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Pentair (NYSE:PNR)

Q1 2013 Earnings Call

April 23, 2013 9:00 am ET

Executives

James C. Lucas - Vice President of Investor Relations

Randall J. Hogan - Chairman, Chief Executive Officer and Member of International Committee

John L. Stauch - Chief Financial Officer and Executive Vice President

Analysts

R. Scott Graham - Jefferies & Company, Inc., Research Division

Brian Konigsberg - Vertical Research Partners, LLC

Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division

Deane M. Dray - Citigroup Inc, Research Division

Garik S. Shmois - Longbow Research LLC

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Joshua C. Pokrzywinski - MKM Partners LLC, Research Division

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Christopher Glynn - Oppenheimer & Co. Inc., Research Division

Hamzah Mazari - Crédit Suisse AG, Research Division

Brian Drab - William Blair & Company L.L.C., Research Division

David L. Rose - Wedbush Securities Inc., Research Division

Chip Moore - Canaccord Genuity, Research Division

Operator

Good morning. My name is Shelley, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pentair Q1 2013 Earnings Conference Call. [Operator Instructions] Jim Lucas, you may begin your conference.

James C. Lucas

Thanks, Shelley, and welcome to Pentair's first quarter 2013 earnings conference call. We're glad you could join us. I'm Jim Lucas, Vice President of Investor Relations. With me today is Randy Hogan, our Chairman and Chief Executive Officer; and John Stauch, our Chief Financial Officer.

On today's call, we will provide details on our first quarter 2013 performance as well as our second quarter and full year 2013 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 10-K for the year ended December 31, 2012, 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.

All references today will be on an adjusted basis, unless otherwise indicated, for which the 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. In recognition that there are other calls this morning, we will target it to be done in 1 hour.[Operator Instructions]

I will now turn the call over to Randy. Randy?

Randall J. Hogan

Thanks, Jim, and good morning, everyone. Let me begin with our first quarter performance on Slide 3. This marks the second quarter for Pentair since we successfully closed our merger with Flow Control at the end of September last year. I want to note straightaway we're very pleased with the progress we've made on integration and the momentum we've been building.

Before I go through the first quarter results in detail, I want to note that we will be discussing our operating results on an adjusted basis to better address the core operating performance of our businesses and referring to 2012 on a pro forma adjusted basis to provide a more accurate apples-to-apples comparison that includes Flow Control in the results. You will find reconciliations of this for overall Pentair and the segments in the appendix at the end of the presentation.

With that, here are the numbers: First quarter revenue grew 1% on an organic basis but was flat as FX was a 1% headwind. Adjusted operating income grew 4%, while adjusted operating margins increased 40 basis points to 10.1%, as price and productivity once again more than offset inflation.

Adjusted EPS grew 7% year-over-year, coming in slightly higher than our expected range at $0.58. Free cash flow for the quarter was a usage of $29 million, in line with our seasonal timing. We believe we're on track to deliver full year free cash flow of greater than 1% of net income once again.

The top line and adjusted operating income were in line with our prior guidance. We made good progress in executing the action plans to deliver the $90 million in synergies we outlined in November, and John will discuss that we've now increased synergy expectations to $100 million for the full year. In addition, we completed $140 million in share repurchases, and we delivered a 25% tax rate in the first quarter. So overall, we are underway at flank speed.

Now let's turn to Slide 4 for our performance review on our largest segment, Water & Fluid Solutions.

Water & Fluid Solutions sales were up 5% on a core basis, and FX was a 1% headwind. As a reminder, Water & Fluid Solutions represents the legacy water segment for Pentair plus the Water & Environmental Systems, or WES, business from Flow Control. Overall, we saw strong volume and price growth, which more than offset the FX headwind.

The residential and commercial vertical, which represents roughly half of the segment, grew 10% in the quarter as the North American residential recovery continued. We saw double-digit gains in our aquatics business, which is hard for us to imagine here in Minneapolis, given we just got a foot of snow last week and more snow last night. Growth was very good given that Western Europe continues to be a challenge, particularly due to distributors maintaining lean inventory and levels -- lean inventory levels and minimal order activity through the start of the year.

In food and beverage, which accounts for nearly 1/5 of Water & Fluid Solutions, sales grew 17% in the quarter, led by solid double-digit growth in agriculture and several beverage projects that were postponed at the end of 2012 shipped during the first quarter.

We won our second major beverage project that combines hygienic valves from our legacy Water & Fluid business and industrial valves from our new Valves & Controls business. This is another example of how we are starting to see some winds in combining the 2 portfolios.

We continue to look for strength in beverage based on our project backlog, and agriculture is well positioned entering the spring selling season.

Infrastructure, which is nearly 20% of Water & Fluid Solutions, was down 10% in the quarter as Europe continues to be miserable. On a positive note, our North American municipal backlog continues to grow, and bidding activity remained healthy.

The right half of the page shows fourth quarter Water & Fluid Solutions operating profits and margins. Water & Fluid Solutions adjusted operating margins improved 90 basis points to 10.6% on the benefits of productivity, price and mix. With the North American residential recovery gaining momentum, we saw a strong drop-through to the bottom line as we have realigned the cost structure in the last several years during the prolonged downturn in this important market. In addition, we made good progress with our repositioning actions, which should begin to read through.

In summary, Water & Fluid Solutions began 2013 strong. With the actions taken to embed PIMS in this segment and the tailwinds in North American residential and food and beverage, Water & Fluid Solutions is in a good position to continue its momentum on operating margin expansion in 2013.

Now let's turn to Slide 5 for a review of our Valves & Controls segment performance. This is the second quarter for Pentair's newest segment, Valves & Controls, and we're quite pleased with the progress we're making. We've been actively engaged with Valves & Controls leadership and are leveraging their deep knowledge of the business. We're tweaking the strategy to focus more clearly on profitable and sustainable growth, which was not always achieved in the past, since the business had growth rates through the cycle that exceeded the industry but margins that have been below industry peers.

To unlock the margin potential we see in Valves & Controls, we're taking a disciplined approach by driving PIMS combined with a simpler, more focused service-led organization. The commercial organization is renewing its focus on development of the MRO services business, as well as being more selective in pursuing large profitable projects.

Looking at first quarter results, we are encouraged that backlogs remains near record levels and shippable backlog grew 17% sequentially, setting us up nicely for low single-digit growth for the full year. Markets were choppy, reflecting the overall economic environment. The 4% top line decline is not reflective of the overall business trends. Oil and gas had a very difficult year-over-year comparison. And power is yet to begin shipping; it's now growing backlog. Plus, Asia has seen a slowdown in spending in process markets. Our book to bill was 1.1 at the end of the first quarter, portending a return to top line growth in the second quarter. We will discuss orders and backlog in further detail in just a moment.

The right half of the page shows fourth quarter Valves & Controls operating profits and margins. Valves & Controls operating margins were up 10 basis points to 10.1%, owing to price and productivity improvements. We've seen broad adoption of PIMS, particularly in the enterprise, and we've seen momentum building on integration synergies that should help drive further margin expansion.

We've deployed 8 senior operating leaders to help accelerate the deployment of Lean, and over 10,000 e-learning PIMS modules have been completed by over 4,000 Valves & Controls employees. In addition, over 1,000 Valves & Controls employees have participated in our PIMS growth tools training.

In summary, Valves & Controls first quarter saw a tough year-over-year comparison, but the fundamentals for this business remain intact and our integration and standardization efforts made good progress, particularly with regard to training on PIMS.

Now let's move to Slide 6 for a look at the orders and backlog for Valves & Controls. As you can see on Slide 6, the Valves & Controls backlog is broken down in 4 key industries, 3 of which fall into our energy vertical -- oil and gas, power and mining -- and one in our industrial vertical, which is the process business.

Backlog grew 1% to a near record $1.4 billion. Within oil and gas, backlog remains strong globally, despite a slight decline from record Q4 levels. Orders declined at a high single-digit rate due to project delays and a tough year-over-year comparison.

The Power business saw a high single-digit increase in orders, so we expect to see sales growth return in power in the second half.

Mining, one of the smallest pieces of Valves & Controls, saw a steep double-digit decline in orders following strong orders in the fourth quarter. However, mining backlog remains at record levels, with projects scheduled to ship through the remainder of the year.

Finally, backlog within process saw a healthy increase, while orders remained flat year-over-year. Process has seen shipping delays in Asia, but the strong backlog points to top line growth as the year progresses.

We knew this business would have some quarter-to-quarter lumpiness, but we remain encouraged by the growing backlog, particularly the 17% growth in the shippable backlog from the first quarter to the second quarter. The organization has been simplified, the team has brought a new discipline to pursuing large projects, and we're very pleased with the adoption of PIMS throughout all of Valves & Controls.

Now let's move to Slide 7 for a review of Technical Solutions.

Technical Solutions comprises Pentair's legacy equipment protection business and Flow Control's thermal management business. Sales through the segment declined 3% for the quarter, led by a nearly 20% decrease in infrastructure, consisting largely of datacom, telecom and networking, which remain weak, particularly in Europe. Industrial declined 2% as inventory destocking continued for much of equipment protection customers. Energy was up 4% as thermal delivered strong product sales in the quarter.

The right half of the page shows fourth quarter Technical Solutions, operating profits and margins. Technical Solutions operating margins increased 230 basis points to 17%, owing to positive contributions from price, productivity and mix, which helped mitigate inflation headwinds in the quarter.

As we've seen in the past few quarters, Technical Solutions is growing its profitable business, while the lower margin infrastructure business is where the declines are occurring. While we expect the top line to remain pressured in Technical Solutions, we'd expect further margin improvement as mix remains favorable and standardization gains momentum.

Let's now turn to Slide 8 for an overall market trend update. Given the top line challenges that persist and the mix signs we're all seeing, we thought it would be very helpful to provide an update on trends on our 5 key verticals as we see them.

Looking around the verticals, Pentair remains well aligned to serve key global megatrends, and we expect to see growth as the year progresses. Within Energy, we still expect low single-digit growth for the full year. The first quarter saw a modest contraction as Valves & Controls faced a tough year-over-year comp. But our backlog provides visibility that growth [ph] accelerating in the second quarter and into the second half. In particular, power orders will continue to grow and should begin shipping in the second half. Industrial remains mixed globally, but we continue to expect modest growth for the full year.

We've seen daily orders rates improving within our Technical Solutions business, and again, backlog and Valves & Controls within the process markets points to an acceleration in the growth rate and the declines we saw in the first quarter.

Residential and commercial has finally evolved into a much improved story. While Europe has not shown signs of recovering, the North American residential market has clearly strengthened. This should contribute nicely to Water & Fluid Solutions margins this year, given the amount of cost we've taken out of this segment and the strong drop-through to the bottom line we should experience as the North American recovery continues.

For the year, we still expect mid to high single-digit growth in the residential and commercial vertical.

Infrastructure is the one vertical that we expect to be down for the full year, which is likely not a surprise given the current state of municipal financing around the globe. While we do not expect much improvement in the datacom, telecom and networking markets within Europe, we have started to see some hints of bidding activity on the water side. Within North America, our municipal backlog has shown strength in the last 5 quarters and bidding activity was strong in the first quarter. Overall, we'd expect the infrastructure to be down mid-single digits for the full year.

Food and beverage, which is our smallest vertical, continues to justify our unique focus. Agriculture has shown consistent high single digit to low double-digit growth for several years now, and we would expect ongoing gains to be made as we continue to invest in this space. On the beverage side of the business, we not only saw delayed projects from the fourth quarter shipped in the first quarter, but more important, backlog continues to grow. Overall, we expect high single-digit growth for food and beverage for the full year.

Now let's turn to Slide 9 for a summary of our first quarter. While markets remain mixed, we believe our diverse portfolio positions us well for the future. As we've highlighted on the previous slide, we're expecting growth to accelerate as the year progresses following a modest top line showing in the first quarter.

We're executing on our commitment in the first quarter, and the integration of Flow Control continues to gain momentum. We completed all of our planned repositioning actions, and standardization roadmaps are being developed and implemented throughout the organization. As we progress with the integration of Flow Control and gain more visibility, we are raising our 2013 synergy expectations to $100 million.

Our first quarter performance positions us to deliver on our 2013 commitments, which John will expand upon.

With that, I'll turn the call over to John.

John L. Stauch

Thank you, Randy. Please turn to Slide #10, labeled Q2 2013 Pentair Outlook.

For Q2, we are initiating revenue guidance of up 3% to 4%. We expect the revenue contribution to remain mixed and, again, led by Water & Fluid, which should be up 5% to 7%. We continue to see high single-digit growth in our North American residential market, which represents approximately 20% of overall Pentair sales and nearly 45% of Water & Fluid sales.

Valves & Controls should turn modestly positive in the quarter as near record level backlog, 17% growth in shippable backlog versus Q1, and an easier comparison year-over-year produce revenue expectations of up 1% to 3% for the second quarter.

Technical Solutions is still expected to be down year-over-year, as mid-single-digit growth in Thermal Management is not enough to offset continued headwinds in equipment protection. Although average daily sales rates in orders in equipment protection are improving, we do not expect to cross over into year-over-year growth until the third quarter.

We're expecting operating income to grow 12% year-over-year and operating margins to expand greater than 100 basis points as standardization and synergy benefits continue to accelerate. Water & Fluid Solutions margins are expected to exceed 15.5%, further evidence of our success in driving PIMS and Lean throughout our businesses.

EPS is expected to be up around 17% to $0.88 to $0.91 per share with a tax rate of roughly 25%, interest of roughly $18.5 million and total weighted average shares around 205 million. Q2 is a seasonally strong cash flow quarter for Pentair, and we expect cash to exceed 125% of net income for the quarter.

Please turn to Slide #11 labeled Q1 to Q2 Seasonality. For those that have followed Pentair for some time, you know that our second quarter is seasonally our strongest quarter of the year. In the new Pentair, we're expecting the pattern to continue, with the difference being that we expect less of a fall-off in Q3 and Q4 with the inclusion of Valves & Controls and Thermal Management, which both have fairly strong back half as a standard rhythm. Our contribution from our global residential businesses is what drives this Q2 pattern, as the Q2 season is when our distributors and partners ramp up to serve the seasonal demand.

The top half of Slide 11 shows you how the normalized seasonality plays out. This would be for the pro forma 2011 and for pro forma 2012. In addition to that normalized pattern, we feel this year, we'll see an incremental bump due to an acceleration of the North American residential market, a larger shippable backlog in Valves & Controls, and specific projects within Water & Fluid infrastructure.

On the operating income side, we expect to experience a nice drop-through on incremental revenue, which is really leveraged in our factories and on our operating costs. The Q2 seasonal shipments are usually quite profitable, and volume through these factories should produce a rich mix of profit. In addition to the normalized profit opportunity, we expect a lower mix of profit on the incremental project shipped in Q2, but we also expect at least $15 million more in synergy and standardization benefit versus the first quarter as we continue to ramp up the repositioning savings in specific projects that are driving through the integration and standardization team that we have deployed.

So bottom line, we feel confident that our normalized pattern will continue, and we expect to see a very strong Q2 result.

Please turn to Slide #12 labeled Integration and Standardization update. For Q1, we exceeded our modest cost takeout goal. This was a big piece of us exceeding our EPS goal and was especially helpful due to the slight shortfall in Valves & Controls revenue. For the full year, we know that we must continue to overdrive the synergies and standardization benefits to help ensure that we could continue to absorb revenue softness if it happens again.

For the full year, we are updating our total integration and standardization benefit to at least $100 million for 2013. $80 million of this is coming from cost or repositioning actions that have already been taken, and $20 million of this is coming from expected Lean and sourcing benefits that are already in the pipeline. And actions are expected to read out throughout the second, third and fourth quarters.

We continue to fill the productivity pipeline and are getting great winds in sourcing projects -- our stock, castings and electronics on the direct side; and shipping, renegotiating product services and global energy treasure hunts on the indirect side, which have already yielded an expected savings of a $40 million annual run rate. Our Lean projects, especially in legacy Flow Control sites, are accelerating as well.

We have trained over 6,000 people and have built great momentum. A few of the examples are our strategy deployment, transformation planning and scorecards, which have helped build the robust Lean savings pipeline. In addition to these efforts, we're also driving Lean enterprise and standardization of ERP platforms, reduction of accounting entities, payroll centers, payable centers and receivable organizations, which are all intended to drive simplicity and a better customer and employee experience while driving significant savings throughout the organization. We have all of these projects and incremental hoppers [ph] and are in the process of creating a master plan for Pentair that will be the main fuel for 2014 and 2015 synergies.

Overall, we are very confident in our progress and believe that further upside will provide further contingency in the wake of uncertain overall global markets.

Please turn to Slide #13. For Q1, we delivered cash flow slightly ahead of forecast but with still a seasonal usage of $29 million. This was lower than historical usage levels in Q1 at Pentair, but we still feel we can improve on this and generate cash in every quarter of the year. With capital expenditures at 125% of depreciation, we're still investing heavily in the overall efficiency of our factories and systems and have to ensure that we continue to put creativity ahead of capital, especially in our new Flow Control businesses.

Total depreciation and amortization of $320 million, plus approximately $30 million of noncash stock compensation, provides a pretty nice cushion for net income to cash and one which we believe we could take advantage of as we start to significantly generate cash flow to pay off debt, accelerate buybacks, put the capital work in the form of acquisitions in our best-performing businesses.

We expect debt levels to remain around $2.6 billion, flat with year-end and we are anticipating having utilized or purchased $825 million of the approved $1.2 billion of buyback by the end of 2013.

Please turn to my last slide, Slide #14.

I will keep this pretty brief so we will have time for your specific questions. Even with some choppiness in some end markets, we're keeping our overall full year outlook consistent with our previous forecast. Sales, operating income, operating margins, net income and EPS are all the same. While some markets like industrial, municipal and energy give us some cause for concern, we have seen other markets like food and beverage, agriculture and North American residential show great signs of resiliency. We'll be evaluating our market outlooks and performance in Q2, and we'll update the full year, if necessary, after we conclude our seasonally important quarter.

With that, I will turn it back to Randy. Randy?

Randall J. Hogan

Thanks, John. And if could turn to Page 15. We'll go through a few of the things John just covered, just to wrap it up before questions. What I thought I'd say in closing is that the first quarter really does position us well to deliver on our 2013 commitments. The top line remains mixed. We have strong backlogs in energy and food and beverage, and we continue to see strengthening in the North American residential market.

As we stated earlier, the residential recovery brings with it strong drop through to the bottom line given the prolonged downturn we experienced, the process improvements we've made, and the amount of cost we've taken out of the business over the last 6 years.

Our integration and standardization efforts continue to build momentum. And we now expect $100 million in synergies versus our prior target of $90 million. We're pleased that the adoption PIMS throughout the Flow Control businesses, has exceeded our initial expectations and we're happy with the creation of the new Pentair.

With that, operator, we'll take our first question.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Scott Graham from Jefferies.

R. Scott Graham - Jefferies & Company, Inc., Research Division

I was just wondering. Last quarter, you gave us a really cool number. And what it was, was, that you said that by -- when you had reported at that time, you had identified 75% of the $90 million of synergies. And I was just kind of wondering if you can kind of give us a similar number updated for the first quarter on the $100 million.

John L. Stauch

Yes, I'd say that the $100 million is 100% identified, Scott.

R. Scott Graham - Jefferies & Company, Inc., Research Division

Great. The other question was kind of simple. I know that you're seeing kind of a choppy energy market. I was wondering, could you tell us what your percent of sales, energy-wise -- and specifically, oil and gas is what I'm referring to -- is North America versus rest of world?

Randall J. Hogan

I don't have that right at my fingertips.

John L. Stauch

No, Scott, I don't know if I have that on top of my fingertips. Because I think there's a breakdown in 2 categories. And our Thermal business deal with a lot of what's going on in the oil sands, which would be up in Canada. And then our global Valves & Controls business is pretty spread across the entire globe, as far as oil and gas. I can certainly...

Randall J. Hogan

And equipment protection is skewed. The energy is skewed to the U.S.

John L. Stauch

But it's probably a good number to know, and we'll see if we can do that.

R. Scott Graham - Jefferies & Company, Inc., Research Division

Well, I guess maybe more succinctly, are you sensing that the choppiness in the orders that you're seeing is more of a function of the North American markets or the rest of the world?

John L. Stauch

I mean, I think what we're seeing is, and it's probably the spread and certainly what's going on within the relative oil and gas, either Brent or West Texas, and then how that compares with what's going on in the oil sands. We're seeing a pause, if you will, in some of those large projects as that all plays out. But we still are seeing a healthy capacity expansion with oil and gas.

Randall J. Hogan

And I'd say it is skewed to a little more softness here. The Middle East, Southeast Asia, that remains strong. But again, we skew because of the legacy Pentair. We skew to more in the North America.

Operator

Your next question comes from the line of Brian Konigsberg from Vertical Research.

Brian Konigsberg - Vertical Research Partners, LLC

Just -- so on synergies. So you raised the targets for 2013. You kept $230 million by 2015. It feels as though you've identified almost incremental savings rather than more of a pull-forward. Is there a reason to believe that it is a pull-forward rather than an incremental? Or maybe you can just touch on that.

John L. Stauch

I think we're very confident in what we can see through 2013. And obviously, the businesses probably have a number greater than what I shared with you. We believe and have always believed that there's opportunities to increase the $230 million. And right now, we're trying to close the gap on what we need for 2014 and ensure that we've got the $230 million and then we'd drive for upsides beyond the $230 million.

Brian Konigsberg - Vertical Research Partners, LLC

Okay. And just back on the Valves & Controls project work, just -- I know that's a business you guys were trying to get your hands around. Had you guys taken a look at the backlog that's existed within Valves & Controls? A lot of the pump players, well, on the pump side, who were selling into a lot of the same projects, particularly in the Middle East over the last couple of years, have experienced a lot of margin pressure that has kind of played out. But I believe that the Valves are really a leader in the sales cycle. I was curious, as you kind of look at the backlog on the Valves & Controls side, do you anticipate that you are going to be realizing some low-margin, lower margin than normal backlog within that business that might mask some improvements from operations that's kind of yet to bleed through. Can you touch on that, please?

Randall J. Hogan

Yes, on that subject, one of the things that we've done and I'm really impressed with the Valve leadership team that's come aboard, I mean, the legacy Valve leadership team. As we've focused on the strategy and simplified the organization, one of the things that, that team identified and we certainly supported, was more discipline around bidding projects with good margin. They had -- there was probably $25 million worth of sales we could have had in the quarter, but we didn't bid it because the margins weren't very good. So we think that over time that discipline is going to lead to a better margin in the backlog. There's a few projects in the backlog which have low margins that we know will read out. Some of them read out in the first quarter, maybe a couple read out in the second quarter. But we think that the team has really got their arms around it well and the disciplines are already improved.

John L. Stauch

So it's a metric -- just to follow up on what Randy said, it's a metric that we've scrubbed, we can basically measure. And it's one that we've actually asked the business to expect a lower outcome, as Randy mentioned, as we work through making sure we've got all the right cost initiatives in place.

Randall J. Hogan

Yes, it's not just about shares. It's about profitable growth, so that's the discipline that they have in place there.

Operator

Your next question comes from the line of Michael Halloran from Robert W. Baird.

Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division

So just on the Valves side. Could you talk about what the quoting and bidding activity looks like and then also maybe provide a full unit order number? I know you gave it by the 4 pieces, but I'm also curious if you could give the overall one.

John L. Stauch

Yes, I mean, overall orders in Valves & Controls, were up about 3% sequentially versus Q4, so that's a metric that we're keeping our eyes on how we're doing as we kind of look through the quarters there.

Randall J. Hogan

And the book to bill we gave, the 1.1, was overall.

John L. Stauch

And you know for us in the quarter, the overall trade orders are right around $600 million overall.

Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division

Okay. But the quoting and bidding activity side of things, how does that look and what are the customers seeing there?

John L. Stauch

I think you've to go by segment. And as Randy mentioned, I mean, I think oil and gas is in the -- what we would -- I don't know if we call it a pause, but there's a lot of projects that are out there. And the timing of those projects feel like they're a little bit slipping. But the projects...

Randall J. Hogan

But the activity level is still pretty good.

John L. Stauch

It's still pretty good.

Randall J. Hogan

Yes. Mining is way off.

John L. Stauch

Mining is starting to taper off. Process and power are starting to get better.

Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division

Makes sense. And then, the follow-up from me is a follow-up from Scott's question on the -- how much of the $100 million is visible at this point? I know the repositioning actions have already been completed in the first quarter. Is that the same for the sourcing in the Lean side as well, that the actions have been completed and it's just going to take time to materialize? Or are the actions and the work still in front of you?

Randall J. Hogan

The actions are fairly visible. And the way those work is, as you get productivity in sourcing, it has to go through the balance sheet. So you don't get it right away. So against that $20 million of, I think it was sourcing, you could imagine that at a run rate basis. An annualized run rate basis is or going to be twice that.

John L. Stauch

What we're guarding against, Mike -- I mean, if I gave you the raw number, it would be substantially higher. But what Randy and I want to make sure that we have is that you don't want -- there's a productivity column and then what we synergy and standardization column. And we've got to make sure the productivity column stays positive as well.

Randall J. Hogan

And we don't duplicate.

John L. Stauch

And we're not putting everything into the synergy or standardization efforts because we needed the holistic number to read out.

Operator

Your next question comes from the line of Deane Dray from Citi Research.

Deane M. Dray - Citigroup Inc, Research Division

I might have missed this, but could you clarify on the backlog when you're now highlighting the shippable backlog being up 17%, will that be a number that we'll be able to back into or that you'll provide on a go-forward basis? And then when you talk about what's shippable for the second quarter, what's the mix look like? Because you've got no sense of what's going to be coming through for the second quarter. But what's the implied margin there?

John L. Stauch

Yes, Deane. As we got through Q1, the business started to share with us kind of the way we need to think about shippable backlog, especially as you take a look at how they performed last Q1, and then if you look at their last Q2, there was a different Valves & Controls. So the shippable backlog is a number that we feel is meaningful, which means, if you could ship everything to the dates that are in the system, that's what you'd ship to. Now obviously, projects move back and forth. It is a number that we think is meaningful, and therefore, probably a number we will share with you on a regular basis. Within there, Randy highlighted there are a couple of projects in the oil and gas area that will ship at lower margins, which I've called out in that seasonality bridge that we did in one of the slides. But overall, I mean, we're starting to build a pretty healthy backlog because as we get power and process into the backlog, those traditionally have higher margins than what we've experienced in oil and gas and mining.

Randall J. Hogan

So think the 17% in the dialogue we're having with the team is very helpful. It's 17% -- going into the second quarter that number was 17% higher than it was going in the first quarter. And we missed shipping a little bit from where we thought we'd be in the first quarter. So it gives us more confidence that we'll hit the number we expect in the second quarter. That's how we use it.

Deane M. Dray - Citigroup Inc, Research Division

Great. And then, maybe just in terms of the upside versus our expectations on North American residential, maybe you can kind of take us through the next layer of detail on North American pull. Were there any special promotions? Is there -- was there an early buy? And what's your sense of inventory in the channel?

Randall J. Hogan

Well, I think we might have mentioned this in the last phone -- on the fourth quarter call, that early buy was as strong as we ever saw it. Some of that certainly shipped in the first quarter. But frankly, the regular buy was strong, given how bad the weather has been. It's not just been bad here. It's been bad in a lot of the areas, cooler spring, later start to the season. So the strength we're seeing in that aquatics business is really quite encouraging, and the industry is quite buoyant, pun intended. Then the pool builds are up.

John L. Stauch

Pool builds are up. We saw our first quarter of positive revenue growth in our valves and tanks in the water softener market. And we're continuing to see pretty nice sales now in the residential components of Flow. And we have a little bit of flooding, which is happening right now, which is always also usually a pretty good indication for that business.

Operator

Your next question comes from the line of Garik Shmois from Longbow Research.

Garik S. Shmois - Longbow Research LLC

The first question is just with respect to food and bev. You saw some demand in the first quarter from projects that were delayed the end of last year, providing a nice bump in revenues. So has a lot of that pent-up demand been worked through in 1Q? Or are we expecting to see some additional project shipments because of the delays that you saw at the end of last year?

Randall J. Hogan

No, those I think were specific delays as some of the companies got concerned about -- I wouldn't want to blame it on the uncertainty or on the election, but there seemed to be a lot of clogged capital at the end of the year last year and some of that broke loose. But the bidding activity has remained strong, and the food and beverage business is a growth business globally. And we have some -- we have a really good position and some unique technologies, not just in beer but in soft drinks and CO2 recovery. And we've picked up a couple, as we mentioned, last time, we picked up another big, multimillion-dollar project because we have the broader scope now for the industrial valves with the hygienic valves and the filtration system. So we did get that benefit in the first quarter of the delayed projects, but the backlog is actually up.

John L. Stauch

And just to add on to what Randy said, I mean, we've always been strong in beer and certainly, our Beer Membrane is a product that's specced into a lot of global breweries, and those breweries are in places like Africa and Vietnam and Malaysia, and there's a huge growth regarding that. But the product that was in alpha and beta state test in 2011 and '12 was our CO2 recovery system. And for 2013, we'll have shipments in excess of $25 million on that product, and that product is becoming a standard product.

Randall J. Hogan

Which is up 10x.

John L. Stauch

Which is up 10x. And we're seeing some substantial revenue and income coming through on those particular projects.

Garik S. Shmois - Longbow Research LLC

Okay. That's good to hear. And then, I guess, just switching on price cost, if you could provide your view as you look out over the next 3 quarters of the year, where that stands. You made some nice improvements in the first quarter. Are you anticipating any cost pressures from raw materials moving forward, or any benefits in it?

Randall J. Hogan

When we look at the activity in the mining segment, we think that that's a good indicator that there's not going to be a lot of commodity pressure, not a lot of commodity pricing pressure. So we don't think inflation goes higher from here. Employee raises are higher than they were, but we think we have that well managed. But John, I don't know if you'd add.

John L. Stauch

No, I'd agree with that. The pricing is somewhere, going to be greater than 100 basis points, and we think we can do better there. I think our new businesses from Flow Control are starting to put in some of the same price disciplines that we've had in legacy Pentair. And we continue to think we'll make progress throughout this year and into next year.

Randall J. Hogan

And if I could add. John mentioned earlier that we want to make sure we don't double comp between base productivity plus the synergistic activities. And in one way we've done -- that one reason we're able to raise that is that those 2 buckets perform well. And when they perform well in the first quarter, it's usually -- it's a good sign for the year.

Operator

Your next question comes from the line of Steven Winoker from Sanford Bernstein.

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Just looking at Page 3 again, if you could, that 220 points of price productivity and mix, you've referenced it a little bit, but I'd love to get a bit more detail here on the productivity angle versus the mix side. You just talked about pricing. So what was the real productivity side of this? And you mentioned the 2 buckets. I want to get a sense, given how important this is to the story, just give us a sense for the real productivity improvement, if you could.

John L. Stauch

Sure. I mean, I think, first of all, if you take a look at where we were with price in the quarter, total Pentair, we got about a point price. One of the things that's netted in productivity is mix. Mix was about a negative 30 to 40 basis points. Inflation was about a negative 1.5-ish percent, Steve. And then on the productivity side, we were net $3 million to $4 million beyond what we said we got in the IST component, or the synergies. And that was inclusive of, if you noticed, a higher corporate spend, which is partially a quarterly timing. We always spend a little bit more in Q1 because of just certain fees that come in, in Q1 versus the rest of the year. But we also we're continuing to invest in what we're doing on the tax rate, what we needed to do around the suite [ph] structure and what we need to do to ensure that we're spending and investing in what the businesses are driving, to drive the standardization activity. So when Randy mentioned that we feel good about where we are in Q1, that's in light of incremental investment as well to drive the back half synergies.

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Okay, all right. And then when you look at Valves & Controls, I visited a number of those plants before you took them over, and I often thought of them as the gift that should keep on giving as you keep looking for repo and other opportunities to lean them out and drive efficiency. What kind of -- what are you starting? Now that it's a couple of quarters, what are you seeing operationally as you're getting to know these plants and the supply chain associated with them?

Randall J. Hogan

Well, as you know because you've been in the plants, Valves & Control is a great product, great quality, like the people a lot, too much complexity and too much differences between plants. So as I mentioned, we've put into 8 full-time operating leaders, basically, if you will, Lean aficionados from legacy Pentair over into the business. They've been very well accepted into the team, and if anything, they're being drawn on even more than I would have hoped. We identified the 3 most underperforming factories, and we've replaced the plant managers in all 3. And we have Lean rangers that we flowed locally from -- in other words, European -- from European Lean rangers from legacy Pentair to the European plants, same in the U.S., same in Latin America, in order to drive the basics of Lean and start driving that common language that we know is going to help simplify. The opportunity in delivery is enormous. It's not in this industry. Valves & Controls is not an industry that is known for their on-time delivery. We have very ambitious targets. If you recall or followed us long enough to know that in our aquatics business, we used to have deliveries that -- I hate to say it, but we're frequently below 60% on time. And now, they're over 95% on time. It's one of the reasons that we keep gaining market share there. Valves & Controls isn't that bad. It's not below 60%. But it's -- as an industry, it's not great. That drives a lot of waste in terms of inventory. That drives a lot of waste in terms of customer planning. It drives a lot of waste in terms of plant planning. And so, we know it works. We know Lean works, and Lean is the way we're going to simplify the business, and so that's our approach to it. And our goal, it took us 10 years to get Pentair where it is, and I want to be able to get Valves & Controls there in 3. But 10 years was hunt and peck. We have a plan now. So it's ambitious, but I think the team is up to it. I'm very impressed with the Valves & Controls team.

Operator

Your next question comes from the line of Joshua Pokrzywinski from MKM Partners.

Joshua C. Pokrzywinski - MKM Partners LLC, Research Division

Can we just talk first about the ramp in IST as we head into '14? I guess with visibility into that $100 million at 100%, presumably, you have some level of visibility into a bridge between the $100 million and the $230 million.

Randall J. Hogan

Yes.

Joshua C. Pokrzywinski - MKM Partners LLC, Research Division

And I guess, how much would you say you have on what kind of number, order of magnitude for '14? I understand that it's still early but I guess, any way to help calibrate whether it's a half-step jump from the $100 million all the way up, or if we get an accelerated realization? Just any kind of color there I think would be helpful.

John L. Stauch

Yes, so, Josh, the number I feel obviously best about, from a number perspective, is obviously the repositioning and the restructuring numbers because they're -- when people leave, those costs permanently leave the organization, and that was incremental to anything we were doing at Pentair. So that's an $80 million benefit this year, and that's well over $100 million next year, given the timing when those people are leaving. So 100% confidence on that number, and it's a known trackable number that doesn't get tied up between this productivity expectation and the synergy. To give you a number, the synergy targets for 2013 around the sourcing and Lean exceed $40 million versus what we're saying is $20 million. And they have to work their way through inventory and they have to work their way through the P&L. And we've got to make sure that they're incremental to what would have been in the base plans anyway. When you take a look at that number from '14, and it probably shouldn't be a surprise, lean builds momentum. And as Randy was talking about when we did this deal, having 100 factories all signed up to $1 million of Lean benefit or $100 million, is not a number that would be insurmountable. So everybody has internal stretch targets that they're driving to around those ranges, and so when you look at the productivity decks and the synergy decks, it's very encouraging. That being said, those same people would've been working on base productivity. So we want to make sure that we're not double counting the synergies in lieu of what we would've got in base productivity anyway. And that's why we're a little bit more conservative and cautious on our outlook. And as I think we get through these and we look at the examples I gave you, bar stock, and negotiations that are in the rack, [ph] those are all real. And as we get more and more confident on what's actually a permanent cost out, we'll certainly share that, and then we can have more confidence on what the '14 and '15 numbers will be.

Joshua C. Pokrzywinski - MKM Partners LLC, Research Division

Okay. I think that's helpful. And then just one clarifying point, maybe you touched on in the prepared remarks, the $825 million in buyback that you're signed up for this year, I noticed that the share count at 205 million looks like either that is very second half or even fourth quarter biased. Is that a new number? I know the 205 million is unchanged, but I'm just trying to understand: is there an element of conservatism or just very late positioning of that buyback in the year?

John L. Stauch

It's actually accelerated from our original views, and we're definitely planning now to have everything complete by the end of '14 and we'd only have $375 million to go next year. As you know, if our debt levels allow, it's in our best interest to do it sooner rather than later. And so we're...

Randall J. Hogan

But where we are is where we planned to be at this point. We accelerated before, as John just said, and we announced that last quarter. And we did the $140 million in this quarter, which is about what we thought we would do. And we thought we'd do more in the middle of the year, in the second half. One reason is, we're disciplined about cash flow, and we didn't know what our first quarter cash flow was going to look like because the Pentair legacy typically was a big sucking sound on cash in the first quarter, and it the minus $80 million or so last year. So we wanted to see what the new -- so we did what we planned to do.

Joshua C. Pokrzywinski - MKM Partners LLC, Research Division

Okay, so $825 million is not a new number, quarter-over-quarter?

John L. Stauch

No, no. Just sharing where we are as a status update, Josh.

Operator

Your next question comes from the line of Jeff Hammond from KeyBanc Capital Markets.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Just on Thermal, can you -- as you look at -- do you expect the mix dynamic to continue, i.e. the infrastructure stays weak, and the other businesses continue? And then you made the comment on oil and gas in a kind of a pause in order of quoting activity. Is that more of a Valves & Controls comment, or does that flow over to Thermal as well?

John L. Stauch

I'll take the first half. I think, when you look at technical solutions, I mean you take thermal and you take equipment protection. Thermal had a great quarter. And our technical -- or our equipment protection businesses is struggling through 2 markets, infrastructure and a slower industrial vertical. Our comparisons in equipment protection get easier in the second half of the year, and we're also focused on the food and beverage market, the energy market and an opportunity for our products to be in those spaces. As far as the Thermal into the oil and gas markets, we're really specifically in the cold weather climates or areas where we see a desert-like environment, where heating is necessary in the process. And those projects are enormous, but they're also dependent on certain price points. And that's what we're constantly monitoring in that side of the business.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

So have you seen slowing in the quoting activity in that side of the business?

John L. Stauch

We've seen a lumpiness, meaning, we -- [indiscernible] was a project that was canceled in its entirety.

Randall J. Hogan

Which we had -- the project we had worked on.

John L. Stauch

We had worked on that. Now there's another project that's starting to come up in its place, which will be in a different location. And then there's large projects or a series of large projects in Canada that are obviously dependent on where the oil spreads are. So, yes, these are slowed, no doubt about it.

Randall J. Hogan

They're slow off what I would call our high expectations, but I think the business will still do well. One area that slowed in the first quarter, and for the Thermal business, is that they're fairly large in Scandinavian countries for snowmelt and in commercial and residential. And Scandinavia had been a bright spot in Europe, in Western Europe in terms of growth, and we've actually seen even Scandinavia slow down now, which is more of a -- that's a comment that I would draw across all of Europe, not just what we saw on Thermal, but it's a good measure for it.

John L. Stauch

So Jeff, just to follow up. I mean, one of the reasons we went back and restated the pro forma as we did without the projects in it, for these solutions, as when those larger projects come, those should be nice incremental upside for Pentair.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

And the mid-single-digit growth you see in that business, is that x the big project comp?

John L. Stauch

Yes.

Randall J. Hogan

It's over the pro forma baseline that we set out.

Operator

Your next question comes from the line of Christopher Glynn from Oppenheimer.

Christopher Glynn - Oppenheimer & Co. Inc., Research Division

I'm just wondering about the Europe linearity, if there's anything curious there, or if you'd even call it may be stable at this point, just kind of an overall complexion.

Randall J. Hogan

I would love it to be linear and flat. I would not really lie. It's really a mixed bag. We've seen our equipment protection business, things they bottomed out. Residential seems to be finding new plateaus on our further downward slide. And so I don't really have a lot of faith that we've seen the bottom yet in the U.S. And even in Eastern Europe, which had been pretty robust, even that is feeling a little softer than it did, at least, when I look at orders. So, we factored all that into our outlook and that is piece -- a piece of the mix look. Middle East remains strong. Latin America is not bad. So it's really interesting. And I saw and read in an article over the weekend that the U.S. is the new fast-growth market. From those words to God's ears, I hope that's true. But certainly, the place we're seeing the best growth is U.S. residential right now

Christopher Glynn - Oppenheimer & Co. Inc., Research Division

Okay. And then just wondering on your acquisition pipeline appetite and how you're thinking about here, and the range of deal sizes that you might be open to, considering the share repurchase commitments.

John L. Stauch

Yes, I mean, I think it goes down to what businesses are operating in a high level and have great standardization and are prepared for acquisitions and a couple of those that we said are -- certainly, our aquatics systems business, especially around aquaculture and thermal management right now, as areas that we'd like to put more effort behind, and eventually, Valves & Controls. But that being said, right now, we're focused on what we're doing on integration and things that we do, in lieu of what we're doing on the buyback, would have to be incremental to what the buyback would yield. So I don't think we're feeling like we're missing out on anything at the moment at all. We're certainly making sure that our pipelines are robust, that we're prepared, we're ready to answer, but we think our plan right now is the right plan.

Operator

Your next question comes from the line of Hamzah Mazari from Crédit Suisse.

Hamzah Mazari - Crédit Suisse AG, Research Division

I just had 2 quick clarification questions. Number one, is there any change in Q2 on infrastructure and industrial end markets versus Q1, or is it more of the same? And second clarification, did you guys say that you guys are front-loading the buyback, is that right?

Randall J. Hogan

Well, we said in the last quarter, the multi-year stock buyback, we accelerated, but we announced that 6 months ago. We said that basically, we were going to move everything up about a year, so that's not new news. And we've been going according to plan since then. So the acceleration was the stock buyback we did in the fourth quarter, and that was the acceleration. The rest is -- and everything else pulled up the same way. In terms of industrial, we saw -- we've seen an increase in daily order rates in our core equipment protection, industrial and as we mentioned, Valves & Controls and other big processes within industrial. We've seen that stabilize, so I wouldn't say we expect industrial to be stronger in the second quarter, meaningfully stronger than in the first quarter. But certainly by the second half, we'd expect that, as we said in the outlook. And what was the other -- Hamzah, what was the other question?

Hamzah Mazari - Crédit Suisse AG, Research Division

On the infrastructure side, any change there?

Randall J. Hogan

Oh, yes. Infrastructure, in general -- in infrastructure, we obviously put water projects but we also put the telecom projects and rail projects and the like. And they just -- it seems to be challenged everywhere. We mentioned that our backlog has been staying at a fairly high level for us in the U.S. in water. But I wouldn't read that broadly because we're a niche player in that. We play, we work strong and we seem to be doing okay in it, but it's not real huge growth for us. It's just a bright spot in what I would call generally a global infrastructure slowdown. The RO projects and the large water products in the rest of the world are just not breaking free.

Operator

Your next question comes from the line of Brian Drab from William Blair.

Brian Drab - William Blair & Company L.L.C., Research Division

Just first, a quick question on the tax rate. You mentioned that you hit the 25% level. The effective tax rate you reported was 28%. Is the difference there just this divestiture of ad spend or is something else going on there?

John L. Stauch

Yes, the 25% reflects what we think the full year ongoing rate will be, and the difference are those things related to either the asset sales or one-time impacts, the true-ups related to the overall Pentair structure.

Brian Drab - William Blair & Company L.L.C., Research Division

And in the first quarter, the adjusted tax rate was 25%, did I hear that correctly?

John L. Stauch

That is correct, correct. That's what I also think the full year will be. Correct.

Brian Drab - William Blair & Company L.L.C., Research Division

And then on the residential side, you mentioned -- you made a couple of comments on how the residential filtration, residential pump business is doing. Can you talk a little bit more, maybe a little bit more specifics, on how those businesses grew in the first quarter, what the order rates were?

Randall J. Hogan

As I mentioned, aquatics was double-digit.

Brian Drab - William Blair & Company L.L.C., Research Division

And in aquatics, I think -- and I don't want to make you repeat yourself in aquatics, but I'm looking more on the filtration and pump side.

Randall J. Hogan

Yes, filtration and pump in North America only or globally?

Brian Drab - William Blair & Company L.L.C., Research Division

North America, given it's weighted towards that market. And if you have any global comments, that would be great.

John L. Stauch

We had high single digits in residential in our Flow business. And as I mentioned earlier, we're just slightly positive in our filtration -- or our tanks and valves. And then in our filtration platform, we were high single digits.

Randall J. Hogan

Operator, how many questions are there left because we're at the hour?

Operator

There are 2.

Randall J. Hogan

Okay, we'll take those 2 and then wrap up.

Operator

Your next question comes from the line of David Rose from Wedbush.

David L. Rose - Wedbush Securities Inc., Research Division

A follow-up question on -- maybe a little point of clarification on the restructuring charge in the $28 million. Can you walk us through the buckets for that? And expectations for restructuring charges in Q2 and how that drives your cost saving goals?

John L. Stauch

Yes, so where we are right now, the $28 million concludes everything that would get us to the $80 million for '13 and then that slightly higher than the $100 million that I mentioned on an ongoing rate. And we would expect, if we could, to do a little bit more in Q2. And we're looking for everything because the inventory step-up in the backlog and the customer amortization concludes the end of Q2.

Randall J. Hogan

For [indiscernible].

John L. Stauch

And as we said, in Q3 and Q4, we'd expect to have a gap reported number, and that be consistent with adjusted. So any incremental restructuring would be assumed to be an incremental benefit to synergies and/or to next year's synergy numbers.

David L. Rose - Wedbush Securities Inc., Research Division

So to be clear, if we do to see any more restructurings in Q2, that means the synergy target for the $100 million target goes up?

John L. Stauch

It could be the $100 million, or it could be next year's 14 [ph] depending on the timing of the projects.

Randall J. Hogan

Yes, I think about it in terms of the $230 million that we put out as the overall target.

David L. Rose - Wedbush Securities Inc., Research Division

Okay, and then was this largely severance? Footprint reduction? Can you kind of break it down?

John L. Stauch

Primarily, G&A structure, severance and tweaking of our structures as it relates to the models that Randy is trying to drive across the globe.

Operator

And your final question comes from the line of Chip Moore.

Chip Moore - Canaccord Genuity, Research Division

For the energy-related business overall, could you give us a sense how that breaks down upstream, versus downstream, oil versus gas and then also the relative mix for mining and power?

John L. Stauch

Well, that's a big question. I think if we -- let me take the second half of that first, because it's an easier knowable answer. If we take a look at where we are from oil and gas, just north of $800-ish million, $825 million in total for Pentair. Power is roughly just north of $425 million for us. Mining is in the low 200s, and that would be in the Valves & Controls space. And if we looked at the total portfolio, we've always said we're pretty diverse from the Valves & Controls standpoint, so we're about 1/3 upstream, we're about 1/3 mid, and 1/3 downstream, plus or minus a little bit on that equation for 2012, and those are '12 numbers.

Randall J. Hogan

All right. Thank you, all, for your attention, and we'll be talking. Operator, can you give the replay information and we'll sign off. Operator?

Operator

If you'd like to listen to the replay of the conference, you can dial (800) 585-8637 or (855) 859-2056, and it will be in until the 23rd of May for you to listen to.

Randall J. Hogan

Thank you, all.

Operator

This concludes today's conference call. You may now disconnect.

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