those would be part of how we think about 2020. As Mark mentioned, we're attacking some of the factories and some of the efforts within the factories. Those tend to have a little bit longer payoff than just structural changes to the business. We’ve made the right investments; we do have a larger footprint than we need and it is always geographically perfect. We've addressed some of that, especially on the flow side, as Mark mentioned. While we're seeing the margin improvement, I think there's still an opportunity for more margin improvement down the road.

Okay. And geographically, where have those costs been focused on restructuring?

A little bit everywhere.

Thank you for joining us today. We are encouraged by our third quarter performance, and we continue to see further signs of stabilization in our core business. We saw further productivity improvement in the quarter and we continue to build on our strong culture. We've been investing and we'll continue to invest in our key growth strategies, as well as digital enterprise capabilities to better serve our customers. We have a strong capital structure and solid free cash flow, and we will continue to invest in our strategy to be the leading residential and commercial water treatment company. Thank you for your continued interest. Dorothy, you can conclude the call.