Q4 2019 Earnings Call
Since our in listen only mode. After the speakers presentation, there will be a question and answer session.
Yes. Good question during the session you will need to press star one on your telephone keypad. Please be advised that today's conference is being recorded if your car any further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today, Jim Lucas.
Please go ahead.
Thanks, Mary Alma.
Fourth quarter 2019 earnings conference call, we're glad you could join us today.
Jim Lucas Senior Vice President Investor Relations, and Treasurer, and with me today, John style, President and Chief Executive Officer, Mark for in our Chief Financial Officer.
Today's call will provide details on our fourth quarter 2019 performance.
First quarter and for your 2020 outlook as outlined in this mornings press release.
Before we began wonder remind you that any statements made about the company's anticipated financial results are forward looking statements subject to future risks and uncertainties.
The risks outlined in pentair as most recent Form 10-Q Form 10-K , and today's press release forward looking statements included here in our me doesn't 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 I present.
Station, which can be found in the Investor Relations section of Petros website, we will reference these lives throughout our prepared remarks any references to non-GAAP financial are reconciled in the appendix of the presentation, we will be shirt or was there a time for questions and answers. After our prepared remarks I would 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 the call over to John .
Thank you Jim good morning, everyone.
Please turn to slide number four titled Executive summary.
We were very pleased to deliver fourth quarter and full year results in line with our expectations. Despite a few macro challenges at the beginning of 2019, we stabilize performance we continue to invest their top priorities and believe we made very good progress in further positioning pentair as a leading water treatment company.
During 2019, we completed two strategic acquisitions that allowed us to move closer to the consumer and we made great strides an accelerating our growth investments around marketing brand building and innovation.
Well look and carried a great management system or pm.
Strong foundation for how we operate or company, we continue to evolve PIMS to go well beyond just operational excellence and make an integral part of driving a high performance grow culture.
As we approach the two year anniversary of becoming a pure play water company.
We believe our strategy is sound and we must continue to be agile to better align our organization with our strategies and just as important to better align with our customer base, we're aiming to two reporting segments.
Scott the new segment structure in greater detail shortly.
We're introducing guidance today for 2020, and we expect to return to core sales growth solid segment income Indeed, P.S. growth along with strong cash flow performance.
I also wanted to take a moment to comment in the second press release that we issued this morning.
Our board has informed us that he is resigning from pentair CFO to accept an operational leadership opportunity at a private employee owned company.
Mark has been a trusted partner for last 12 years has been an important leader in building a strong finance foundation that pentair, we've commenced a search for our new CFO Mark plans to remain in his role pentair through the search process to assist with an orderly transition mark will truly be missed we wish him continued success as he moves to the next chapter of his career.
Please turn to slide number five label executing a consistent strategy.
When we embarked on a strategy as a pure play water company a few years ago. We were excited at the significant opportunities that existed with a leading cool franchise. We have a large installed base could serve and therefore, a significant opportunity increased content.
We also identified a number of exciting opportunities and residential and commercial water treatment and we continue to build on our strong foundation.
We have made notable progress and the migration from being a component supplier to operating systems and solutions help consumers solve their water quality needs.
Staying ability awareness is increasing around the globe, we have a broad portfolio technology and services help solve many of the world's challenges regarding access to clean safe and great tasting water.
During 2019, we need to strategic acquisitions that we've just closer to the consumer.
We've learned a lot in a short time about consumer needs and preferences and we look forward to updating you throughout the year as we expect to further expand our business to directly solve these consumer desires.
We've shared with you in the past that we identified two key priorities for pentair.
That's cool growth accelerate residential commercial water treatment.
We continue to fund these initiatives as well as build out our overall capabilities. These investments are now what our base and we plan to continue to fund the most attractive growth opportunities as we head into 2020.
We made a lot of progress last year around digital transformation innovation technology and building our brand.
During 2019, we consolidate a 35 web sites to one pentair dot com, which resulted in a 60% increase in web traffic for the year.
We are still in the early stages, our digital transformation, we're very pleased with the progress we've made a short time and we're excited about what more we can do.
Also in 2019, we had an enterprise wide launch at Salesforce Dot com, there's enabling our various businesses to better share information and is linked to our digital strategy with customers.
As the company completed its separation in 2018, we identified the need to improve our new product development pipeline and we're pleased that 2019 was a very productive year Burke technology development initiatives.
Over the next 12 to 18 month, we expect introduced a number of exciting new water treatment solutions and today, we're proud to give you an update on the major progress. We've made on a journey developed smart I O T connected solutions.
This past year, we made significant investments to build the internal talent and strategic partnerships to develop our I O T cloud architecture that supports our residential commercial and industrial applications.
Based on this I O T platform, we developed to apps the pentair home after the consumer and the Pentair program for our dealers. We expect these apps to seamlessly connecting entire sweet assumed a launch residential products tenant total throughout 2020, including a smart water softening Val two new pool automation systems and.
It was the residential flow control products.
Considering the breadth of our residential water products. This new IP platform as a major differentiator our single product category competitors.
We believe this new platform will play a key role to raise enters brand awareness with consumers as we come to go to company for solving consumer water needs. We also believe it will create increase the loyalty by generating new sales leads as well as improved customer loyalty through more easily attainable service offerings.
Finally, we expect this platform to also enable improved sales of additional pentair products and services as well it'd be an avenue to drive recurring monthly revenue services directly to pentair.
We've also made significant progress in both commercial and industrial food and beverage applications. The next generation of our leading Argo system for high end coffee shops, and other food service applications isn't now I O p. enable for real time performance monitoring as incorporate new features to allow predictive maintenance he system components, including the pump.
And filtration elements.
Finally in our food and beverage business, we developed and implemented the brewer cloud and I hope he solution to enable monitoring of the service for our industry, leading beer membrane filtration systems. The eye on T. service includes 24, seven support and proactive monitoring and reporting.
The use of I hope he is helping to accelerate the adoption of the innovative BMS solution that able to service contracts to scale efficiently with real time analysis.
By using the Brewer cloud service platform, we've been able to demonstrate strong increases in production efficiency for customers. Ultimately we believe this aiotv service solution helps build stronger strategic customer focus relationships with our brewing partners also opening up new application opportunities for our products.
The final element around their strategy is disciplined capital allocation, we recently announced that 2020, what mark the 44th consecutive year, given increases, which places pentair in rather leak company. The dividend aristocrats, we plan to continue to use our cash flow to fund the most attractive growth opportunities both organically and.
Inorganically, while still being mindful of returning capital to our shareholders and meaning committed to our investment grade ratings. Please turn to slide six label evolving to retain our vision.
Over the past year, we completed a 5000 person North American segmentation analysis that is provided detailed information on how consumers make purchases decisions.
In essence codified in the customer journeys with pentair in our products.
Just help this move for with an important decision on how to better position our portfolio to align with our strategies and our customer base, we must move with a greater sense of urgency and supported the needs of our bearing customers.
The segmentation data helped inform us as we reorganized into two business segments consumer solutions and industrial flow technologies will that business. It I've always had different customers influencers and go to market strategies various parts of our business are more closely aligned.
We believe the new alignment into a business to consumer focused segment consumer solutions, primarily business to business driven segment industrial flow technologies better positions our teams to build upon our core strengths more aggressively pursue our growth opportunities increase productivity and enhance profitability.
The ultimate goal is to exceed the expectations of our customers and all other stakeholders and we believe that we can do that so we have moved forward into 2020 with great enthusiasm.
Let me now expand in more detail with the two segments are.
Sure solutions is made up a pool and water solutions historically will comprise the majority of our prior aquatic solution segment, while water solutions is comprised what we historically referred to as residential commercial filtration that was part of the filtration solutions segment.
Artist solutions consists of components systems end to end services and are focused on the China Southeast Asia region. The objectives for the consumer solutions team or accelerate revenue growth in income enhanced consumer branding and experiences and build an expanded services capability, we believe the opportunity to grow our consumer solutions business.
Is significant.
Industrial flow technologies or <unk>. She is made up of three businesses. The first piece of IP is the remainder of what was previously in the filtration solutions segment.
These businesses are focused on industrial filtration, including a strong niche in food and beverage filtration. The other two pieces of Iotg come from the previous slow technology segment.
The two businesses, our residential irrigation flow think smallpox and commercial infrastructure flow, which is primarily larger engineered pumps.
The segment is primarily focused on beat it be customers the businesses that make up this segment have similar operational characteristics and we believe combining these businesses in this new structure can realize incremental value in the areas of engineering.
Solutions sourcing technology, I, OTI innovation and regional support.
Our new segment structure is focused on better alignment around our product and service offerings by customer type to maximize the customer experience and drive profitable growth. We expect this new structure to further each team's ability to prioritize opportunities accelerate decision, making processes optimally allocate resources innovate developing.
Prove new products and services and maximize our go to market strategies I would now like to turn the call over to Mark to focus.
<unk> financial results in more detail Mark.
Thank you John Please turn to slide seven labeled Q4, 19 Pentair performance.
For the fourth quarter overall sales increased 2% with core sales down 1%.
Segment income grew 5% and adjusted EPS increased 13% will provide more color on the individual segment performance shortly.
Below the line, we saw an adjusted tax rate of 13.4% net interest other expense of 7.3 million and our average shares in the quarter were 169.39.
The lower tax rate during the quarter and for the full year was the result of our tax strategies being spread over a lower income level in 2019, and we would anticipate a higher tax rate in 2020, as we expect income to grow.
For the third consecutive quarter price was inline or better than inflation and productivity was strong in the quarter.
Please turn to slide eight labeled full year 2019 pentair performance.
This slide looks at Pentair as full year performance for 2019 sales were flat with core sales down 1%.
While we experienced a very slow start to the year. We saw continued stabilization in the subsequent quarters and an overall improvement in our performance.
For the full year segment income was down 4% and return on sales declined 60 basis points to 17.5%.
Price nearly offset inflation for the full year and productivity built momentum as the year progressed.
The adjusted tax rate for the full year ended at 16% net interest other was 34 million and the average share count was 170.4 million.
Adjusted EPS of $2.38 represented a modest year over year increase.
Please turn to slide nine labeled Q4, 19 Pentair segment performance.
This slide lays out the fourth quarter performance of our three segments.
Aquatic systems core sales grew 1% as normal early buy programs returned to more historical patterns.
Net income for aquatic grew 9% and return on sales increased an impressive 260 basis points to 30.8%.
While we have to wait to see how the spring season unfolds. We are encouraged that our channel inventory appears closer to more historical normal levels.
Filtration solutions saw core sales declined 2%.
Segment income fell 4% and return on sales contract 210 basis points to 15.8%.
There continues to be a number of moving parts to filtration solutions, but overall, we believe the business is better positioned exiting 2019.
On the residential and commercial side the integration of Aquion at Pelican make good progress throughout the year in the core business, we saw systems grown nicely, which in part offset continued softness in the components business.
Within the industrial business there was some softness during the quarter due to the shipment timing of certain large orders.
We continue to invest in the residential and commercial business, which did have some impact on the income performance during the quarter. However, we believe this better positions the business going forward.
Flow technology saw core sales declined 1%. However segment income grew 10% and return on sales expanded 150 basis points to 13.5%.
While the topline remain next within flow technologies strong pricing on easier inflation, CCOP and improved productivity contributed to the strong income in our or EPS expansion in the quarter.
We made a number of investments and flow technologies in 2019 to help improve productivity and we would expect that momentum to carry into the new year.
Please turn to slide 10 labeled balance sheet and cash flow.
Our balance sheet ended the year in great shape with leverage comes comfortably below two times, a well balanced mix effects than variable debt and our average borrowing rate just below 3%.
Free cash flow for the year was just below 300 million and we were clearly disappointed in the results. However, we believe that most of the contributing factors were onetime in nature, and we would expect 2020 to see cash flow return to greater than 100% conversion of net income.
As the table on the left slide of the slide shows the two biggest contributing factors to the weaker cash flow performance, we're working capital and other accruals.
The biggest culprit within working capital was around payables timing just as we had increased prices to help mitigate unprecedent material inflation, we experience a similar phenomenon from many of our suppliers.
The timing of some of these increases and our subsequent action saw inventory come on the balance sheet and the timing of payable slipped from the end of 2018 ended the beginning of 2019.
With that now behind US, we expect working capital normalized and not be as big of a swing going forward.
Within other accruals there were a number of onetime factors that were not big individually or collectively added up to contribute to the year over year swing.
This includes timing of tax payments and pension termination that included the funding of an annuity.
Similar to the comment on working capital we have now cleaned up most of the long term liabilities on the balance sheet and we would expect less volatility in this category going forward.
Our long term cash port profile remains unchanged and we're committed to delivering free cash flow to be greater than our net income.
The balance sheet has a lot of flexibility and we strengthened our overall capital structure throughout 2019.
Please turn to slide 11 labeled Q1, 20 pentair outlook.
For the first quarter, we expect core sales to be up 4% to 6%.
We expect consumer solutions to be up 9% to 11% driven by pool.
We would remind you that the pool season in some years varies from a March to April start depending on weather, but overall, we expect a strong poor performance in the first half.
We expect industrial and flow technologies to be flattish, reflecting modest recovery on a residential irrigation business offset by slightly softer industrial sales.
We expect segment income to be up approximately 9% to 13% driven by solid volume growth better price cost and improve productivity.
We expect adjusted EPS to be in a range of 48 cents to 51 cents per share.
Below the line, we expect corporate expense to be approximately 17 million to 18 million.
We expect our first quarter adjusted tax rate to be around 17%.
We also expect net interest other expense of roughly $8 million and shares to be approximately 169 to 170 million.
Please turn to slide 12 labeled full year 2020 pentair outlook.
For the full year, we expect core sales to be up 2% to 4% driven by an expected, 5% to 7% increase and consumer solutions and relatively flattish topline performance from industrial and flow technologies.
We expect segment income to be up around 3% to 6%.
We are introducing guidance of an adjusted EPS range of $2.50 to $2.55 per share.
Other items embedded in our guidance include expected corporate expense of approximately 65 million on adjusted tax rate of 17%.
Net interest other expense of 27 to 29 million at an average share count for the year of 168 to 169 million shares.
We are targeting free cash flow greater than 100% of net income capital expenditures of approximately $60 million.
Depreciation and amortization around 80 million, a noncash stock compensation expense to approximate 25 million.
Before we turn the call over to Q and a I would like to take a moment to thank everyone, especially John for the support I've received through my long tenure with pentair.
I believe that pentair strategy is strong and I'm excited about what we have built here I.
I will help to ensure an orderly transition and I'm excited about the opportunity become an operating leader to private employee young company.
I would now like to turn the call over to Mariana for Q away after which John will have a few closing remarks.
Mariama. Please open the line for questions. Thank you.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or how ski.
Please standby well, we compiled acuity roster.
Your first question comes from Jeff Hammond with Keybanc capital markets. Your line is open.
Hey, good morning, guys.
Good morning, Jeff when exactly just just with the segment change can you give us a better sense of how you're thinking about.
Growth versus filtration within that five to seven and then Mark you mentioned inventory levels kind of.
Kind of approaching normal would that suggest there's still a little bit higher or lean coming into the year. Thanks.
Sure. So so first on and on core growth side, you can assume that the majority of that higher core growth in in the first quarter and for the full years driven by by the pool business within consumer solutions with.
With that residential commercial filtration system side.
Being a little bit more moderated, but also a also contributing to the higher core growth.
On the inventory side, yes, we see inventory levels now back to more normalized levels and so as we've talked about throughout the year that was the objective and and we saw those come back in line and we would anticipate.
Not having to really comment on inventories going forward.
Okay, Great and then.
Looking at the new segments, it looks like the margin differential pretty stark just how do we how do we think about.
Capital allocation simple portfolio simplification within the two segments and just maybe comment on where you think entitlement margins should be in the two segments. Thanks.
Yes, I think one of the reasons to put the like businesses. Together, we mentioned was really about the consumer focus and we had the opportunity to share digital marketing strategies across the water solutions and pool, we all have the ability to utilize branding and messaging and also what do you think about where the pool.
Revenue is by states and geography, those a huge water opportunities from a drinking water perspective, so there's a lot of strategic growth opportunities on a consumer solution side on the T. side. We think we have a lot of operational efficiencies. We can drive both in the way that we it's a very global business. So the geographical footprint as.
We need to be better understood and better optimized and we also have project.
Learnings from each of the business as Jeff that we think we can expand to two pins capability to be more efficient and the way that we deliver projects onto our end customer base. So ultimately we don't feel really good about this line up.
I don't have margin opportunities I think in the short run you're going to see more margin expansion. The IP side, while we invested heavily in the consumer solutions to build out the consumer side, but as you know the consumer solutions businesses had a higher starting our west level.
Okay. Thanks, guys.
Thank you Jeff.
Your next question comes from Steve Tusa with JP Morgan Your line is open.
Okay.
Steve.
Steve.
Maybe the mute button speed, Steve Tusa Your line is open.
Okay.
To come back to Steve.
The next question.
Your next question comes from Brian Lee with Goldman Sachs. Your line is open.
Hey, guys. Good morning, Hey, good morning, good morning.
Good morning, just question on the guidance I guess for Q1 in 2020, it would seem to imply you know the segment income growth is fading quite a bit starting from the 9% to 13% in Q1 to the average out to just the 3% to 6% for the full year EPS I assume some of that as the tougher back half comps versus the first half, but maybe give us a sense for what else is embedded in there moving.
Through the year in your assumptions that kind of drives a little bit of that fade as you move moved through the.
Yes, I think you nailed it I mean, we have some easier comparisons in the first half of the year and we believe that we're going to get back to normal seasonality.
Given what we're expecting around the overall.
Mandan, our our businesses. So you got it the second one is we're going to continue to invest and our growth opportunities.
And that core assumption of that continued investment isn't.
All year, but it's it's muting kind of the back half performance.
Okay Fair enough and then John speaking of investment you talked about.
The water services opportunity here in resin commercial can you can you maybe give us somewhat context. The infrastructure you have in place today for that what new investments, you're making there and then what sort of revenue opportunity and timings reasonable to expect there and then maybe just if I could squeeze one in.
Lastly, just on the margins with respect to that opportunity any sense of where that stacks up.
In terms of Viawest ranges versus the rest of the portfolio buffering. Thanks, guys.
Yes. So you know what infrastructure, we have we purchased Pelican, which gave us the end to end solutions and the in home residential experience that we think we can.
Move forward into what we're calling pentair water solutions, and we want to be the fully integrated supplier too.
To be able to give to consumers good quality drinking water at their point of use in the home. We also think we can expand that capability to commercial and really utilize our commercial expertise and our water expertise to expand where you work and where you live. So we're building out that infrastructure and capability a lot of that digital.
The rest of its really highly around the technical capabilities, we're bringing around our ability to solve those solutions either in the home or in the commercial application through a combination and or you know chilled water and or salt three applications. So that's really where we've been spending or time.
I would also say that the margins in these businesses start out really nice.
Basis think about 20% ish and we believe that growth.
Finally, leverages, both the investment and the existing infrastructure we have.
All right. Thanks, guys.
Thank you.
Your next question comes from Steve Tusa with JP Morgan Your line is open.
Hey, sorry about that missing that missing you guys, calling but.
The odd kind of the bridge for next year can you just kind of clarify what I'm.
Kind of.
The magnitude if somebody's moving parts and when you said you have investment.
And then you know price inflation productivity, just kind of the big buckets that roughly you're expecting for next year.
For 20.
Sure sure, let me try to walk through it Steve.
So maybe first just thinking about price cost.
As we've talked before we expect to be backup kind of a more historical normal normal level look at price cost kind of offsetting and being in that 1% to 2% range.
We've got the so thats embedded in the core growth and volume growth on top of that we would expect to see dropped through in that kind of mid thirtys range to 40%.
On the on the volume dropped through and then from a productivity perspective.
I referenced earlier, we would expect to see productivity coming out of industrial or the IMF T. segment and.
But offsetting that that we certainly do you have there are some things that that it will be headwind in 2020 coming out of 2019, if you think about incentive compensation and some other variable expense items that would have been lower in 2019 that really is headwind to negative productivity in 2020, so that would that would be at offset to the.
Actual productivity that the businesses are driving so so ultimately kind of on a net basis productivity versus kind of those investments is that is that flat is that part still positive or what would you kind of expect to see on that front, yes, it's kind of flattish to slightly positive.
Okay, and then I'm on the cash flow side.
Big working capital headwind. This year are you expecting a working capital you said, it's going to be now 100 greater than 100 that income do you expect Q working capital as a positive obviously next year if that's the case.
So I think a working capital thing that has a positive done a year over year basis. So as I said in my comments it negatively affected us this year, primarily looking at payables timing and little bit on just receivables and much of that as related.
To the situation from 2018 and bleeding over into 2019 as we look at 2020 were back to flag is a more normalized level. So we shouldn't see big swings either to the positive or the negative frankly on working capital and you're just to be clear on and to the guide around 100% of net income versus 100% of.
Adjusted net income.
We do recognize there are certain things that are reflected in adjusted net income that are that our cash expenses and so that's also part of it was we think about what the the reasonable expectation on a conversion basis. So it's something something on an adjusted basis, just slightly less than 100%, but but the guide would be greater than 100%.
Net income.
Okay, great. Thanks like I appreciate it.
Steve.
Your next question comes from Joe Giordano with Cowen Your line is open.
Hey, guys good morning.
Morning.
Yeah, So I wanted to start on the segmentation.
No just like optically it seems like you're putting asset that you've been more happy with in one bucket and other ones in another like.
Some sort of portfolio change or.
Several of the business or cinema businesses that is that like something thats on the table or that even something that's been thought about.
No.
Hi, I mean, clearly this is more of a a growth and operational efficiency and we like the business as we have I do think when it comes to prioritizing across the portfolio. You can expect most of the capital allocation as far as the acquisitions to be on the consumer solution side.
The day to day growth investments.
Probably in the near term on the consumer solutions side, but we have businesses that have performed well in the eye of T. side, and we want to continue to prior to those prioritize those within the IP space. So.
To answer your question just succinctly no we don't anticipate incident.
I understand the business to business versus the business to consumer but like within the within the consumer the channels are pretty different so with pool versus like the in home ready.
Thank you so can you talk to what the.
How this changes the way you guys that internally or how can you like what do you leveraging out of out of this.
Yes, I mean, starting with the point that we we sell over a billion dollars a year of branded pool products and we have a very active user and pool that references and comes to the pentair Dotcom website, often right. So we havent really large you know this 5 million install pools with an active user googling.
And certainly seeking more information about their products that gives us the ability to bring traffic to pentair dot com and then make those consumers and more aware of the types of things. We can do to also help their quality of water in their homes.
And there we expect to take those leads and move them to our independent dealer channels and solve those needs of those those consumers and so we're starting from a really good.
Place and I mentioned that our web traffic's up 60% a lot of that increase web traffic people looking for drinking water or in home solutions and then we with our Pelican direct to consumer and services model, we're expanding that to do things beyond just this all three systems that they offer and we have Oh, we have the ability over the next three to five.
Here is to really build what we think is the right services and consumer focused.
Model that we can give people the the national awareness and the differentiation by ZIP code that I think people want.
That's helpful. And then May last from me, what's embedded expectation for AG in 2020, I assume that's all in and that's all going to be in the industrial and has a pretty easy comp, particularly in the.
Beginning the year, so kind of what was the in kind of percentage of sales or how big was that business in 19, and what's embedded in growth for the industrial business there.
So you you had to AG business, yes, yes, I know that we talked about that a bunch. This year, yes, yes, yes, so we or the overall guide includes an assumption of AG being around flattish.
So you're right there should be easier comps overall, but we're not anticipating any any big rebound.
And Dan just in terms of size.
The that business is about 10% to 15% of the IMF T. segment.
Okay. Thanks, guys.
Thank you.
Your next question comes from Mike Halloran with Baird. Your line is open good morning, gentlemen.
Accordingly.
So first staying with the segmentation side, maybe maybe just to a more in depth discussion on lessons learned.
No you obviously just address the whether there was divestitures associated with with a lot of the core work you did.
For the investment dollars are you already mentioned is starting to swing towards the digital side because of some of the work you did anything else that you would point to that you are capitalizing or changing where you're allocating your capital early internally or where other investment initiatives might might spring up based on that work.
Yes, Mike I mean first you know just the thank you know the internal pentair teams I mean, we did as I mentioned in my.
Script, 5000 people United States weight in those are consumers of water as to how they engage and by water and how they want to buy and engage water and we use that to inform what we think we want to go as you can imagine that type of wed capabilities or digital capabilities, we need an E business is a more things related to awareness con.
10, some dealer portals.
And then also on the consumer side, we need to have the consumer engagement and the ability to work directly with the consumer and the dealer to satisfy that need also when you think operationally we got to get to next day shipments and same day shipments in our consumer side of the business, we don't need that same type of.
Infrastructure a capability on the fee side. So what we learned about how we can differentiate ourselves against competition in these spaces informed how we create the segmentation and build the capability around the businesses to help each of the businesses succeed.
That's that's what we really learn and those are lessons learned and I'm very proud of how we've organized the organization I'm very optimistic and excited about what we can do with these two organizations.
Make sense and then just on the cap allocation side as we think about 2020 would see M&A environment look like and how are you thinking about.
The acquisition opportunity versus the buyback opportunity as you sit here today.
Yes, so as we as we continue to generate cash and have opportunities I like what we're doing organically and I think we're well positioned today and we have to opportunistically participate in M&A at the right return levels there have been some acquisitions.
As announced in kind of went beyond this year and I think you know where we have to be disciplined because we have to when we engage in acquisitions deliver a significant ROI seat over some period of time. So we're going to continue to be disciplined and you know we have options and I think those options gives the ability to create the the shareowner value.
Appreciate it thank you.
Thank you.
Your next question comes from Andrew Kaplowitz with Citi. Your line is open.
Hi, This is a time bookbinder on brandy good morning.
Morning.
So coming out in the third quarter, you had an expectation for any kind of course sales decline and ends up slightly positive what happened during the progression of the fourth quarter that may have benefited the segment. Your initial forecast and are there any scheduled price increases that may have impacted fail.
Sure. So just in terms of that looking at the sequential and why they did slightly better than forecast really just just continued back getting back to what I said as a more normalized level. So good solid demand in the quarter and real really nothing unusual from from an overall demand perspective.
Okay and are looking towards next year guide core sales within industrial technologies are expected to be down went up one.
With the understanding that the legacy filtration segments coming off a relatively easy comp, albeit for part of the portfolio could you maybe parse the expected performance and the different pieces.
So in consumer solutions, right, we guided sort of for the full year up 5% to 7%.
A big portion of that as been being driven by the pool business within consumer solutions.
And then the filtration piece that's in there is maybe kind of mid mid single digit low mid single digit type of growth and and the pool piece would be more of that that kind of mid to high single digit.
Okay. Thank you.
Your next question comes from Nathan Jones with Stifel. Your line is open.
Good morning, everyone.
Good morning.
And I know this is not the primary reason for it.
All of that he had a two segments, but typically you do see some cost reductions.
Come out of these kind of combinations are you guys expecting to see cost savings.
By consolidating down to two segments and if so could you quantify that for us.
I do think over three to five years, Nathan without a doubt we're going to see functional efficiencies across these two segments and driving higher efficiencies. The businesses. It's not the main intent of doing this as a matter of fact, we're adding back resources and the differential capabilities into the businesses and segments based upon the needs we have.
But over a three to five year period I do think we'll start to identify function by function. How we can differentiate ourselves in these segments and that will drive some value, but I can't quantify right now.
Fair enough.
Productivity over the last couple of years, it's been a little up and down are you guys confident now that you're on a path to be able to more consistently deliver productivity quarter in quarter out.
Do you see any specific discrete headwinds this year or anything like that we should be aware of.
Well Mark mentioned the headwind I think the you know the reinstatement of variable compensation, which tends to be extremely low in a tough year like 2019. It is going to come back to headwind as we head into 2020, that's the only thing we see out there and the horizon. We have added about 2% of revenue over the last couple of years in the form.
Estimates.
In the R&D sales and marketing and the development of people as we mentioned.
And we continue to invest and I read for you some of those big advancements on the T. side. The digital front I do think now that's going to stabilize as we go forward and that level investment will continue but we don't see those sizable year over year headwinds that I think has been mitigating what has been real productivity in the businesses and finally growth I mean, when you when you get.
Back to growth and you get core volume growth that goes a long way in factories to drive productivity.
So I think the cost input sides of stabilized and I think our ability to invest is it's going to pay dividends and continue that investment will no longer be a year over year challenge and then when we return to growth, we should see ourselves getting back to the protein that you mentioned.
Okay. So just on the investment side, you've reached a plateau and then now you're comfortable that you have the right spending level. There is not you hides now too low that's kind of what you anticipate going forward I.
I mean, it's going to vary up and down a little bit Nathan we probably have over next three to five years from GE day opportunity at the same time going to continue to invest in more innovative products around R&D. So a couple of lines are going to move from from quarter to quarter year to year, but overall, we don't see a step change investment that's required to grow our existing businesses.
Great. Thanks, very much for taking my questions.
Thank you name it Q.
Your next question comes from Saree Boroditsky with Jefferies. Your line is open.
Thank you then mining.
The comments on add last year, you saw some headwinds on the precision side from the late planting season could you just comment on what your expectations after that and other business.
Sure as I was talking earlier about sort of the expectation for AG coming into 2020.
Yes thinking of it sort of being flattish. So it was down last year, and really returning to flat, but not anticipating and nothing's embedded in guidance in terms of any significant recovery.
Okay, and then can you provide some color on what you saw geographically I believe last quarter, you talked about moderating growth in Europe , along with some continued growth in China did these trends continuing the corridor and any expectations for next year.
And they're very similar really from the commentary I would have had last quarter in terms of jet geographic split so some softness in a in Europe in certain product lines continue to see good momentum in China.
And then the remainder of the puts and takes coming out of North America.
Great. Thanks for taking my question. Thank.
Thank you.
Your next question comes from Scott Graham with Rosenblatt Securities. Your line is open.
Hey, good morning, Thanks for taking my call.
Scott.
And good luck humor.
Thanks Scott.
So two questions for you really one of the things you were talking about last year was that you had a little bit excess inventory in the channels in the other business non pool businesses. I guess my first question would be how are you feeling about those and then secondly.
I'm, hoping you can unpack this filtration margin decline in the quarter or.
You know by size of issue and the impact that.
The carryover effect of the same into the first half.
Yes, let me let me take the the margin impact in filtration I'll hand, the rest over to Mark I mean, what we're doing and pentair water solutions is adding what's called a mobile retail center, which they give us a salesperson in a vehicle that helps the consumer be able to.
Take a look at the product that we're trying to sell in and see that product in action and the actual vehicle itself. We are accelerating the rate of investment of putting those vehicles and those people on the road and training those new sales organizations right. So think of that investment being significantly ahead of the revenue that theyve generate and right now we're targeting somewhere around three quarters of the million.
Dollars, a year and revenue from a vehicle that's been in place for 12 months or greater and so it takes a while the ramp up to that level and to have that working so that is the primary investment that's continuing infiltration and we'll probably continue for some period of time as we believe that where we're doing the right things to drive long term value but.
There is a push of cost ahead of that that growth Mark you take the second sure and just to go back to sort of the inventory question. So.
It's a good point, yes, we we talked about pool or inventory both in the pool and in some of the other business as it relates to to some of the buy ahead that happened in the back half of 2018.
So a couple of things that right that introduces and factors into our guidance for 2020, but it also helps explain that the Q4 19 performance as on a year over year comp basis, we've got the tougher comps in 2018 that are tied to that.
By ahead that was related to the price increase.
So I'm translating that to mean that you're okay with the inventories in the channels as we enter 2020 in those businesses. That's correct Thats correct. So my comment on sort of normalize inventory levels would be applied really across all of the businesses.
Thank you and John if I could just revisit your response you talked about the investments is that the only item that.
Drove down the margin or would there other factors as well.
Infiltration.
Yes, I mean filtration on a historical basis, there's a lot of different pieces to that businesses that we talked about with different margin profile. So some of that is just the mix in the fourth quarter.
Related to related to other quarters.
As we just look at the makeup of the product sales in the quarter.
That's great. Thank you.
Thank you. Thank you.
Your next question comes from Brian job with William Blair. Your line is open.
Good morning. This is Joe again on for Brian today.
I was wondering if you talk little bit more about what you're seeing in some of your end markets right. Now are you seeing more stability across some of those on markets right now and particularly on the industrial side.
Are you seeing demand starts to level off there.
Well 2000 question. So let me try to address I think when we look at the linearity of our revenue and you'd you'd take a look at moving throughout a year from Q1 Q2 to Q3 Q4, we've seen significant stability and most of all of our product categories.
There were exposed to residential commercial we still see resilience and we still see strong consumer sentiment driving incremental demand.
And industrial Yeah, I mean things have gotten a little slower globally. We don't have a lot of industrial exposure, but product lines. We have have have shown basically more of a flattening.
According to court growth trajectory.
Okay. Thanks, and then just on the non core residential business.
And then you mentioned us normalized inventory levels, what are your expectations in terms of revenue growth for business and 20 clients that would really be tied to kind of my comment on to the filtration business. So sort of the low mid single digit growth rate.
Okay.
Okay, great. Thanks for taking my questions.
Thank you. Thank you.
Your next question comes from Julian Mitchell with Barclays. Your line is open.
Hey, good morning, Trish on for Julian on just a quick one on the consumer solutions segment can what percentage of sales go through E. Commerce at this point and on up you have any target for that and then just any significant difference in margins there between ecommerce other distribution, yes, I don't have a target for for that primarily I would look at.
What we're trying to do is consumer enabled which is different than D to C rights were trying to engage the consumer and make the consumer aware of all the different options available to them and then we're trying to bring it through a professional channel.
Either in that none of us providing those services or are affiliated.
Partners, bringing that through their channel.
Our direct to consumer business today is just pelican and that's what they did before because that is 20 to 30 million maybe that gets sold in the form a product the rest of adults services.
Okay. That's helpful. And then just maybe any early feedback on the Pentair Omar I noticed launched last quarter, but anything there.
Well, we just soft launch.
Well, we'll be on contiguity take the consumer feedback and evolve, but we're excited.
We obviously are not trying to be the integrated platform. There's there's other companies who will lead in that area, but we want to tie into those platforms and then we want to have a whole suite of products and capability that would help you make make the consumer more aware of their water needs, where I'm. Most excited by though is on the dealer side right and and as.
We as we provide to connect ability of that app and allow the consumer to get their dealers scheduled or request the service and their most efficient way and then also follow up on the consumer experience. That's what we're really excited about that application watch.
Okay, great. Thanks, guys.
Thank you.
Your next question comes from Brett Linzey with vertical research partners. Your line is open.
Hey, good morning, all.
Just a wouldn't come back to the to the 2020 guidance specific around just margin. So you said core incrementals of 30 to 40 for the total company.
What are you expecting for margin performance by segment do you think both are up year over year, and then any color on restructuring what you're targeting for this year.
Yes to margin expansion in both segments.
And right now we're not targeting are forecasting any major restructuring or restructure.
Okay, and then looks like you're guiding a to 2% divestiture and consumer solutions. It looks like it takes place later in the year.
Maybe just some color their strategic rationale what's being sold.
Sure and just to clarify accident, so theres kind of a net going on in Q1. So there's a there's the acquisition timing of of Aquion at Pelican from 2018 that that lapses and coming into this quarter. So that's that's about $12 million.
Then the rest of it as the sale of the aquaculture business that we had announced previously so that sale has been ongoing and so the guide reflects the assumption that that business has been divested in in 2020.
Okay, Great I'll pass it along thanks.
Thank you.
There are no further questions at this time I will now turn call back over to the company for closing remarks.
Thank you for joining us today, despite the challenging start to 2019, we made great progress with respect to our vision to build a high performance growth culture.
I believe we have significant opportunities ahead of us and with our customer centric structure and shared services support platform. We're ready to further advance the pentair strategy more efficiently and with the greater sense of urgency.
I speak for the full pentair team when I say, we're excited about our future optimistic about 2020 and motivated to create value for all key stakeholders in the near and longer term. Thank you for your continued interest Mariama you can conclude the call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.