Pentair Inc. (

PNR

)

Q4 2011 Earnings Call

January 31, 2012 9:00 am ET

Executives

Sara Zawoyski - Head, IR

Randy Hogan - Chairman and CEO

John Stauch - CFO

Analysts

Robert Barry - UBS

Mike Worley - Janney Capital Markets

Hamzah Mazari - Credit Suisse

John Quealy - Canaccord

Josh Pokrzywinski - MKM Partners

Jeff Hammond - KeyBanc Capital Markets

Scott Graham - Jefferies

Brian Drab - William Blair

Brian Konigsberg - Vertical Research

Deane Dray - Citigroup

Garik Shmois - Longbow Research

Terry Darling - Goldman Sachs

David Rose - Wedbush Securities

Mike Halloran - Robert Baird

Stewart Scharf - S&P Capital

Presentation

Operator

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At this time, I would like to welcome everyone to the Pentair Q4 2011 earnings conference call. (Operator Instructions) I'll now introduce and turn the call over to Sara Zawoyski, Head of Investor Relations.

Sara Zawoyski

Welcome to Pentair's full year and Q4 2011 earnings conference call. We're glad you could join us. I'm Sara Zawoyski, Head 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 Q4 and full year 2011 performance as well as our Q1 2012 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-Q for the quarter ended October 1, 2011, 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 at www.pentair.com. We will reference these slides throughout our prepared remarks. All references today will be on an adjusted basis amongst otherwise indicated towards the non-GAAP financials reconciled in the appendix of the presentation.

We'll reserve time for questions and answers after our prepared remarks, but in recognition that there are other calls going on this morning, we will target to be done in an hour. With that, I'd like to request you to limit your question to one and get back in the queue for further questions. So we can try to make it for everyone this morning.

With that, Randy?

Randy Hogan

Thanks, Sara, and welcome everybody. Let me begin with our fourth quarter performance on Slide 2. As you saw in the press release, we recorded the non-cash goodwill impairment charge of roughly $200 million pre-tax and $1.82 per share related exclusively to our Residential Filtration business as a result of our annual impairment assessment process.

The recent decline we saw in residential water treatment components sales in the U.S. and Western Europe and the expected continued softness in these end markets no longer supported the level of goodwill carried in Residential Filtration.

Clearly, this is a difficult headline on which to end the year and one that I'm personally disappointed to have to report. However, it does not change where we are as a company, the progress we've made in 2011 and the growth opportunities we have ahead.

Today, we sell roughly $1.2 billion into the global residential end markets. Roughly one-third of that relates to pool, which is already back to setting records with good secular trends and efficiency in automation. Another third of that is Flow with solid replacement demand and a strong performance in 2011. The remaining third is Filtration, which includes point-of-use filtration which has low penetration and solid global growth, and the water treatment softener component business that mainly serves developed regions and tends to be more discretionary. This business is the one that's been impacted by consumer sentiment and financing in the housing business.

We still, however, continue to see long-term value in the Residential Filtration business with growing scale and fast growth regions and industry-changing innovations like the Hybrid DI coming to market this year. We expect to continue to gain from our global expansion and innovation to drive topline growth and will be relentless in our focus on operational excellence and improving operating performance in Residential Filtration to be sure Pentair is well positioned to benefit from a meaning residential recovery in this business when that comes.

The other item impacting Q4 reported earnings was an $11 million pre-tax restructuring charge as we reposition the company to capture CPT cost synergies, address the realities in the developed markets and continue to reposition us for global growth.

Let's turn now to the core operating performance in Q4, which came in generally in line with the revised growth expectations we shared in December. The operating performance headlines were solid despite the headwinds in Western Europe in Residential Filtration. Overall, we grew sales 15%, expanded adjusted operating margins to drive operating profits of 18% and delivered adjusted EPS of $0.56, which is up 14%.

Strength continued in many of the end markets we serve, including industrial, beverage, agriculture and energy. Momentum continued in the fast growth regions as well with sales up 23% in the quarter before including the CPT acquisition. We continue to execute well on our growth initiatives with new products and expanding coverage adding to our growth.

Margin increased another 30 basis points in the fourth quarter, generally as expected. Volume, productivity and pricing helped to offset persistent material inflation to sustain growth investments.

In Q4, we delivered adjusted EPS of $0.56 compared to the $0.49 in the prior year, reflecting the solid sales in both Water and Technical Products, excellent operating performance and benefit from CPT. We finished strong in cash flow, generating $61 million in the quarter. This brings our full year free cash flow to $248 million.

In sum, we delivered another quarter of solid operating performance with strong execution driving topline results, good price cost dynamics enabling margin expansion and sustained productivity funding continued growth investments, which we believe position us well for growth in 2012 and beyond.

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