Pentair's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Pentair, Inc. (PNR)

Q2 2012 Earnings Call

July 24, 2012 9:00 AM ET

Executives

Jim Lucas – VP, IR

Randy Hogan – Chairman and CEO

John Stauch – CFO

Analysts

Brian Konigsberg – Vertical Research

Brett Lindsay – KeyBanc Capital Markets

Hamzah Mazari – Credit Suisse

Garik Shmois – Longbow Research

Robert Barry – UBS

Deane Dray – Citi Research

Mike Wherley – Janney Capital Markets

Brian Drab – William Blair

Scott Graham – Jefferies

Christopher Glynn – Oppenheimer

David Rose – Wedbush Securities

Presentation

Operator

My name is Katie and I will be your conference operator today. At this time, I would like to welcome everyone to the Pentair Q2 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I’d now like to turn the call over to Jim Lucas, VP of Investor Relations. Please go ahead. Mr. Lucas.

Jim Lucas

Thanks, Katie and welcome to Pentair’s second quarter 2012 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. Today’s call we will provide details on our second quarter 2012 performance, as well as our full year 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-K for the year-ended December 31, 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 investor’s section of Pentair’s website. We will reference these slides throughout the 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.

I would like to also point out that the third quarter and full year outlook does not include any future impact related to the pending Tyco Flow deal that we announced on March 28 as stated in this morning’s release. We will be sure to reserve time for questions-and-answers after our prepared remarks. I will now turn the call over to Randy.

Randy Hogan

Thanks, Jim and welcome. And good morning to everybody. Let me begin with second quarter results as shown on slide three. We had another strong operating performance in the quarter driven by our focus on the three Ps that we can control.

PIMS, price and productivity. We grew sales 3% on a reported basis. We drove operating profits up 11% expanding adjusted operating margins by 100 basis points and we delivered adjusted EPS of $0.83, which is up 11%.

While a combination of unfavorable foreign currency translation, continued softness in Western Europe, and the last quarter of an end-of-life telecom project tempered top line growth, we saw continued strength in many of the sectors we serve.

Industrial, agriculture, pool and energy all contributed solid gains in the quarter and we saw strong pricing across the portfolio with total price favorable by 2.4%. Fast growth region sales were slower but still grew faster than overall Pentair.

We continue to expect double-digit growth for the full year in fast growth regions as we execute our expansion plans. Adjusted margins increased 100 basis points to 14.3% in the second quarter as we continue to drive greater productivity and execute the pricing actions to offset material inflation while funding growth investments. While we have seen some easing in commodity inflation, our pricing initiatives remain sound.

In the second quarter, we delivered adjusted EPS of $0.83 compared to the $0.75 in the prior year driven by our strong operational execution in the quarter, which helps somewhat mitigate the areas out of our control, such as softer Western European volumes and continued headwinds from foreign currency.

On cash flow, we saw the seasonal rebound in free cash of $222 million in the second quarter, bringing the year-to-date total to 140 million, putting us well on our way to converting more than 100% of net income to free cash flow, something we’ve done consistently eight out of the last 10 years.

As Western Europe continues to be a headwind and uncertainty persists, we accelerated several repositioning actions during the quarter. This is not dissimilar to the approach we’ve taken during other challenging times in the past.

All in, we delivered another quarter of solid operating performance with well executed productivity initiatives, good price realization, while continuing our growth investments, which we believe position us well for the balance of 2012 and beyond.

Now, let’s turn to slide four for a review of our Water & Fluid Solutions segment performance. Water & Fluid Solutions sales grew 7% year-over-year in the quarter largely driven by the CPT acquisition, which added $40 million in sales. Excluding CPT, Water & Fluid sales grew 3% in local currency as price realization remains favorable.

Aquatic Systems delivered solid results in its seasonally strongest quarter and treatment process continues to benefit from a strong backlog and a healthy pipeline of new product introductions.

Let me begin with the flow business, where sales were essentially flat in the quarter, an improvement from the decline seen in the first quarter. The business continues to see softness in residential pumps through the absence of any major weather related activity this year. Municipal was flat, but the project business saw a healthy, double digit increase in orders and the backlog continues to build, signaling some increases in sales in this vertical starting in the fourth quarter this year and into the first half of 2013.

We are not prepared to call a bottom in Municipal, but we are seeing signs of stabilization and an increase in quoting activity in the traditional break and fix activity, which may signal a return to more normal demand.

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