Jim Lucas - Vice President of Investor Relations Randy Hogan - Chairman and Chief Executive Officer John Stauch - Chief Financial Officer and Executive Vice President.

Steve Tusa - JPMorgan Steven Winoker - Sanford C. Bernstein & Co., LLC Deane Dray - RBC Capital Markets Joe Ritchie - Goldman Sachs Shannon O'Callaghan - UBS Scott Graham - Jefferies Jeff Hammond - KeyBanc Capital Markets Brian Konigsberg - Vertical Research Partners Andrew Obin - Bank of America Merrill Lynch.

Good morning. My name is Elisa and I will be your conference operator today. At this time, I would like to welcome everyone to the Pentair Q4 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Jim Lucas, you may begin your conference..

Thanks, Elisa. And welcome to Pentair's fourth quarter 2014 earnings conference call. We're glad you could join us. I'm Jim Lucas, Vice President of Investor Relations. With me today is Randy Hogan, our Chairman and Chief Executive Officer; and John Stauch, our Chief Financial Officer.

On today's call, we will provide details on our fourth quarter 2014 performance, as well as our first quarter and full year 2014 outlook as outlined in this morning's release.

Before we begin, let me remind you that any statements made about the company's anticipated financial results are forward-looking statements subject to future risks and uncertainties, such as the risks outlined in Pentair's most recent 10-K and 10-Q in today's release.

Forward-looking statements included herein are made as of today and the company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances. Actual results could differ materially from anticipated results.

Today's webcast is accompanied by a presentation, which can be found in the Investors section of Pentair's website. We will reference to these slides 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 would like to request that you limit your questions to one and follow up and get back in the queue for further questions in order that everyone has an opportunity to ask their questions. I will now turn the call over to Randy..

Thanks, Jim. And good morning, everyone. Let me just begin with the summary of 2014 on Slide 4.

As we highlighted during our outlook call in December, we are very pleased with the integration of Flow Control and our progress for last two years demonstrates the power the Pentair integrated management system or PIMS as a differentiating tool for integrating acquisitions.

We are very pleased with how the company has come together and one Pentair culture has been firmly established. Yes, we know the best is still to come. In 2014, we delivered 2% core sales growth which we recognize as mid- pack at best.

But our 160 basis points the margin expansion, 24% adjusted EPS growth and very strong free cash flow clearly places us in the upper quartile of performance last year compared to our peer group. In addition, we returned $1.4 billion to our shareholders through share repurchases and dividends, a very solid year indeed.

While the market environment remains challenging, we further simplified the business and consolidated GBU. We are more closely aligned around channels solutions than ever, we have structured our four business units as reporting segments allowing even more strategic alignment. 2014 was another good year for Pentair.

We built momentum on our internal execution to drive shareholder value in 2015 and beyond. Now let's turn to Slide 5 for a quick look at our key 2015 forecast assumptions. Lots changed in the world since we provided initial 2015 outlook just last December.

In our initially EPS guidance we provided a list of key variables that could impact the low, mid and high end of the range. Some of these have gotten better but unfortunately some more critical factors have gotten more negative.

The further fall in oil prices is rightly came under the lot of attention with many other companies have indicated the ongoing strengthening dollar has created substantial foreign exchange headwinds as well. In mid December we forecasted an FX headwind of roughly $0.10 per share.

This headwind is now doubled as the dollar further strengthened against most currencies. We've not sat by idly, and have continue to go after further cost structure resulting in recognizing additional restructuring in the fourth quarter as we've positioned for a continued push to achieve top line growth.

These external challenges are also reflected in our core sales growth outlook, which is now targeted to be 2% to 3% down from 2% to 4%. To point out the top line is a response to the reality of substantial uncertainty in our energy vertical due to oil and gas. We've forecasted $200 million also buyback for 2015 and that is already been completed.

Our balance sheet capacity remains over $1 billion and we will continue to remain disciplined in our capital allocation as we build an active M&A pipeline.

Taking all these into consideration, we are adjusting our 2015 EPS guidance to a range of $4.10 to $4.25 from a range of $4.20 to $4.35, with a dime adjustments being solely related to the increase FX headwind. John will cover the 2015 outlook in greater detail later in the call.

It is important for us to be realistic about the economic environment of the world day while we continue to execute on the elements within our control at a very high level. Now let's turn to Slide 6 for discussion of our fourth quarter results. We delivered a strong fourth quarter with the core sales growth of 2% which is in line with our forecast.

We saw continued strength in our Residential and Commercial and Food & Beverage vertical while Industrial improved in the second half and appeared to build momentum entering the new year. Technical Solutions had another strong quarter with 7% core sales growth and Process Technologies also delivered strong core sales growth of 5%.

We delivered 10% adjusted operating income growth, 160 basis points of margin expansion and 23% adjusted EPS growth. Free cash flow was very strong in the quarter and a full year as we generated nearly $900 million of full year free cash flow. We've represented 121% conversion of adjusted net income.

This is a large part of Pentair's ongoing value proposition. Now let's turn to Slide 7 for more detail look at the fourth quarter results. Our 2% core sales growth consisted of one point of volume growth and one point of price. But FX was 4% headwind as a dollar strengthened later in the year.

We are expecting this type of foreign exchange headwind to persist in 2015 with the first quarter facing a particularly tough comparison. The quarter's 10% adjusted operating income growth is also consistent with our long-term value proposition with price and productivity offsetting inflation.

We saw inflation run fairly consistent throughout 2014 and raw material inflation may moderate, wage inflation is expected to persist. Our lean sourcing and standardization efforts continue to deliver, contributing to our 160 basis points of margin expansion in the quarter.

The fourth quarter showed solid core sales growth which we believe demonstrates the diversification in our portfolio and our strong internal execution highlights our unwavering focus to over deliver on the elements within our control. Now let's turn to Slide 8 for review of our largest segment, Valves & Controls.

Values & Controls' fourth quarter sales declined 1% as we faced the very tough year-over-year comparison since the prior year Q4 included over $30 million of loan margin shipments out of the backlog.

Including significant adjustments due to currency translation the quarter ending backlog declined 7% sequentially with over half of the decline a result of FX headwinds. Given the backlog is generally shippable in the next 6 to 12 months; we feel it's prudent to adjust backlog for FX to give the most appropriate view of the business.

Core orders declined 6% which we will discuss in more detail in the next slide. Once again the sales results were mix for Valves & Controls with process up modestly, oil and gas down and power and mining both flat in the quarter. The right half of the page shows fourth quarter Valves & Controls' operating profit end margins.

Although the top line had its fair share of volatility, the operating income performance within Valves & Controls has been very strong. Operating income grew 30% and operating margin expanded 470 basis points to 16.9%.

While the comparable quarter's results were dragged down by the low margin shipments last year, Valves & Controls make tremendous progress in driving productivity as they build momentum in lean sourcing and standardization all part of PIMS. Now let's turn to Slide 9 for look at the orders and backlog for Valves & Controls.

As you can see on slide 9, Valves & Controls' backlog is broken down in four key industries, three of which fall under our energy vertical, those are oil and gas, power and mining and one in our industrial vertical which the process business is.

It's clearly been a lot of focus on our Valves & Controls business particularly its oil and gas exposure, 65% of the Valves & Controls is not oil and gas related. Orders remain volatile, core is growing in process and mining while they decline double digits in both oil and gas and power.

The decline in oil and gas orders follow two quarters of orders growth was not unexpected given the dramatic decline in oil prices throughout the fourth quarter. Power and mining both continue to see evolved order pattern but excluding the negative impact of FX, backlog in these two smaller sub verticals appears to be stabilizing.

Process orders showed small growth in the quarter and we continue to expect orders to grow in 2015 as the North American chemical build out continues. Valves & Controls' orders come later in the procurement cycle and projects that have already been commissioned continue to move forward, giving us confidence and some order momentum building in 2015.

Now let's move to Slide 10 for look at our Process Technologies segment. Process Technologies achieved another strong quarter growth with 5% core sales growth overall with all key verticals contributing.

Food and Beverage growth is 7% and spread across both our beverage and food services businesses and residential and commercial saw growth from both pool and residential filtration. The right half of the page shows fourth quarter Process Technologies' operating profit and margins.

So while the top line showed strength once again, this is the second quarter in a row where incoming margin performances were challenged. We continue to see opportunities to drive lean and standardization within many of our filtration businesses and have combined these businesses with flow to focus on accelerating the pace of change.

While price and productivity were not enough to offset inflation this quarter, we've taken the necessary root cause counter measures and are focused on driving the type of income growth and margin expansion we expect on the strong core sales growth performance. Now to move to Slide 11 for look at Flow Technologies.

Flow Technology reported a core sales decline of 4%, half of which was attributable to our strategic decision to exit the big box channel and focus on a profitable pro channel. Despite this headwind our residential and commercial business showed a modest increase in the quarter.

We are now pleased with our performance in industrial and infrastructure in the fourth quarter. We believe backlog is stabilized. While we do not anticipate this would read out fully in the first half of 2015, we do expect continuing improvement in both of these verticals within the segment as 2015 progresses.

The right half of the page shows fourth quarter Flow Technologies' operating profits and margins. Operating income grew 5% and operating margins expand at 110 basis points to 10.3%.

Flow Technologies delivered strong price and productivity while differentiating growth and improving mix should help continue the momentum we built to drive margins to higher performance level. Let's now turn to Slide 12 for look at Technical Solutions results.

Technical Solutions had another fantastic quarter with 7% core sales growth led by energy and residential and commercial. For the first time this year Technical Solutions posted a small decline in infrastructure as comparisons for the electronics business began to get more challenging.

Within energy, we saw strength once again in the Canadian oil and sand shipping and projects currently in the backlog. Our heat management solutions business is more than just oil and gas and we saw strong orders and backlog growth in the fourth quarter driven by two large projects.

Residential and commercial benefited from continued growth in Europe and North America. Industrial growth of 6% was led by our North American equipment protection and North American heat management solutions businesses. The right half of the page shows third quarter Technical Solutions' operating profits and margins.

Operating income grew 7% in the quarter and operating margin expanded 90 basis points to 22.9%. Our price and productivity initiatives continue to outpace inflation while core sales growth leverage is partially offset by increased FX headwinds during the quarter. Now let's turn to Slide 13 for review of 2014 full year results.

In 2014, we delivered 2% core sales growth led by our Process Technologies and Technical Solutions segment. We completed our previous share buyback program during 2014. Adjusted operating income for the full year increased 13% and adjusted operating margin expanded 160 basis points to 14.5%.

We made a lot of progress for last year's improving our operating margins but many opportunities remain to drive overall margin even higher. Free cash flow was nearly $900 million and represented 121% conversion of adjusted net income.

I am pleased with our operating performance in 2014 and recognized we must continue to drive more consistent, predictable organic growth. Let's now turn to Slide 14 for look at our Oil and Gas profile. Pentair has narrowly diversified industrial company operating in five verticals.

Just under 20% of our business is exposed to global oil and gas market and over 80% of the portfolio participates in other verticals where we believe growth exist today.

We highlighted this part of our portfolio in December outlook call and wanted to remind our shareholders that even within oil and gas we are diversified, specifically we are 5% exposed to upstream, 5% midstream and 9% downstream on a total Pentair's sales basis.

Our upstream and midstream exposure is mostly in our Valves & Controls segment and are split roughly 60:40 between new constructions and install base. The upstream portion is where we believe the greatest uncertainty exists today. Our downstream exposures will involve Valves & Controls and Technical Solutions.

During the fourth quarter, we mentioned previously we saw strong orders and backlog growth in our heat management solutions business within Technical Solutions.

While there has been some focus recently on the outlook for refining, we continue to see strong MRO activity that I have not seen any slowing in maintenance spending as our focus on the install base continues to gain traction.

The continued volatility in oil prices which remain below $50 per barrel does create a level of uncertainty within 19% of our portfolio. So our focus for our growth is squarely on the other 81% of our portfolio where we have several areas of opportunity entering 2015. As shown on Slide 15, our overall 2015 core sales growth profile by vertical.

As you can see on 15 starting with industrial, our largest vertical representing roughly 29% of sales. We are forecasting 3% to 5% core sales growth in 2015. Our Valves & Controls business is expected to see improving orders during the year in North America as expansion and process industries continues.

Within Technical Solutions our North American equipment protection business saw improving order trends in the second half of 2014 and globalize ISM report remain positive and support our expectations in industrial will remain solid. Our second largest vertical, residential and commercial has been our bright spot for past couple of years.

In 2015 should see momentum that momentum continues. This vertical represents approximately 27% of our sales with large portion of our residential and commercial business exposed replacing spending which remains positive.

We've recognized that our big box exit within Flow Technologies creates some modest headwind for this vertical but overall we are forecasting 46% core sales growth in residential and commercial. Roughly 10% of our sales are within food and beverage vertical.

Our agriculture related businesses are facing markets that are likely to be down overall again in 2015. But both or irrigation and crop spray businesses are expected to deliver differentiated growth to mitigate some of the market related headwinds.

Our food service business is expected to continue to perform well expanding with customers globally while also further penetrating areas such as grocery stores and convenient stores. We believe our beverage business is well positioned with global customers in the beer industry and we expect to see more growth as our dairy business gains momentum.

Within our infrastructure vertical which accounts for less than 10% of our overall sales, we are forecasting modest growth in 2015. Our electronics business and Technical Solutions faces tough comparison in the first half of the year but the business is focused on winning new opportunities.

Within our advanced filtration business it appears to global desalination markets and water treatment and finally reached a bottom after prolonged hibernation. And we are encouraged to see order in the fourth quarter of 2014. Within our engineered flow business, our infrastructure backlog improved in the back half for 2014.

And leads us to believe that after challenging first quarter this business should see growth return in the second half. In addition to our 19% in oil and gas, we have another 8% of our sales in power and mining within our energy vertical. For 2015, we now expect core sales in energy to be down 5% to 7% on a core basis.

With the momentum we are seeing in a majority of our portfolio there is non energy related is expected to drive low single digit overall core sales growth in 2015. Let's now turn to Slide 16 for look at how we believe will driving shareholder value.

Before I hand off the call to John, I wanted to focus on what we believe we are doing to drive shareholder value. Simply put, we remain focused on three areas. Organic growth, margin expansion and free cash flow and capital allocation. We've recognized in the last couple of years when the second and third performance quartile in organic growth.

That's why we continue to sharpen the growth tools within our PIMS tools box. At the beginning of last year, we organized into 18 growth platforms under our four reporting segments, which provide us a better mechanism to prioritize investments across the enterprise.

The platform focus allows us the ability to differentially fund and track growth actions on a more granular level within the businesses. While we cannot control the external economic environment, we are focused on driving differentiated growth in our most attractive businesses in our portfolio. That's already reading out in spots.

Regarding margin expansion and free cash flow and capital allocation, we believe we have proven track record of success that places in the first quartile of performance, top of class.

Over the last two years, we've expanded our adjusted operating margins over 300 basis points and we believe we have the proven play book to continue driving productivity and cost structure. Our free cash generation has increased dramatically for the last two years.

We returned $2.3 billion to our shareholders through buyback and dividends for last two years. We remained disciplined in our capital allocation and our free cash flow is nearing $1 billion per year on an annual basis, allowing us more degrees of freedom than any other time in Pentair. All three components are important to driving shareholder value.

We are doing very well in two areas and are focused on improving the third area, organic growth which we know is important to driving long-term shareholder value and we are committed to delivering that. So with that I'll turn it over to John..

Thank you, Randy. Please turn to Slide number 17 titled 2014 Free Cash Flow Generation. Cash flow was strong 2014 as free cash flow for the year was $889 million, which represented 121% of net income. This is the second consecutive year that free cash flow exceeded a 120% of net income. Just as important, ROIC increased over 11%.

Free cash flow is an important component of our value creation story and we remain committed to delivering strong free cash flow on a consistent basis. Please turn to Slide number 18 labeled Balance Sheet and Cash Flow.

As I mentioned on the previous slide, ROIC ended the year just over 11%, which we believe demonstrate the value creation from the Flow Control acquisition. We returned $1.4 billion to shareholders in 2014 through share repurchases and dividends.

Our capital expenditures were lower last year to $130 million as we focused on fewer, higher return investments. But we expect that number to increase in 2015 as we continue to invest in growth and productivity initiatives across the company. Ending debt was $3 billion or $2.9 billion on a net debt basis inclusive of over cash on hand.

Please turn to Slide number 19 labeled 2015 Forecasted Cash Flow Usage and Capital Allocation. We expect another strong year of free cash flow in 2015. With free cash expected to be around $925 million or greater than 115% of net income. We anticipate returning at least $440 million through share repurchases and dividends.

Through January 2015, we completed $200 million of share repurchases under our current $1 billion authorization. And we've recently announced a dividend increase for the 39th consecutive year. We remained disciplined in our capital allocation approach which starts with our investment grade upgrading.

We continue to fund organic growth opportunities and expect capital expenditures to be slightly ahead of depreciation. We are building our M&A funnel and expect to see acquisition activity return as the year progresses.

We've made great strides in our standardization efforts and many of our businesses have earned the right to make strategic acquisitions. If we do not see deals materialize as we get later into the year, we will consider incremental share repurchases. Please turn to Slide number 20 labeled New Pentair Segmentation.

As Randy mentioned earlier in the call, we are further streamlined the organization and have eliminated a GBU. This means that each of our four remaining GBUs will now also be an external reporting segment.

We expect this new alignment to help optimize the revenue expansion of our growth platforms while also driving standardization to PIMS within the platforms and GBUs. We have moved our former filtration and processed platforms and combined them with our former flow technologies business to create flow and filtration solution.

The Process Technologies segment has been renamed Water Quality Systems and includes our product systems, water purification, food service and environmental systems platforms. Valves & Controls and Technical Solutions remains the same. For your modeling purposes we have included restated segment numbers in the appendix in today's presentation.

Please turn to Slide number 21 labeled Q1, 2015 Pentair Outlook. For the first quarter we expect core sales to increase 2% to 3% with the FX anticipated to be large 4% to 5% headwinds. On a core basis, we expect Valves & Controls sales to be flat based on their shippable backlog.

Flow and filtration solutions sales are anticipated to be down 2% to 3% on a core basis which includes the big box exit. Water quality system sales are anticipated to grow 6% to 7% on a core basis with pool energy efficient penetration and continued growth in food service.

Finally, Technical Solutions sales are expected to be up 2% to 3% on a core basis with strength in both industrial and energy. We are expecting adjusted operating income to be flat and adjusted operating margins to expand 40 basis points to 12.6%.

Below the last operating line we anticipate our tax rates to be approximately 23%, net interest and other to be around $18 million and share count to be approximately 180 million. Our first quarter adjusted EPS range of $0.75 to $0.77 represents 7% growth to the mid point.

As a reminder, free cash flow is historically run negative in the first quarter. Please turn to Slide number 22 labeled Full Year 2015 Outlook. As Randy mentioned earlier in the call, we are lowering our 2015 adjusted EPS guidance by a dime to range at $4.10 to $4.25.

This reduction is solely attributable to the anticipated increased FX headwinds that we and most others are expecting. We continue to focus on the elements within our control and are working to deliver another year of double digit adjusted EPS growth.

For the full year we expect core sales to grow 2% to 3% which we anticipate will be more than offset by 4% to 5% FX headwinds. Valves & Controls sales are anticipated to be flat to down 2% on core basis. We'll watch orders closely and continue to drive the short cycle business.

Flow and filtrations solutions sales are expected to be up 3% to 5% on a core basis inclusive of the big box exit. Water quality system sales are anticipated to be up 5% to 7% on a core basis and technical solutions sales are expected to be up 3% to 5% on a core basis.

We anticipate growth in our residential and commercial, industrial and food and beverage verticals while infrastructure is expected to improve as the year progresses. We expect adjusted operating income to be up 5% for the year and adjusted operating margins to expand 90 basis points to 15.4%.

We continue to drive lean sourcing and standardization, expecting growth leverage to materialize within our businesses that are growing although FX headwinds will mitigate some of their leverage. We expect overall corporate cost to be approximately $105 million, net interest and other to be around $71 million.

Our full year tax rate amount to 23% and the share count for the full year to be approximately 183 million. EPS growth is anticipated to increase 10% at the mid point of the range. Finally, we expect another strong year of free cash flow at approximately $925 million or greater than 115% of net income. Elisa, can you please open the line for questions.

Thank you. .

[Operator Instructions] Your first question comes from the line of Steve Tusa with JPMorgan. Your line is open..

What are you assuming on the raw materials dynamics for this year?.

We are seeing -- we are expecting to see little inflation if no inflation is there, Steve. I mean clearly we are going to expect especially in Valves & Controls more difficult pricing environment with our large customers and they are going to ask us to work with our channel partners and suppliers to keep cost down.

So we are basically assuming no inflation right in material. .

Okay.

And is there anything that you kind of marked to market, is there any kind of benefit or anything like that?.

Not really that. We are looking for -- how do we turn the FX change and doing advantage from a sourcing standpoint, yes. That's one of the active actions we have on; we don't have anything quantified yet, so Europe on sale and some other countries are too..

Right. On the oil and gas weakness in the fourth quarter.

Where exactly could you maybe little more precise that where you saw that? The orders?.

We are downstream for sure. So what we saw was -- what we are recalling earlier, Steve is we saw those orders being delayed in Q2 and Q3. And in fact they just continued to push out so most of the weakness was in the downstream and the capital expenditure models of our customers. .

Sorry downstream or upstream?.

No, upstream..

Yes, too many streams. .

Yes. You are already seeing rig counts declining. Projects that are committed the downstream once refining and other profit-- those committed ones are we think are moving ahead and we are seeing releases on those. What it means for downstream in 2016, we will figure out but we are seeing a much faster change in the upstream activity.

Midstream, they look good..

Within your upstream, I know the business is pretty diverse globally.

Within your upstream, is there any geography that you know I know this kind of parses it again but any geography that you are seeing that in? I mean it's pretty obvious the North America rate of changes obviously pretty dramatic keeping even though there were some companies that didn't really see it in the fourth quarter yet.

Is it a global thing? Is it North America?.

Well, yes, North America clearly is a lot of coverage on that. But North Sea offshore which is obviously North Sea even Middle East..

Okay, so it's in global stuff and then --.

Really the -- on the upstream side they are rapidly looking at all the budgets globally so --.

And then just one last comment. I mean this re-segmenting, I understand that there's a degree of perhaps cost saves associated with realignments and stuff. But this constant re-segmenting just breed's skepticism, I think, in the investment community. Hopefully, this is the last one.

It really does not help, especially in an environment like this where there's a lot of stuff moving around. It does not help people gain confidence in the numbers..

I appreciate that. And we didn't do it to make anyone's life difficult or to make things opaque when we merge the companies two years ago; we have seven GBU that wasn't sustainable.

We got down to five GBUs and what this alignment was we have some under performance in one of the GBUs, we are getting cost structure that's easy and fast but the real focus is to get -- we now have all of -- in water we have all of our standard product sold through distribution in one business and now we move the engineer solution or filtration together with the engineered solutions or flow particularly with the exit of the big box so we have more consistency of end market and channel this way.

And hopefully get some leverage..

Your next question comes from the line of Steven Winoker with Bernstein. Your line is open..

Thanks and good morning, all. Randy, it sure sounds like you were declaring victory on Tyco Flow at the beginning of this call. And we are two years in, obviously some great margin expansion.

But could you maybe expand a little bit on that and where you are headed? And what does that imply for your thinking about M&A going forward?.

Yes. We feel pleased about where we are, we are two years in. I hesitate to call and declaring victory but we are pleased with our progress and I put it that way.

And we are pleased because we believed in going in there, there were some very good businesses, they were not performing at the level they could perform if you apply good operating discipline. And this two years has proven that number one, yes, they are good businesses.

Number two, our approach which we call PIMS was fundamental to bringing operating disciplines to those businesses very quickly. It raises our confidence and raises the Board's confidence; it raises many of shareholders' confidence that we can do it again.

Our capacity is larger and what I mean by that our capacity and our expertise and the talent base we build to do it again. And we believe that we created a lot of value through doing it.

And we talked before that the biggest myth in Tyco was the fact that if you go back to the Form -10 forecasted growth that they would see in those businesses was at least 3x higher than in all of the segments than what the world really delivered on that two years so we over delivered on what we controlled in an environment that turned out to be not as good.

So what's the implication for M&A, we believe we have capability and we should put it to work. But we are going to remain discipline. We have the capacity, we mentioned in a $1 billion worth of capacity and but we are going to remain disciplined.

We wanted to fit our five -- our five questions we always go through which is how does it fit our strategy? Number two, how is the financials work? Number three, why we the right buyer? Where is the value? And actually we have more offered there now with our capital structure and tax structure and our domicile.

We actually have more unique opportunities to bring to play there. And then what's the integration plan importantly and what's the integration team? And we really got that right on Tyco. And we are not going to rush anything but we certainly up on our toes, on our balls of our feet looking out..

Okay. And on the oil and gas topic, let's assume for a minute that oil prices stabilize maybe even get a little bit better from here. In terms of -- I don't want to -- maybe I shouldn't use this word.

Well, in terms of the damage that has already been done to this point right as this just -- the time -- can you help me with the pacing through orders and revenues and earnings, assuming things were to get a little bit better from here on the commodity side? Does that still -- how would that maybe change your outlook or how you're thinking about everything flowing through the business?.

Well, I'll ask John to give you a little more detail on the forecast. As we look at our forecast -- our forecast is we restart valves to basically be flat year-over-year and it is going to work to be there because we are seeing some price pressures.

Our base case of how we are looking at this is where our underlying base case is that oil is going to be in turmoil for at least another 9 to 10 months. And even when it gets back up to more what let's call it sustainable level of $70 a barrel. The spending in the oil companies isn't going to snap back as quickly and snapped away.

And I think they remain cautious. But it is basically supply demand in balance. So the price went lower than people expected, so they weren't forecasting the six months ago, I tend to be cautious about the forecast they make now. That's why we are assuming -- we are not assuming that there is any kind of snap back. .

Okay. And when you mentioned downstream and petro -- and North America process build out on page 15 in industrial, the North America process build out, are you talking about petrochem and everything or do you include --.

We put process industries and petrochemical not in a sort of after the refinery, petrochemical and other chemicals that aren't just petrol related. We put that in our industrial category. There are still a lot of attractive economics to most of those projects and we are not seeing cancellations there.

Some of the ones that are on the deep planning board may have a little bit of doubt to them now but even the LNG facilities, all the ones that FERC has approved and we expect those to go forward. We still have the opportunities to ship natural gas overseas to other countries.

We have in North America; we still have an advantage if not an even more advantaged situation. .

Okay and just building on Steve, just one last question. That page 10, process technology, is the only place where you had inflation not offsetting productivity and price.

So is that part of having function of this additional segmentation? Is that what you're saying?.

Yes. Our performance on productivity and managing inflation and actually price realization wasn't very good in that GBU. .

Your next question comes from the line of Deane Dray with RBC Capital Markets. Your line is open..

Thank you. Good morning, everyone. Appreciate all the calibration you are providing on your oil exposure. And I know it's 19% of your portfolio, but that's where we're seeing most of the changes, and that's why you're getting all of these questions. So let me just chime in with mine.

Just for clarification on slide 9, the energy backlog, the sequential decline. I believe you said that you had re-priced your backlog for FX.

So how much of that sequential decline was in FX versus push-outs?.

Yes. It is about half.

What we did there as we -- that's the reality if you price it today and revalue it with FX today, so we just think that's like the better way to do it because if you sold it today that's what sort of would be add and Valves & Controls business we have fairly large book of business actually in Europe is booked in euros but to change that more in dollars, it is work to be done yet.

So that's what we are doing there. .

Have any of those backlogs been re-priced, customers coming back to you?.

No. We are hearing from customers as John mentioned customers asking us to look hard at price and on what's being lack, what's being worked but not in what's in the backlog..

Okay. And then if we go back to slide 5 which was very helpful in saying, look at the changes since the December outlook call, maybe just clarify on the restructuring comment, where in December there was modest, and then saying more aggressive. But it says 2014 restructuring.

Does that suggest you did more in the quarter? And what about -- can you give us some color on the restructuring actions for 2015?.

Yes. We did more in the quarter. It's really what we were referring to as we started to see some of the currency challenges and the oil and gas headwinds we went to the businesses and took incremental restructuring. So far up to 2015 we are not anticipating any more so our current guidance reflects net adjusted end reported are equal there.

If we need to do more we will do more. .

And then last question, John, since I've got you here. On FX, just refresh us on what types of natural hedges that you have, the currency exposure; might you be doing any translational hedging? We're seeing companies like GE and Honeywell talking about that. We're in an unprecedented FX headwind right now.

Might you be doing anything additional on the hedging front? And especially if it ties to your foreign domicile, whether that's an advantage or a disadvantage?.

Yes. So this number here represents the translational impact of the dollar against global currencies. It is unprecedented and being that the dollar strengthens against every currency generally in the world. I mean usually there are natural hedges where the dollar weakens against some and strengthens against others.

There is as Randy mentioned also the transactional benefit that we would expect and that would come through the sourcing line where the lower currency is actually giving us productivity and less expensive purchases. I would think that somewhere in the 40% of this number range. And that we will see to the sourcing benefit.

As far as what everybody else is doing a hedging, I remain interested and curious. We are looking at some of those options but quite frankly we got to find a way to make them work into our reporting and as you know you can hedge sequentially but you can't hedge year-over-year.

So we have to be comfortable that if we were to do that everybody would understand what we are doing and I think right now there is -- it is anybody's call what's going to happen and so I am not a genius at hedging so we have to look at the upside and downside. .

Your next question comes from the line of Joe Ritchie with Goldman Sachs. Your line is open..

Thank you. Good morning, everyone. My first question is on V&C. The margins were incredibly strong this quarter. And I basically wanted to just get a sense from you on the long-term trajectory of these margins. I think we've talked historically that this could be a high-teens type business.

But just in light of your commentary on wage inflation, pricing could be a little bit more difficult in 2015. I'm just trying to understand the trajectory of that business moving forward..

Yes. I'll start with just framing and I mean we still think we are roughly 400 to 500 basis points behind what we call a peer group that continues to perform and improve their margins as well.

And so we still haven't -- I look at this as opportunity but we acquired some 20 ERP systems and lots of global back offices and lots of entities that we never integrated, and so what we are doing and we are launching this year is OMT initiative which is our operating model transformation and as we go live we will be able to put all these businesses on a common framework and really believe that there is enormous potential that still remains on the margin side.

I'll let Randy comment on incremental value for them..

Well, I mean really and we wanted to turn some of that increased capability to improving our differential growth.

But we actually haven't touched the go to market side of Valves & Controls, so we are focusing on the operating side so that we can keep growth going but frankly I am disappointed with the performance on the growth side of Valves & Controls, so I think we need to leverage that to get better connected and leveraged and gain share on -- based on the execution improvements we've had in things like pressure management where we have moved situations very difficult up to being almost high performing in terms of delivery and quality.

We should be gaining a lot more share from that. .

Now that makes sense.

But maybe following up on OMT, did you guys start to see some of the benefit already this quarter? And can you just remind us what your expectation is for the benefit in 2015?.

A lot of the benefits that we have been getting in 2013 and 2014 were lean sourcing, lowering operational fruit, fixing quality delivery and over time and premium freight --.

Then a few plant shutdown.

And then a few small plant closures as Randy mentioned. Also fixing some low margin product mix challenges, so a lot more of the operational prioritization side and what we realized in 2013 and 2014.

What we are going to see now coming in 2015 and beyond will be the benefits of related to OMT is we would see coming through primarily the G&A side as well as more operational efficiencies and working capital improvement..

Okay.

And is there a number that you guys have quantified that is embedded in your guidance?.

It is probably 200 -300 basis points more on that regarding over the next couple of years. .

That's couple of years not this year. .

Okay. And maybe one last question. John, you mentioned earlier -- clearly you guys bought back about $200 million this quarter. You've got about $1 billion left. And I think you mentioned earlier that you'd consider incremental share repurchases if M&A didn't come to fruition.

So is it fair to say that you are going to put the buyback on hold for now just based on what you see in your pipeline, and then could get more aggressive in the back half of the year? Is that how we should interpret your comments?.

That's a fair assessment, correct..

Your next question comes from the line of Shannon O'Callaghan with UBS. Your line is open..

Good morning, guys. Well, I do have one non oil questions..

Thank you. You win the prize.

How many minutes in are we?.

On tech solutions, this industrial strength that you started to see the last couple quarters, could you may be fill that out a little bit in terms of what you're seeing, and your confidence that that's real, sustained momentum? And then also on kind of on the flip side there of -- I guess I'm not totally avoiding -- is the energy piece on Canadian oil sands.

Where does that head from here?.

Sure. On the first one, a lot of that strength in industrial is North America, is the North American investments and you can see the ISM numbers.

We've also had -- one of the reasons we are up energy there is that we've launched a new line of product that is finding good promise particularly in the downstream refining and really very well received by customers. So we believe we are gaining share in that product line.

So it's end market it is North America and it is both the discrete and process manufacturing so that's why we feel like second half bodes well for the industrial part of technical solutions there.

On the oil sand, the oil sand there is small projects are going forward the MRO, it is a hostile environment that requires money to be spent to keep it going. And we think it will, that money the MRO the short cycle will keep going. Couple of larger projects have been affirmed and going forward.

And I think all the other projects are probably -- all the projects that haven't been given the go ahead are questionable at this point. That would be my conjecture. .

Okay. And then on the re-segmentation again, could you just fill out a little bit more what you expect the benefits to be? Is it more of a -- you think it's going to show up -- you mentioned where you are in quartiles on growth, versus things like cash or margins.

Do you expect this re-segmentation to benefit more on the growth side or margins? Or what was exactly not working?.

Yes. Let me start with -- seven GBU was too many, I think four was just right. We are really driving towards a simpler structure that is more intimate for John and I in particular to deal with the presidents on the opportunities and challenges that they each have.

We had a mix, we had two in the process technologies we had the water quality businesses which included pool and residential filtration. These are products that were -- they are largely standard, they are engineered but they are standard set of products largely sold through distribution.

And it is a different go-to-market model than the engineered bespoke filtration systems that was at the high end. And it is closer to the infrastructure and industrial kind of things that flow does particular as flow is moved away from the big box business.

So we have the opportunity to get cost but we have a simpler organization, they are each well over a $1 billion in size so we have scale and we have expectations on those four presidents that are higher, clear and more demanding. .

Your next question comes from the line of Scott Graham with Jefferies. Your line is open..

Hey, good morning. And thanks for all this clarity.

The one thing I would hope that maybe you can bring a little bit more to bear on would be the Valves & Controls 2015 outlook, which actually looks like was upgraded from what you said a month ago, month and a half ago, of down 2% to 4%, to flat to down to 2%, in an oil environment that has obviously deteriorated.

So could you give us your thinking on that?.

Yes. I think just to clarify to you Scott, I think the update we probably gave last time included the foreign exchange impact and the flat to down 2% that we are looking at now which is core, if you look at them on a FX or the same basis we think it is maybe two points worse on the top line --.

And on same, same basis..

On same, same basis..

So you're saying that within your 2015 outlook, that was a grossed up number?.

Yes. I think we definitely adjusted two points down on the top line.

As you know, there is piece every single year that you head into the year and shippable backlog, so we've FX adjusted as shippable backlog and that makes up almost 50% of the shipments we expect this year and then the rest is what orders you take in and the booking ship nature of those orders within the year.

So I think we are really talking as Randy mentioned earlier what is the impact to 2016 and 2017 as we kind of go to through the year with Valves & Controls and what happens with oil prices and what happens with this end market that we are facing. .

Okay, got you. On the adjusted margins, no change there, but obviously a little bit lower on the operating leverage.

And you are essentially saying and obviously a little bit off on the FX but you're saying that the restructuring kind of fills a lot of that gap, yes?.

Yes. I mean I think we took out the translational impact of foreign exchange; it still seems double digit operating income across most of these segments. .

Okay, great. Thank you. Last question.

How skewed towards the second half of the year is the share repurchase going to be? Could you maybe be a little bit more specific on that prior question?.

We've already finished it. .

We've already finished the $200 million --.

$200 million out of the $1 billion. The original approval was the $1 billion over multiple years and first $200 million was what we intended to do this year -- we finished it already. .

I was referring to the 2015 within the guidance..

Yes, Scott, I think we really -- we are seeing a richer funnel of M&A activity right now and we think that our business that we mentioned that are more standardized and certainly the ones that are growing organically you could certainly benefit from adding some content to their customers.

And I think this could be a year where we complete several transactions. And if those don't materialize and we feel like they are fading away from the funnel then we would look at our capital allocation strategy again and certainly buyback is a smart thing to do if you don't have any use of the capital. .

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

Hi, guys, good morning.

Just to clarify so what's the offset to the oil and gas top line weakness? Is that the additional restructuring within the guide?.

Yes. .

Okay. And then just on the new segments, how should we think about the long-term margin trajectory in the two segments? You have one that sticks out as very good margins and one as much lower.

Where can those go?.

I would just say you are going to see a higher level of basis point improvement in Valves & Controls and flow and filtration solutions. Both have significant standardization opportunities in front of them. And both obviously Valves & Controls because they started lot later but both have more lean opportunities.

What I call the systems and technical solutions, they have pretty nice margins. And the majority of their platforms but some of their platforms still substantial opportunities as well. So we see margin improvement across all of them. But you are going to see the majority of the opportunity in flow and filtration solutions and Valves & Controls. .

And I just add also those higher margin ones, water quality systems and technical solutions, they have really good growth opportunities and we want to make sure that we are taking that high profitability and high grading with they are going after so that we can continue to drive that.

You see that in a technical solutions performance in the fourth quarter where we had good quarter growth and we got significant margin expansion on top of that which is the operating leverage. .

Your next question comes from the line of Brian Konigsberg with Vertical Research Partners. Your line is open..

Yes, hi, good morning, guys. Just actually one clarification. On the guidance, it just looks like you reset the base a little bit both on the Q1 comparison also the full year.

Is that just purely the water transport business that is being reflected there?.

No. Water transport we took out -- we had no water transport in for the year. .

Yes. That's in discontinued operations, Brian. So there is no impact of water transport. The full year guidance was just adjusted $0.10 on a lower end and $0.10 on a higher end for further foreign exchange.

And when -- as the currency moved probably just the year ago from the mid $1.20 all the way down $1.13, so that's really what we are adjusting for this Q -- sorry Q1 is little bit more FX on a year-on-year basis of headwind and then there is plus shipping days in the quarter and it is just overall not the strongest quarter of the year. .

Actually, I guess I was asking a different question. I was just looking at your Q1 2015 guidance. You're looking -- the comparison is $1.64 billion. When you reported it, it just was $1.725 billion in the first quarter of last year..

I have to follow up with you; I'll find Brian on that. .

Okay. And I think actually the full year 2014 number -- well, actually I'm sorry. The full year 2013 number is a little bit different too. Anyway we'll follow up on that..

Just to clear, I mean last year's shipments were $1.644 billion Q1 on a continued operation basis. .

So probably is water transport.

Okay, so it was the water transport. It was just in disc ops..

Yes. You are probably right. .

The base was just -- okay, got it. Separately, just on working capital, so you kept the free cash flow assumption. I think when you gave the outlook for 2015, you only anticipated about $10 million of working capital benefit. Is that still the same in the outlook? And maybe separately, just maybe comment on the lower CapEx, where you're cutting and --.

I mean roughly yes we do still have significant working capital improvement in front of us. We are not forecasting a lot of improvement in 2015.

But it remains our largest opportunity and so really on a cash flow to net income basis we are somewhere that $1.15 to $1.20 range I mean you can like collect cash once, so we had a strong cash performance in 2014 and we are expecting a strong gain in 2015. Not really cutting capital, we are prioritizing it.

And we are prioritizing it to program that have the highest level of return. And right now we've always generally had a concept here that we have creativity for capital. And that's part of lean and a lot of our businesses are realizing that through the lean adoption especially our newer businesses they have less capital are required.

So where we have opportunities to upgrade for automated purposes or driving significant productivity, we continue to fund those projects as they generate substantial returns. .

If I could sneak one last in, just on the FX. So obviously with the stronger dollar and the weaker euro, would you anticipate that to translate actually into greater demand within the European region? Is that in the plan at all or maybe just general thoughts on --.

I mean we would expect that the European business is -- European base businesses will be more competitive globally and so that over time macroeconomics would say that would favor economic growth there, economic growth there -- it would be good for the world unless it comes with the expense of another region like --.

But not in the 2015 plan?.

No..

Your next question comes from the line of Andrew Obin with Bank of America Merrill Lynch. Your line is open..

Yes, good morning, guys. Thanks for taking my questions. Just a couple of clarifications.

Did I hear right on Valves & Controls pricing that you are renegotiating with the customers given the current environment?.

No. We said -- what we said was that customers are asking us to participate in the difficulties they are facing. But nothing has been renegotiated. This is on new things. So just what I would characterize, I would characterize it is tougher pricing environment on the horizon. .

So, do you think pricing could turn negative?.

In Valves & Controls, yes, I mean obviously it is anticipated pricing so it's not anything to do with margin and backlog. So these are projects that on horizon so you don't usually score keep price but the competitive dynamics will be tougher. And so therefore we will have to get tougher in our cost reductions to be competitive on those projects..

And just another clarification on Valves & Controls backlog.

Did I hear you right that you guys think that it will start going up in the second half? I'm just questioning, where does the confidence come from given that so far I think it has been somewhat below expectations?.

Yes. I don't -- I think we don't want to interpret; there is a lot of confidence in the backlog increasing. I mean what we are suggesting is that the orders throughout the year will reflect the projects in the market that we are participating in. And so I am not suggesting that we are going to raise backlog substantially for the year.

We are actually saying --.

But did I hear right that the expectation is that sometimes this year backlog will turn positive?.

No. What we said specifically was that we think that the process segment which is an industrial, order will go forward and we expect that we will get orders. We didn't read that across the backlog at all.

Do some more work on us, okay?.

Okay. Then just a last question on M&A. It sounds like you said certain businesses have earned their right to do business, to do deals. And clearly you guys are very happy with underlying performance at Tyco. You also highlighted that I think I heard a comment that Europe is on sale. Private equity guys are pulling back due to regulations.

Does that mean that energy is probably the most likely place where you guys are going to look for M&A? Just a little bit more color there..

Our performance on the integration of Tyco is what I said it has been very, very good and we have one company now, it is not Tyco, it is not Pentair, it is one new Pentair -.

Yes, I apologize, yes. .

We are -- we have demonstrated with our performance and we have lots of happy shareholders as a result. The M&A -- I would not rule out oil and gas but I wouldn't say if that was necessarily the priority.

I wouldn't say anything in particular to priority, we will apply our disciplines, we will apply our four questions or five questions and if we find things that are -- that meet our screen we will be active. If we don't --.

So what are the other businesses that earned their right to do M&A, then? You were very, obviously and deservedly so highlighting very strong underlying execution.

So what other businesses should I think about?.

Well, Technical Solutions and water quality systems are our highest performing businesses. We like those a lot but all four of the businesses do have opportunities in one or more of their 18 platforms, but I won't in the interest of competitive thus --.

No, sure. I appreciate. Thank you so much..

All right. That was last question. About the replay information.

Operator?.

Thank you for participating in today's Pentair Q4, 2014 earnings conference call. This call will be available for replay beginning at 12 O'clock noon Eastern Standard Time today though 11.59 PM Eastern Standard Time on February 27. The conference ID number for the replay is 63853866. Again the conference ID number for the replay is 63853866.

The number to dial for the replay is 800-585-8367 or 404-537-3406..