Q3 2019 Earnings Call
At this time all participants are in the listen only mode.
After the speaker's remarks, there will be a question and answer session to ask a question. During this session you need to press star one on your telephone if he would like to the jar. Your question press the pound key BP require further assistance. Please press star Zero I would now like to hand, the conference over to were speaker today, Jim Lucas.
Thank you you may begin.
Thanks, Dorothy and walking in Pentair third quarter 2019 earnings Conference call. We're glad you could join us on Jim Lucas Senior Vice President Investor Relations and Treasurer and with me today as John style, <unk>, President and Chief Executive Officer, Mark Warner Chief Financial Officer.
Today's call will provide details on our third quarter 2019 performance as well as our fourth quarter and full year 2019 outlook as outlined in this mornings 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. His most recent Form 10-Q Form 10-K in today's press release.
Forward looking statements included here in our 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 as a company by a presentation, which can be found in the Investor Relations section centers website, we will reference these slice 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 like to request that you limit your questions to one of the follow up in order to ensure everyone an opportunity to ask their questions I'll now turn call over to John .
Thank you Jim and good morning, everyone.
Please turn to slide number four titled Executive summary.
We're pleased to deliver solid third quarter performance in particular, a return to segment income growth in our lives expansion.
And building out our performance from the second quarter.
We're maintaining our full year EPS guidance, we have seen price cost stabilized and we are encouraged to see further signs of top line stabilization and are important aquatic business.
We continue to invest in our two key strategic growth priorities advancing pool, great and accelerating residential commercial water treatment.
These investments are centered around building out a consumer experience inclusive of our brand.
Handle innovative products and services.
We continue to believe we're well positioned to return to core sales and income growth in 2020 that we'll talk a little more later in the call about our optimism about our long term strategy and prospects.
Ill now turn the call over to Mark to discuss had third quarter results, an updated full year outlook Mark.
Thank you John Please turn to slide five labeled Q3 19 pentair performance.
For the third quarter overall sales increased slightly and we saw core sales declined 2% segment income grew 1% and adjusted EPS increased 7%.
We provide more color on the individual segment performance shortly.
Below the line, we saw an adjusted tax rate of 15% net interest other expense 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 inline with normal seasonal patterns.
We were pleased to see segment income grow at our last expand despite the softer topline and we believe this is a reflection of price cost stabilizing following the headwinds of significant inflation, we discussed in prior corners.
Please turn to slide six 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 and the resolved wasn't improved sell through.
Aquatic saw segment income declined 9% and our west 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, but 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 at Pelican remained on track and both businesses performed inline with our expectations.
Segment income grew 17% for filtration and our last 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% at our west expanded 170 basis points to 17.1%.
As a reminder flow technologies was hit hardest by tariffs and broader inflation in the second half of 2018 and the comparison in the quarter was it's easier to the year.
While we continue to see mixed results across the three segments, where most encouraged by signs of stabilization in price cost.
As well as only one more quarter of tough topline comparisons for products.
Please turn to slide seven labeled balance sheet and cash flow.
Our balance sheet continue to strengthen in the third quarter delivered another seasonally strong quarter of free cash flow.
During the third quarter, we had one bond mature and we have one other bond 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 eight 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 making sure channel inventories returned 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 64 to 66 cents 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 other expense of roughly $8 million and shares to be approximately 169 million.
Please turn to slide nine 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% headwind 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 on adjusted tax rate of 17%.
Net interest other expense of 35 million at an average share count for the year of roughly 170 million shares.
While there are undoubtedly many moving pieces to our 2019 path to expected flat EPS.
We continue to be encouraged by size of topline stabilization and further price cost improvement.
We are encouraged by the performance of business are delivering in light of the topline challenges faced this year.
I would now like to turn the call back to John Thank you Mark.
Please turn to slide number 10 labeled executing a consistent strategy.
We continue to be focused on driving our long term strategy and we believe there was a lot of evidenced that the focused investments, we're making are the right investments and driving results.
Most people would agree that global water quality the challenge.
While many companies are participating in offerings to solve this global issue, we have chosen to focus primarily on the residential commercial markets.
There was little argument that consumers can benefit from taking ownership of their own water experience.
They can do it to their own taste and with solutions that meet their individual needs and preferences.
I've been here has a wide variety of solutions to help consumers threed move and enjoy water.
Back Pentair as one of the few total solution providers to residential customers.
Also when we aligned on a strategy that nearly two years ago, starting with our leading aquatic franchise.
With over 5 million pools installed in the U.S. and over half of them being over a decade old there was a large installed base to serve.
We have built a strong business focused on new product development and strong dealer loyalty.
The introduction of the variable speed pumps, nearly a decade ago, creating awareness around energy savings and the result is compounded with other product categories from LCD lighting to hybrid heaters.
We believe the continued adoption of automation, which is small today, roughly 275000 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 residential filtration markets the acquisitions of Aquion at Pelican earlier, this year moved us from being a leading component supplier to now being a provider systems and solutions.
We have learned quite a lot no short time owning both of these businesses and we believe there are many paths to creating value as we help consumers solve their water challenges in their homes.
On the commercial side of the business, we have historically enjoyed a strong position that foodservice area.
Increasingly we are focusing on total water management with customers and we believe this presents an opportunity better position 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 and 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 have developed around nano and ultra filtration.
As we develop new aiotv 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 that enables our customers to become more sustainable lower costs move from static dynamic library porting and improve overall operating performance.
We're transitioning this technology into the sustainable gas industry, and we believe there are opportunities to extend this technology to other parts of our portfolio overtime.
We also continue to believe there are multiple path to drive consistent sustainable growth.
Especially in our core residential commercial businesses.
Our recent acquisitions allowed us to move closer to the consumer and while we haven't been built a strong 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 the strong core to build from in a healthy balance sheet to support both organic and inorganic opportunities. We look forward to demonstrating our strategy to our shareholders in Q4 and in 2020 and beyond.
I'd now like to turn the call over to Dorothy acuity after which I will have a few closing remarks Dorothy. Please open the line for questions. At this at this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad, we will pause for just a moment to compile the Q and a roster.
Your first question comes from the line of Steve Tusa with JP Morgan.
Hi, guys. Good morning, Good morning, Steve Steve.
Hey.
He just.
Break down a little more like.
What's going on in the flow business.
You know revenues were way off versus our model, but the profits kind of held in.
I know theres some dispersion in the margin profile at some of those businesses, so and that was one I think.
In the in the first quarter that was tough for us to kind of figure out what what's what's going on and that in that second I think the other two are pretty straight forward, what what's going on in this segment, yes, Steve Let me, let me speak to the revenue Miss and then I'll, let mark into the details but.
During the end of Q2, we saw little pulse false positive on some of the AG orders.
And right out of the gate in Q3, we just saw that AG did not recover at all so we had anticipated a little more recovery.
Sequentially in Q3, and it just flat out didnt happen.
So now we've adjusted heading into Q4 next year. The fact that we don't see AG recovering at all night I think a lot of the global data would suggest that we're probably figured it out right now, but that was a little bit of a bounce in Q3 that we had expected that didnt happen.
How big is AG and isn't that relatively profitable shouldnt have that had a shouldn't shouldnt that have had a kind of more negative impact on the margin like what am I missing on that front.
Hey, Steve It's Marty that's a great question.
But we what we saw positive signs out here were two things really see price cost getting better.
As I said in my prepared comments flow was hit hardest by the inflation pressure. So so we see price cost turning positive in Q3, and then also productivity we touched on that in Q2 that that although we weren't we didnt 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 thats really.
That's really what happened so you're right that being down in AG from a mix perspective would push margins down and then come down, but but that was we were benefited by better productivity and improved price cost as to how big how big is AG for you guys.
Hi, AG would be somewhere in that 200 million dollar range.
For year.
Okay, and then one last one just on aquatic <unk>.
I pull made some pretty positive comments at their channels clear.
Can you kind of validate that comment or is are there other considerations and.
You know.
Thinking about next year a little bit.
You know 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 into next year.
Yes, Steve So I think you're right I mean, we do track.
Our largest customers on earnings calls and we agree that inventory is definitely getting more normalized here and our goal is in between now and the end of year to make sure 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 in the channel would reach.
To do the by heads that we saw last year with a much more elevated pricing level. So mark I don't know if you want to add and I agree I mean, as we've said we continue to believe that by the end of the year, we'll exit with normal levels.
We think of 2020 or more in line with the historical normal seasonal.
Stabilized perspective.
Great all right. Thanks, guys. Thank you Steve.
Your next question comes from the line of Nathan Jones with Stifel.
Good morning, everyone.
Good morning Ethan.
Just maybe thinking a little bit about where the a return to organic growth comes from in 2020, I mean, I think we've probably based in the pull business to death and can I can understand why that should return to growth that I mean, if again, if I happen to look at the last couple of quarters results organic sales have been down.
And with positive.
Our impacts from price this quarter, you down to with three points of price and volume down five 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.
2020 outside of pool.
Well I mean, it's good question today, Thank you for asking but I mean, I think first of all lead beyond pool. We also had some channel inventory in both filtration inflow that was built up for some the same buy ahead patterns that happened in last year's Q3 and Q4. So this years Q3 Q4 have those difficult comparisons and then Q.
One in Q2 next year have much easier comparisons across both filtration flow and aquatic.
Okay. So some comp some tough comp issues. This year for the same reasons as Paul late just a major ones next year.
That makes sense can you maybe talk a little bit more about some of the pace you talked about focused investments being the right investments in driving results, maybe talk a little bit more about.
Where those investments.
What kind of results you seeing that 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 commercial filtration, it's really about having.
I'll start commercial first it's about rent, having the best commercial systems and capabilities and we're really excited about the technology that we're building to solve commercial office water opportunities. As you know people are seeking carbonated water and they're also thinking seeking flavored carbonated water. So really excited about the investments we made on the technology.
He side and while were more than a year away from launching a that product that our product is a really.
You know better solution that we think that the market will benefit from so excited there were also through both the acquisitions and also internally within pentair, we're having the best residential systems smarter more innovative valves on technology smarter water softer systems technology on booking those to automation and then.
Having the services piece to the Pelican acquisition to complete that last mile and 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 bands 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, new technologies around automation. So we're excited that that penetration rate will show up and when you look at the sell through rates a pool in both Q2 in Q3 other back to the high single digits again, so once we get through this inventory channel issue and the pool.
This normalizes I think we're we're very positive that we'll see that return to growth next year.
On the commercial water.
Filtration product that flavored net bubbly award.
I have you guys got enough what to kind of talk about what you think the size of that opportunities for you.
I think it's really fragmented.
I think the overall momentum is there I.
I think what we want to do is make sure that we had the systems that can give you chilled heated sparkling and as you know our ever pure filtration as big part of that overall component. So we want to be talked about in the space and we want to make sure. We have the right systems that that can solve any solution that.
Basically a commercial customer has.
Okay. Thanks, I'll pass it on thank you.
Your next question comes from a line of Joe Giordano with Cowen.
Hey, guys good morning, Hey, Joe Maury.
John just wanted to clarify something you said.
Earlier on Steve's question regarding slow I think you mentioned that there were some had big kind of exiting QQ about AG.
That didn't materialize in the quarter I was under the impression that once AG, but when we had that bad.
Whether in the first half that like any recovery in AG was was taken out of guidance. So I'm just a little confused about.
Can you kind of square that for me, yes, two there's two forms of and we have a precision AG spray business and that that we did address earlier that is a very very high margin offering.
The other part of AG is more the pivot AG spray and the irrigation side of the business that specifically, what I was referring to.
Okay. So this is the irrigation not that versus okay great.
Okay.
Can you talk about maybe some of the.
Traction you're having with some not just the internal cost initiatives is clearly I mean.
Particularly in flow and you're seeing the margins come through on on week number on a weak growth number so you've talked about them at a high level, maybe if theres. A couple examples you can kind of take us through as to some things that are being done differently today than maybe a year ago across the enterprise maybe.
Yes sure on one of the things we've talked a lot about as we separated was optimization and really looking at where did we have complexity and how can we get after complexity reduction.
In the flow technologies segment was certainly one of those businesses, where we saw a high degree of that SKU rationalization things that inherently drive cost and drive down margins and the team really got after that.
In as we exited 2017 and throughout 2018 as we're starting to see those those activities and actions pay off here in 2019.
And also we've also talked about some of the factories, where we've had some challenges we've been investing in automation and in other technology to replace and improve some of the older equipment and machinery that used in some of those factories. That's also starting to read out early stages. So so theres more of that to calm as we think about 2020, but.
Were again seeing favorable signs and encouraged by what we're seeing.
Maybe last from me.
Look I know, it's too early to talk 2020, but if we just think about a situation where there is inventory is cleaned up to your partners and we can start ramping a little bit.
When I think about free cash flow the nice nice performance here in the quarter.
Is that going to be how much of a headwind you see that being into 20 in kind of ramp up and you have to start producing at a higher rate.
I think we still have opportunity to really focus on cash flow and would continue to view cash flow targeting at.
At approximately approximating adjusted net income so we wouldnt 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 in but there are opportunities and other places that we would we would manage and balance out to have that long term targets still maintained.
Okay. Thanks, guys.
Thank you.
Your next question comes from the line of Mike Halloran with Baird.
Good morning, everyone, Hey, Mike learning.
A couple ones first just on capital usage here.
And any thoughts to bringing back being more aggressive on the buyback side again, and then secondarily related to that as the M&A pipeline look, what's the willingness or ability to ability to bring something in.
And how our the valuations looking out there.
Yes, I mean, I think clearly where we're focused on execution right now unlike in.
Part of that was making sure that we're delivering on our commitments.
Q2, Q3 in Q4 sets that's our first.
Focus area I think you know there there is.
They're growing opportunities to invest in the platforms I mentioned and we'll continue to look at those tuck in acquisitions I would say that that feed more of what we've done already.
But you can over time those them no 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, though John .
Good.
All right and then.
Just thoughts on the price cost side, you talked it seemed like you're implying that the price cost side to be a little bit more favorable moving forward from here and maybe talk about puts and takes on the pricing side is that kind of flatten out a little bit relative to the commodity side and how you're thinking about that moving into next year.
Yes, so maybe the way to think about it as we had significant price cost headwind.
As we talked about the coming out of last year and into into the beginning of this year now what I reference in the in Q3 in particular was favorability because we've got we've got favorable pricing we have inflation moderating as you as you move forward that favorable year over year price will start to be a little bit more in a normal at a more normal.
Lies level versus the unusually.
Hi price increases that we had in 2018 that spilled over into 2019.
So I don't it's more of a stabilization story, rather rather than in.
Benefit it's just mitigation of what had been a pretty significant headwind and on the inflation side.
One thing to always kind of keep in mind is inflation is not just the material or commodity inflation, but we certainly also have labor inflation and we don't see that that going away are moderating. So that will continue to be part of how we think about one or 2020 will look like.
Thank you appreciate it thank you thanks.
Your next question comes from the line of Jeff Hammond with Keybanc capital markets.
Good morning, guys, Hey, Jeff mourn Jeff.
Just on can you just talk about what is informing the lower growth rate in filtration and then just as you look forward, we're hearing a lot of.
A lot about macro slowing and just where are you seeing some signs of slowing in your business outside of that AG space.
Okay.
Sure as we as I talked about in Q3, we saw pretty pretty improved performance in the food and beverage part of the filtration business that moderates a little bit in Q4. So thats part of the story, we do see continued stabilization and incremental improvement on the important residential and.
Commercial side, both the systems and components businesses, where our where those are the investments in those acquisitions took place so.
Overall, just more of a moderated view given the performance in Q3.
And then wed expect to kind of as we think about moving into 2020.
Similar level of performance and starting to see some of the investments that John talked about reading out in in improve core sales growth.
Okay and then just.
So.
What are you assuming in water customers, telling you about.
Kind of the normal early buy situation and then just.
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 are above thanks.
So in the first question that from an early buy perspective, we're seeing kind of consistent early buy pattern of last year was a little bit unusual because of the blend of 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 we're exiting Q4 you see the Q4 guide is what I would think of is back to little bit more level of of normalization improved income performance flattening of the of the topline which had been decreasing and as we think about 2020, we're just in a really focused on getting back to what.
We believe would be performance in line with with our long term.
Objectives.
Okay, great. Thanks, guys.
Your next question comes from a line of Deane Dray with RBC at RBC capital markets.
Thanks. Good morning, everyone again, how are you wondering Dave 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 $60 million access and just based on commentary about expected for Q.
New normalizing how much should we think about that 60 million haven't been worked off 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 at levels that are in line with more historical.
Seasonal patterns.
Okay, and then on pool, John you talked about some of the new product development.
Filtration and pool and automation.
Our just to set expectations might you have some new automation.
Offerings for the 2020 season.
Yes, we do already and I think we're we're learning how to sell it better.
We believe everybody can benefit from that automation capability.
The different type of sale, though and.
We have that we believe the right products that can really help.
The user.
Along and we have to tweak our ability to sell telco technology, it's not like selling a product it's more like selling a service or capability and so we learned a lot. This year and I think we're encouraged by the progress making in Q3 and into Q4 and I think those products that are really accelerate as they had into next year.
When you say sell a service is that something that panty air would benefit from on a recurring basis or is that a.
A pool dealer that would that would be part of their revenue stream.
Clearly the vision would be that everybody would benefit right and that at the end of the day, most people by technology and more rented basis, because they believe whatever they have is going to be obsoleted.
We'd have to align the channel that way Dean, but ultimately we think thats going to be the right answer we're launching in this in this quarter, the new pentair whole math, which basically is abroad umbrella that takes all of the the suite of products that pentair offers and allows us to be connected into that home app and we're hopeful that as the consumer sees more.
In the more things that are available to either protecting with Alexa or Google home.
Or apple or whatever your devices that you start to see the benefits of some some of the monitoring your water quality and then starting to buy some of the products and services that would attached 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 us selling them.
Being as you know the market does rent them.
The end.
Solution providers do read units don't know yet if thats the space that we want to be in.
But we were we introduced carbonated water you know some eight to 10 years ago were probably early in the market.
We have all the technology and we delivered after foodservice and so how do we bring that into a commercial office environment in a productive way if thats what people want as you guys know, there's there's a lot of fickle drinkers. The first one is get tea and coffee, most all tea and coffee needs to be filtered CDEL scale units or cause damage those units and our filter.
Patient plays a big part of that and if we expand that filtration into other forms of water, we think theres a huge opportunity for pentair.
This is forward thinking we believe we have the technology, where it's probably not a 20 launch it's probably somewhere in 2021.
Understood. Thank you. Thank you.
Your next question comes from the line of Josh Pokrzywinski from Morgan Stanley .
Hi, Good morning, guys wondering Josh.
Quick question on the on price cost I guess with working now channel inventory and.
Kind of generalize market weakness some of that related to weather earlier in the year.
I would imagine it's harder to get price certainly probably more in 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 think the best way to think about it is as I said before is just more of a normalized level of price.
Yes.
As you know a big chunk of the price that we see overall comes from the from the pool business that unusually high price last year in response to inflation. This year. They they had a price increase that would have gone into effect in September which is the normal timeframe that those price increases go into place and I'd call that more and more normal.
Historical level and something similar in in the other businesses. So we were not seeing and we didn't see any unusual reaction to price. This year as a result of of channel inventories and but we do see just.
Going through a more normalized level given that last year's higher price was really driven by that incremental inflation.
Got it and then I guess as it pertains to the the aquatic season just is.
We kind of wound down there in the third quarter, obviously had a slow start with weather, particularly in in some of the warmer regions that would have been bigger contributors in the first quarter.
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 is that something that you guys noticed and maybe sets up a comp we should think about in at least in 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 and they'll 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 and.
You're not going to see that same level of.
Bill that you tend to see in the more summer seasons.
Understood. Thanks, guys.
Thank you.
Your next question comes from the line of Saree Boroditsky with Jefferies.
Good morning, Good morning could you could you provide some color only saw geographically I believe last quarter, you talked about Europe , and China being positive did that continue any expectation doesn't apply towards the end of the year.
Sure that that it did continue so we had commented earlier in the year that we saw some weakness in Europe , particularly on the filtration side as we move through the year Q in Q2, and then again in Q3, and we really see through the balance of the year. We saw improvement there. So Europe now has is back to moderating growth.
And China as well.
Is is returned to to a reasonably good growth level.
Okay, and then just more longer term question aquatic.
Think about impact from the various variable speed pumps legislation that goes into effect in 2021.
We believe in 2021, it should help our overall sales.
You know variable speed pumps for us today are probably just over half of our total pump sold they do sell at a higher sell through value.
So we do believe as the.
You know transition happens I those of US who have been through these transitions before always have to though question one of those dates going to really happen and whether it be slippage and also how does the inventory work its way through and so.
We're not putting anything into 2020, obviously and we'll we'll see if theres a.
Relative bump in 2021, but overall should be positive to our business.
Great. Thanks for taking my question.
Thank you.
Your next question comes from the line of Julian Mitchell with Barclays.
Thank you good morning.
Maybe just following up on that geographic point you'd emphasize some of the weakness in AG.
Not already about residential trends in the U.S.
In the past few months.
Just wondered if you could give any detail around what you've seen in some of them more commercial industrial markets in the us if there's been any particular shifting demand from month to month since July .
Nothing.
Nothing significant from a from a month to month perspective.
Our 80% of our business 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 five.
When we're thinking about the productivity portion of that in aggregate.
It looks like it's probably a maybe a $20 million tailwind those something for the year as a whole.
If you could just sort of clarify if that sounds about right and then when thinking about next year.
So we think about some of those measures that you have accelerated around productivity pushing that number up or is that a pretty good run rates for the current demand environment.
Yes, I think what you're seeing in Q3 is more in line with with a level that we would anticipate and I think to remember kind of what makes set up there is there's there's multiple elements. So there's there's material productivity, which is where we're we're working on trying to mitigate some of the inflation headwinds.
There's there's operating cost productivity.
I would think about that is looking at opportunities to reduce gionee cost and then there's factory productivity, but then what offsets that is also the investments we're making in in the growth areas around R&D and selling marketing investments in technology and things like that so as we think about this year and into next year, we'll continue to.
Look for.
Increasing levels of productivity.
But but utilizing some of that to continue to invest in areas, where we see the biggest growth opportunities.
Thanks, very much and one last quick ones for me looking at the filtration.
Operating performance you know you had pretty healthy.
Sales growth there in Q3 incremental margin was around 20% or so is that a reasonable sort of place holder for that business with his current mix or do you see anything sort of one time within that figure.
I wouldn't call 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 topline growth we have and we continue to add back both digital marketing advertising branding and.
R&D spend.
Really.
Accelerate the long term growth there. So I think this is a more normalized pattern.
As we head into 2020 is benefiting from the growth and then reinvesting a portion of that that income back into fuel more growth.
Makes sense. Thank you very much thank you.
Your next question comes from a line of water Walter Liptak with Seaport Global.
Hi, good morning.
Good morning.
Okay.
Well, yes.
Geographically quite some reimbursements.
The comments about the new creation.
Monitoring growth on that doing okay now.
I Wonder if we give a little bit more details line, we look at macro numbers merger.
We're.
Hi.
GDP numbers we.
What's going on sector, we market.
Yes, let me let me start let me talk about China first.
Our China business, we've said before in China Southeast Asia overall is residential commercial filtration, primarily and think about that being just north of $107 million on an annual basis. So the growth rates were talking about are really about us starting for relatively low base in a.
Very enormous market in which we have a dedicated China team and we have a dedicated factory dedicated R&D lab, and we've really invested a lot of new product growth and and marketing. So we're we're winning.
In the space that may or may not overall be growing but we have a lot of runway left and that area in Europe . Mark gave you overall numbers and that that is appropriate.
Within those overall numbers, there's things that are doing well and Europe , and there's things that aren't doing so well in Europe . So as we look at some of the global industrial product lines, we definitely saw slowdowns and when you take a look at some of the more installed base.
Natural commercial aftermarket business as they're doing okay.
No way would we call it a robust.
Market environment.
Okay.
Can you help us with the size of the.
Industrial business.
Yes thats.
Hundreds roughly $100 million.
Hundred total for the year for the year right not in the quarter.
Okay, Great and then just switch gears over to the.
R&D.
You know 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 step up in R&D spend.
Yes, I think you're going to expect to step up.
I've said many times that we have the ability to invest a lot more in R&D and we'll feel better about that investment when we feel markings done the work.
To produce the road map of where our R&D will be best utilize them. We're really excited about automation platforms and we have a global innovation center around automation.
One pentair solution that we work across the enterprise really excited about that roadmap.
And then around our treatment.
Water treatment innovation center really excited about the nano and ultra filtration technologies out of the CPG acquisition directs flow business and expanding those into both residential and commercial very excited and then as I mentioned earlier building systems capability that takes that technology and gives the overall solution those are the double down.
Yes.
For me in the team and I'm going to accelerate that investment in 2020, and probably 21, and we're encouraged and excited by.
The products for the other ended that investment.
Okay, Alright sounds great. Thank you.
Your next question comes from the line of Brian Lee with Goldman Sachs.
Hey, guys good morning.
Thanks for taking the questions May maybe just first one on price going back to that topic to clarify a bit.
No 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 air where there's still some spillover.
Into the early part of next year.
I think about it is slightly higher than that.
1% that we've seen so prior to 2018 for the few years prior to that had been right around 1%, but that was I'd 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 fishing, Okay. I mean, I think it's too early to say the businesses that went out in <unk>.
In September as Mark said, I mean, we were out in that range that Mark said and we 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 de risked is the view here for Fourq you 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.
Can't call it de risk.
I can tell you that it represents the.
Last multiple quarters trends in doesnt produce any incremental upside sequentially.
You know from things growing off of how they did the previous quarter and then there is some year over year benefit as you look at Q1 in Q2 in this business next year and then we'll we'll see how confident we are when we come out with the guide of being able to drive organic growth in Q3 in Q4.
Next year.
Okay fair enough thanks, guys.
Your next question comes from the line of Brett Linzey with vertical research partners.
Hi, good morning, guys.
Hey, just wanted to come back to aquatic see you talked about some of the technology and growth priorities you have there and pool.
As we think about those incremental cost and price moderating, but also some relief on roles and other spending what's what's the right incremental margin range, we should be thinking about next year as here, maybe see a more normal topline.
This business has a fairly sizable drop through.
And.
Because its sales might as material in a really efficient manufacturing process. So good drop twos.
Not going to give you an answer because this is a.
Huge value contributor to pentair I want to invest in this and I think we have some really exciting technology is the pipeline here as well and we'd like to put some investment back into sales channel.
Primarily around the aftermarket side I think we do a really nice job with with our dealer channel covering both new pools and remodel pools I think our opportunity is being farther down the aftermarket cycle with the services channel and making sure where the company of choice for consumers and that services play and then also making sure that we.
Go back to our roots and I'd still say, we are the technology leader, but we used to be significantly more advanced that we are today and we believe we have those technologies in the and the pipeline and need to drive them through new product development phase and that will be an investment thesis for 2020 as well.
Okay, Great and then shifting to restructuring you took I think 6 million this quarter 7 million last quarter or you budgeting more more spending in Q4, and then just thinking about the payback did most of that get realized in the quarter or do you see some of that rolling over into 2020 and promote saving standpoint. Thanks.
We are so we don't include in our and our guidance an expectation around restructuring, but I would anticipate there would be some incremental restructuring again in in Q4 and Andy investments in restructuring that we've made in this year really wouldnt see those necessarily reading out now, but those would would be part.
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. So.
Right investments, we do have a larger footprint than we need and as isn't always geographically perfect. So we've.
We've addressed some of that especially the flow side as Mark mentioned and 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 were those cost focused.
Restructuring little bit everywhere.
Okay, all right Great pass along thanks, guys.
Thank you.
And there are no further questions at this time I will turn the call back over to our speakers for closing remarks.
Thank you for joining us today, we're 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 solid free cash flow and we will continue to invest in our strategy to be the leading residential commercial water treatment company. Thank you could continue to interest Dorothy you can conclude the call.
Thank you, ladies and gentlemen that does conclude today's conference call. We thank you for your participation and ask that you. Please disconnect your lines.