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

Deane Dray - RBC Capital Markets Joe Ritchie - Goldman Sachs Steve Tusa - JPMorgan Steven Winoker - Sanford C. Bernstein & Co. Scott Graham - Jefferies Shannon O'Callaghan - UBS Nathan Jones - Stifel Nicolaus Jeff Hammond - KeyBanc Capital Markets Konigsberg - Vertical Research Partners Christopher Glynn - Oppenheimer Brian Drab - William Blair.

Good morning. My name is Jody and I will be your conference operator today. At this time, I would like to welcome everyone to the Pentair Q1 2015 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, VP of Investor Relations, you may begin your conference..

Thanks, Jody. And welcome to Pentair's first quarter 2015 earnings 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 CEO; and John Stauch, our Chief Financial Officer.

On today's call, we will provide details on our first quarter 2015 performance, as well as our second quarter and full year 2015 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 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 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 a follow up and get back in the queue for further questions in order to ensure everyone 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 on Slide 4 with a summary of how 2015 has started and how we see Pentair positioned for the remainder of 2015. As we announced two weeks ago this year has started off significantly below our initial forecast.

We expected most of our energy related businesses to be challenged this year given the dramatic decline in oil prices in the second half of 2014. But a global capital spending freeze and its impact on industrial businesses was not foreseen.

We do not see this to be a Pentair specific issue as this broad-based decline was across virtually every business, every geography and every market. In fact, the only geography of growth we saw was North America.

We believe there is broad, economic uncertainty that is contributing to delays in our customer’s spending habits, and we have felt this in both large projects and some MRO business.

As a result of the dramatic impact of FX translation and a significantly slower start to the year we are now taking a cautious position on any expected recovery this year. So we have gone back to our cost [paybook] and are working aggressively to adjust our cost structures accordingly.

Our balance sheet remains healthy and we expect 2015 to still be a strong free cash flow year. We will continue to invest in M&A where appropriate while executing on costs. Given the uncertainty, we have rebuilt the plan to drive performance in 2015 to equal 2014.

As a result we are adjusting our 2015 adjusted EPS guidance to approximately $3.80 per share, making 2015 a pause year. We believe that Pentair is in attractive markets for the long term. We have detailed plans in place to work through the anticipated near-term challenges and we are executing them.

Now let us turn to Slide 5 for a quick look at our key 2015 forecast assumptions. Given the significantly slower start to 2015 as a result of the global capital strike we are experiencing, we are now expecting our core sales for the year to decline 2 to 3 percentage points instead of growing 2% to 3%.

Given the first quarter top line shortfall and its negative operating leverage, we could not adjust our cost structure quickly enough in Q1. But we still expect operating margins to expand roughly 50 basis points for the full year.

We completed $200 million of share repurchases in January, and we’re still focused on our active M&A list in our most attractive businesses. John will outline in detail the cost actions being taken both variable and fixed as we adjust to the start of 2015.

As a result of these actions, we are expecting roughly 40 million of repositioning benefits this year, an accumulative 100 million plus in 2016. Our balance sheet capacity is over 800 million. Although the external headwinds have worsened, we are focusing on the elements within our control.

This includes getting more aggressive on cost actions, continuing to invest in differentiated growth, and as I mentioned, select M&A where appropriate. Now let us turn to Slide 6 for a discussion of our first-quarter results. This first quarter saw our core sales decline 4% as all verticals declined except Food & Beverage.

The one geography that performed well was North America, but we saw weakness in all other key geographies, particularly in fast growth regions. As previously mentioned, FX was a significant headwind in the quarter.

Given the sharper than anticipated volume declines, productivity and price were not enough to compensate and we saw adjusted operating income decline and margins contract in the quarter. Cash flow was a typical seasonal usage where we expect another strong free cash flow year, and expect significant improvements in sequential cash flow improvement.

Now let us turn to Slide 7 for a more detailed look at the first quarter results. Our 4% core sales decline consists of 5 points of volume decline and one point of positive contribution from price. FX subtracted another 6%.

Adjusted operating income declined 15% in the quarter and operating margins contracted 60 basis points, even though we continued to see lean sourcing actions and standardization efforts and G&A gained traction.

We are accelerating our cost actions to adjust to the reality of the FX environment and lower core volumes, which should reverse this operating margin contraction. Now let us turn to Slide 8 for a review of our largest segment, Valves & Controls.

Valves & Controls has seen a fair amount of quarter to quarter volatility in its performance, and the first quarter saw both sales and orders fall double digits. North America was the one pocket of strength, particularly in processed and with LNG customers.

But all other geographies were down with double-digit declines in fast growth regions as customers seem to be delaying and in some cases canceling projects. For the first quarter, Valves & Controls core sales declined 11% and FX translation was a further 8% headwind.

Including significant adjustments due to currency translation the quarter ending backlog declined 4% sequentially following a 7% decline in the fourth quarter of 2014. Over half of this six-month backlog decline was the result of FX headwinds.

Given that backlog is generally shippable in the next 6 to 12 months we feel it was prudent to adjust backlog for FX to give the most appropriate view of the state of the business. Core orders declined 15%, which we’ll discuss in more detail in the next slide. Total orders declined 22% while including negative FX translation.

During the quarter we saw some customers [directed] delays of scheduled shipments, and this accelerated near the end of the quarter. We anticipate some delays and expedites in shipments every quarter. The first quarter saw an even greater amount of net delays than we are accustomed to seeing. We did not see a material increase in project cancellation.

We are seeing more customers requesting delayed deliveries which is not surprising within oil and gas, but we have also seen in the process industries. The right half of the page shows first-quarter Valves & Controls operating profits and margins.

While our lean sourcing and standardization continued to drive productivity within Valves & Controls, it was not enough to offset the volume drops in an already typically slow period, and FX translation also had some impact in the 30% drop in operating income.

We are still making progress with our changed agenda and gross margins in Valves & Controls expanded as a result of strong productivity. So we continue to feel good about our efforts underway, including lean transformation and the OMT initiative within Valves & Controls.

While the strong margins gains of the past two years are encouraging, there is much more to do. So we plan to go even more aggressively after the cost structure and getting results from where we are investing for growth. Now let us turn to Slide 9 for a look at the orders and backlogs for Valves & Controls.

As you can see on Slide 9, Valves & Controls backlog is broken down into four key industries, three of which fall under our energy vertical, those being oil and gas, power and mining, and one in our industrial vertical, which is called [process here].

Orders were down double digits across all four industries in the quarter, while the impacts to our energy related businesses were not a surprise given the decline in oil prices, process order weakness was not expected and declined globally with North America the lone bright spot.

We are not expecting orders to improve during 2015 as customers continue to re-evaluate existing projects and in their pipelines for planning projects. Although backlog has been hurt by the stronger dollar, we saw a decline in our backlog in real business terms as well.

We will continue to focus on capturing shorter cycle MRO business, which has remained somewhat stronger than projects. While we do not expect the global capital strike to last forever, we are being cautious and are rightsizing to the current reality that Valves & Controls is likely to see top line pressure throughout the year.

We continue to believe in the long-term prospects for Valves & Controls and the transformation underway. For the next several quarters we will be focused more on cost, while anticipating increasing price pressure on the existing business. Now let us move to Slide 10 for a look at flow and filtration solutions.

Flow and filtration solutions saw a 13% top line decline. Its core sales fell 7% and FX translation was an additional 6% impact. All four verticals served by flow and filtration solutions saw a decline. Residential and commercial fell 11% as global weakness and destocking in some of our North American distributing channels impacted the top line.

Infrastructure was down 14% as municipalities continued to delay spending, although we have remained more disciplined on pricing and believe we are seeing declines greater than in the served market. Food & Beverage was down 2% as the strength in global beer and diary was not enough to offset declines in agriculture spending.

Segment income declined 16%, but margins contracted only 40 basis points despite the volumes, FX and mix drags during the quarter. Productivity readout was strong and we believe we continue to have a long runway for improvement in margins within flow and filtration solutions.

Given the weaker top line environment we plan to go after more than just G&A standardization opportunities and accelerate our rightsizing efforts within this segment. Now let us move to Slide 11 for a look at Water Quality Systems. Water Quality Systems was a bright spot in the quarter with core sales growth of 4%.

The growth within Water Quality Systems was not a surprise given that they are over 70% in North America and mostly serve the residential and commercial, including beverage verticals, which have been our two growth verticals recently. Our aquatic systems business started strongly and we believe it is well positioned entering the pool season.

Our foodservice business continued to grow globally with core sales up 11% in the quarter. The right half of the page shows first quarter Water Quality Systems operating profits and margins. Segment income grew 3% and margins expanded 40 basis points to 16.1%. Price and productivity offset inflation and new product development investments continue.

Our outlook for Water Quality Systems remains positive and we expect to see solid growth and margin expansion for the full year. Let us now turn to Slide 12 for a look at technical solutions results. Technical solutions saw core sales grow 1%, which was offset by a 6% FX translation headwind.

Energy was up 2% as our heat management solutions business entered the year with strong backlog, including two larger projects beginning to shift. We will watch orders closely as the year progresses. Industrial was flat as our equipment protection business was impacted by delays in industrial spending that occurred in the quarter.

Residential and commercial grew nicely and despite a tough comp, infrastructure also was up modestly driven by telecom. The right half of the page shows first-quarter technical solutions operating profits and margins. Segment income declined 8% and margins contracted 70 basis points to 18.4%.

With the absence of price in the quarter, productivity was not enough to offset inflation and mix further hampered the income and margin performance during the quarter. Negative FX transaction cost were a factor in margins as strong growth in Canada, combined with the strengthening dollar, squeezed margins on our U.S.-made products.

Following the end of the first quarter, we closed a small bolt on acquisition within technical solutions for our thermal building solutions business, which we believe has attractive growth opportunities. We have five criteria around acquisitions and this transaction met all five. The deal made strategic sense. It made financial sense.

We were the right buyers. We have a detailed integration plan, and we know who will lead that integration. Process and Technical Solutions will be addressed in cost structure as a result of FX and mix, we believe we have interesting M&A tunnel for this segment.

Now let us turn to Slide 13 for a review of our key verticals and our expectations for growth in 2015. Given the difficult start to the year, we have adjusted our expectations across all verticals. Starting with industrial, our largest vertical representing roughly 29% of sales, we now expect core sales to decline 4% to 6% in 2015.

While Valves & Controls continued to see strength in sales with its North American customers in the first quarter, the rest of the globe saw a sharp decline in orders. The remaining parts of Valves & Controls, industrial business, also saw weakness including industrial gas and shipbuilding.

We now expect the channel and customer destocking to continue throughout the year and pricing is something that we are actively managing. Core sales in our second largest vertical, residential and commercial, are still expected to grow 2% to 3% for the full year.

But the slow start to the year has lead us to shave a couple of points off of our expected full-year growth rate.

We believe that our aquatics systems business within Water Quality Systems is well positioned for another strong pool season in North America, and while a smaller piece of our vertical we expect improvements in non-residential construction as well.

Roughly 10% of our sales are within our Food & Beverage vertical, which we expect to grow 5% to 7% on a core basis for the full year. This is on the anticipated strength of our global beverage and food service businesses. Food service had a great first quarter and should stay strong through 2015.

While core sales growth in beverage is also expected to be strong, this is a global business and we expect to be negatively impacted by FX translation. The strength in beverage is in both beer and diary. Within Food & Beverage, we also include the agriculture related businesses in flow and filtration solutions.

While we are driving differentiated growth in agriculture, it will likely continue to be a drag on growth in our Food & Beverage vertical. Within our infrastructure vertical, which accounts for less than 10% of our overall sales, we are now anticipating a modest decline in core sales for 2015.

We knew our electronics protection business in the technical space had tough comparisons to start the year, but we are encouraged to see modest growth in the first quarter. We expect our infrastructure related businesses within flow and filtration solution, serving global desalination, water treatment and water supply to continue to be challenged.

While it appears the municipal desalination markets have bottomed, we do not expect any recovery this year. Within North America the infrastructure break and fix business, we expect it to remain mixed with continued price competition. We now expect energy core sales to decline 6% to 8% for the year.

This includes oil and gas, power and mining industries for us. The upstream business has been as weak as we had anticipated. We now expect to continue the pause in shorter cycle downstream business with capital spending delays or reductions have spread to midstream and downstream as well.

We saw continued strength in North America in LNG, but the majority of global oil and gas was as weak if not weaker than we are expecting entering 2015. Let us now turn to Slide 14 for a look at our updated 2015 adjusted EPS guidance.

As we take into account the challenging start to the year and the pause in global capital spending we are adjusting our guidance to approximately $3.80 per share from a range of $4.10 to $4.25 per share. The volume shortfall will not be overcome in one quarter.

We are taking corrective cost actions that we expect to begin to read out in the second half of 2015, and also benefit 2016. Begum not foresee the industrial pause continuing indefinitely, but until we see customers beginning to spend again, we will remain cautious. In the meantime, we plan to continue to invest for the long term.

Not all of our businesses have been impacted in the short term and with our strong balance sheet and cash flow we will be thoughtful as we look at M&A opportunities. With that, I'll turn the call over to John to give more details on the cost actions we are taking and provide additional color on the outlook.

John?.

Thank you, Randy. Please turn to Slide number 15 titled 2015-2016 cost actions. As Randy mentioned, we faced increasing headwinds in the first quarter and we are working to align our cost structure appropriately. To start, we saw a strengthening dollar create both top line and bottom-line headwinds.

With euro at $1.07, we anticipate a $65 million operating income headwind for 2015. If the Euro were to move to parity against the dollar, it would create another $10 million impact on operating income.

We’re not planning for the dollar to weaken, in fact we are assuming that this will be the new norm for the year, and are now implementing cost out actions to mitigate the translation impact on the go forward basis. If the dollar weakens, we would expect to benefit, but we’re not counting on it.

The cost actions will primarily be in Valves & Controls and flow and filtration solutions, the two segments hit the hardest by the global capital spending pause. We expect these actions will yield $40 million in savings in 2015, an accumulative $100 million plus in 2016.

We plan to continue to continue to focus on G&A and variable labor, but we are also expanding our cost actions through our fixed cost structure. Please turn to Slide 16 labeled 2015 current outlook. This slide looks at the changes that have occurred since we last updated our forecast in early February.

We experienced lower than expected volumes in two of our larger verticals, energy and industrial, and we are now anticipating pricing to be flat for the year and down for the next three quarters. As our Valves & Controls segment is expected to see increase in pricing pressure as the year progresses.

Within the residential and commercial vertical, we expect another strong year in North America, while anticipating residential spending around the globe at slower levels. We believe that Food & Beverage will continue to be a bright spot, where we expect benefits from commercial expansion.

We do not expect the negative operating leverage from lower volumes to be offset immediately, and the translation impact discussed previously has become more challenging. We plan to continue to drive productivity and expect the cost savings from our actions to read out in the second half to help mitigate some of the top line challenges.

We still expect operating margins to expand approximately 50 basis points to 15% for the full year. Please turn to Slide 17 labeled balance sheet and cash flow. Quarter-ending debt was approximately $3.4 billion or $3.3 billion on a net debt basis, inclusive of global cash on hand.

In the first quarter, we returned 258 million in cash to shareholders in the form of dividends and share repurchases. We completed $200 million in share repurchases during the quarter and we have $800 million left under our current $1 billion authorization. Our ROIC ended the quarter at 10.9%.

The first quarter has historically been a seasonal usage of cash, just as it was this year, but we expect strong cash flow during the second quarter and throughout the second half of the year. Please turn to Slide 18 labeled 2015 forecasted cash flow usage and capital allocation.

For the full year, we are expecting free cash flow of approximately $900 million or greater than 120% of net income. We anticipate returning nearly $200 million to shareholders through additional dividends for the remainder of the year. We remain committed to our investment grade rating and will remain disciplined in our capital allocation approach.

We expect to continue to fund organic growth opportunities and that capital expenditures will be slightly ahead of depreciation. We still see select opportunity for M&A in some of our businesses. If these deals do not materialize as we get later into the year we will consider incremental share repurchases.

Please turn to Slide 19 labeled Q2 2015 Pentair outlook. For the second quarter we expect core sales to decline approximately 3% to 4% and FX to present a 7% headwind. On a core basis, we expect Valves & Controls sales to be down 13% to 15% based on their shippable backlog and what we expect to be further project delays.

Flow and filtration solutions core sales are anticipated to be down 3% to 4% on slower industrial and infrastructure business. Water Quality Systems core sales are expected to grow 6% to 7% as we enter the peak period for North American residential, which includes another expected strong pool season.

Finally, technical solutions core sales are anticipated to be up 3% to 5% in the strength of energy backlog in our heat management solutions business, and some expected increase in industrial capital spending as the quarter progresses.

We’re expecting adjusted operating income to be down roughly 10% and adjusted operating margins to contract 10 basis points to 15.1%. Below the operating line, we anticipate our tax rate to be approximately 23%, net interest and other to be around $18 million and the share count to be approximately 182 million.

Our second quarter adjusted EPS range of $0.95 to $0.96 represents a decline of roughly 6% year-over-year. As mentioned previously, we are expecting a strong quarter of cash flows. Please turn to Slide 20 labeled full year 2015 Pentair outlook.

For the full year we are now expecting adjusted EPS of roughly $3.80 as the cost actions we’re implementing in the second quarter not anticipated to be enough to fully offset the volume shortfall and negative FX translation impact that hit our first quarter results.

For the full year, we expect core sales to decline 2% to 3% and FX to be around a 6% headwind. Valves & Controls sales are anticipated to be down 8% to 10% on a core basis. Flow and filtration solution sales are expected to be down 4% to 6% on a core basis.

Water Quality Systems sales are anticipated to be up 6% to 7% on a core basis and technical solution sales are expected to be up 2% to 4% on a core basis. We anticipate growth in our residential and commercial and Food & Beverage verticals with energy and industrial decline expected to continue.

We expect adjusted operating income to be down 5% for the year and adjusted operating margins to expand 50 basis points to 15%. We will continue to right size our cost structure for the economic realities we are facing. It will take time for those savings to begin to materialize.

We expect overall corporate costs to be approximately $100 million, net interest and other to be around $73 million, and our full-year tax rate around 23%, and the share count for the full year to be approximately 182 million. Adjusted EPS is expected to be roughly flat in the pause year we are anticipating.

Finally, we expect another strong year of free cash flow of approximately $900 million or greater than 120% of net income. Jody, can you please open the line for questions. Thank you..

[Operator Instructions] Your first question comes from the line of Deane Dray of RBC Capital Markets. Your line is open..

Thank you. Good morning everyone..

Good morning..

Hi Deane..

Yeah, maybe we could start with the comments about the global CapEx spending freeze, and maybe take us through the cadence of the months and I am particularly interested in the comments regarding how it may have spilled into some of the MRO spending and maybe this was part of the destocking comment in your – the negative [Ph] announcement, so could we start there please?.

Yeah, thanks Deane. Basically if you take the industrial market that we follow most closely is of course our equipment protection business, and actually industrial and that business, industrial showed some increasing weakness in Valves & Controls as the quarter went.

But really we saw a pronounced decline in March in the other industrial businesses, the sell through distribution, which we believe is some destocking and uncertainty as the knock-on effect, which we can see in valves as we saw the knock-on from oil and gas into some slowdowns in other projects and delays in other projects.

So we think there is a bit of a knock on effect and uncertainty that has caused this and we do believe this destocking, we even saw some destocking in the residential and commercial side in flow. So we do believe that distribution has taken a cautious turn in their re-ordering in industrial and in some places in residential and commercial..

And then could you expand on that comment on energy regarding seeing the softness starting to work its way into your midstream and downstream businesses, I mean, clearly everyone has been set up for an upstream headwind, and that seems to be playing out a little bit earlier, but could you expand on the comments and any specifics regarding the midstream and downstream activities?.

Well, we – particularly the downstream is bigger for us than upstream. So to see the oil and gas decline that we did and when we look at the projects we see a slowing in the orders rate across the board really. Our hit rate seems to be okay.

But with the exceptions we pointed out, process, which we count as industrial, in North America was pretty good, but we saw a slowdown in process. In the fast growth markets we saw a slowdown in refining in the fast growth markets and now a lot of that is in specific countries like Brazil, which shouldn’t be much of a surprise.

But we do think there is a knock-on effect and I think you can see it in oil and gas companies, who are basically constraining capital and [Indiscernible] constrains capital it is a blunter instrument than just precisely focused on projects.

We also saw MRO decline, you know, single digits, but MRO sales in Valves & Controls generally has been up every quarter, and we actually saw a decline, which to us feels like a – obviously you have to maintain things. So, it feels like a slowdown in general capital spending to us in the downstream. We will see how this – if they see it too..

And just last one from me related to the energy side, Randy you made some comments about delays versus cancellations in some of the orders and maybe just expand there by your major energy businesses, you know, how much are delays?.

Yes, it was a comment about Valves & Controls, primarily the – our Valves & Controls ship later in projects cycles. And so, you know, every quarter we see projects get pushed out some because they don’t want the valves onsite until they are ready for them. But also usually there is some that get pulled in because projects speed up and slow down.

So we always see a mix of delays and expedites in a quarter. We basically saw no expedites in the quarter. I would say delays were probably 20% higher than normal, but there were no expedites to offset it and that to me – that feels like to us just a general slowing on project execution.

We have had some specifics, which I won’t get into, people exploring, we have had a few cancellations, but I can’t say that that is any – that is abnormal. You know, orders that we thought were going to go the projects we cancelled. But we are very cautious as to that was my comment about customers reviewing project pipelines.

I think mergers in the industry affect that and the customers industry affects that and as they look at adjusting the capital obviously they’re going to take some projects off the list..

Thank you..

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

Thank you and good morning Randy, John and Jim. So, my first question clearly oil and gas is weaker you’ve got this contingent effect it’s still over into industrial Randy you mentioned in your prepared comments that the delays accelerated in March.

And so, I’m just trying to get, I’m trying to understand I guess, when I think about your organic growth guidance for the year of down 2 to down 3, your complicated puffer organic growth is down 4 in the first quarter and just trying to get the sense for what gives you the confidence that you’ll get some improvement as the year progresses?.

Joe just to clarify its John. I think some of the Valves and Controls as we call Q3 and Q4 were not great quarters for us, so we started to see some of the slowdown from the order shortfalls in last Q1 and Q2, start to work its way in Q3 and Q4.

So, some of those comps and Valves and Controls gets a little bit better, same thing in industrial (indiscernible) business solid backlog that we feel comfortable is going to continue to shift throughout the year.

And then, residential commercial has been strong as Randy said in Water Quality Systems and we also start to anniversary some of the tougher headwinds in our flow and filtration solutions.

I think we’ve looked at the organic growth and although we don’t see if we took a 90 day rolling average of historical sales we don’t see that improving throughout the year. We do think that gives us a little bit easier comparison to the back half of the year..

Okay.

Do you guys have any clarity at this point on the destocking and when you would anticipate some of the headwinds associated with destock to subside?.

We think it continues in the Q2 for us, I mean, we look at some of the same bell weathers that you guys do in the industrial distribution side, I think they saw the slowdown a little later then we did and they started to correct as Randy mentioned and that started to work its way through our March shipments, we expect that to continue through April and May..

Okay. And then, I guess one last question on – I’ll pass it up.

On the restructuring side I applaud your efforts to take cost out just given the economic backdrop, can you just maybe provide some more clarity on the run rate that 100 million plus in 2016 just given the restructuring actions that you have 60 million this year, does that bake into some of the restructuring actions that you took last year as well because the magnitude of that number just seems like a big number and the payback seems quick?.

Yes.

These are new actions incremental to the things we’re working already in synergies and in fact as Randy and I met with the business precedence we’re still hopeful and our sales people are still hopeful that things going to improve throughout the year, we’re trying to be hopeful as we were trained, hope it’s not a plan and we think our view now is react to this new economic uncertainty and take the cost out.

So which you’re seeing in G&A and then some entry into footprint actions finally in our Valves and Controls and other businesses where we can get after some product line moves and get ourselves right sized and competitive.

As Randy mentioned in his remarks and I followed up, I mean, we now expect pricing to be the new norm in Valves and Controls and so even the projects that we’re anticipating wining we’re expecting to come at lower margins and so we’ve to accelerate our competiveness to continue to bring those projects in at the same drop through that we anticipated for..

Okay, helpful guys, thank you..

Your next question comes from the line of Steve Tusa of JPMorgan, your line is open..

Hi guys, good morning..

Good morning Steve..

So, just on the pricing dynamics, I guess this is just happening in Valves and the orders, just happening a little bit faster than expected in Valves and Controls, I mean, is pricing, are these orders kind of going to impact ’16 now or is this say kind of reshuffling in the backlog such as becoming more, it was longer cycle on the way up and it’s now shorter cycle on the way down I guess.

And then, from that perspective prices already kind of stating here in that business in revenues, so I mean, how we think about pricing in the back half of the year does that actually go negative in the back half of the year in Valves?.

Let me talk about 2000 – we think, we were very cautious on orders through the year which we think will effect Valves and Control sales in 2016.

So, we don’t see a change really in sort of things going faster or slower, I think it’s going to be a tough year on order and we’re going to do everything we can do to win in a discipline way which will put switching the price. We already see pricing and you already heard about what customers are asking in terms of pricing.

It might not just be in Valves and Controls, I mean, one of the things that effects does is if you’re, the example I used in – which was a surprise, it won’t be a surprise next time in terms of the transactional impact of effects that was an impact in our technical solutions business.

Technical solutions really did pretty well in the quarter but we had a few surprises that being one that was a Canadian dollar transaction in the U.S. dollar cost and that hits prices. And as competitors as foreign, as non-U.S.

competitors start using their change in cost advantage, price advantage we expect the challenging price environment in more than just Valves and Controls..

So when think about kind of this total price of Pentair going negative in the second half of this year?.

Yes. We do think it goes slightly negative still in some of our distribution business we still expect to gain normal price increase and we have those through and they’ve been accepted but we would expect any project and certainly areas where we got a bid on a cost to the price negative to the back half of the year..

We’ve good material productivity that’s hung up on the balance sheet so that will get more productivity as we go through the year too which will help offset some of that price. But, we think it’s a more cautious plan to assume, we’re going to see tougher pricing environment..

And then, I think you said in Valves and Controls next year, just kind of a high level 100 to 200 basis points as kind of not out at the question, I mean, as you move through the quarter here and assume you’re just seeing on your dashboard, I mean, is that now maybe a little too aggressive, I mean, could we see more, we did – price decline in the long time in any of the markets we cover so the magnitude is always kind of tough, could it be worse in that do you think in ’16?.

I don’t know, I think we’re – to address the previous question, we’re getting after the cost in aggressive way to continue to be competitive, so we’re anticipating a tougher environment on the quotes and we’ve got to have more cost competitiveness and so we’re looking to our suppliers to participate as we’re being after participate and we’re also looking on our own cost structure and trying to be more competitive within that cost structure.

So, the goal here is to continue to improve margins even with the decline of the revenue and we’re going to have to be very aggressive to accomplish that..

Okay.

One last quick question on free cash, what’s kind of the key lever to ramp that cash flow throughout the year, what’s kind of the one or two things that you’re looking at to play out because it’s little bit weaker than expected in the first quarter?.

Yes. It’s right sizing the inventory in our working capital levels to the new one..

Yes. Basically we’re relying on working capital inventories to support the higher sales level and needs to be corrected and we know how..

Okay.

So that’s a negative for margins going forward then?.

That’s baked in..

Okay, thank you, thanks a lot..

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

Thanks and good morning. Just I want to stick on pricing and margin for a minute, we are entering this environment you had significant material deflation I think as a tailwind as well as pricing up until now has been helpful.

Now those are both going against you and my question is given that you don't know how long this will last the restructuring that you have already taken and that is going to be fairly aggressive here how much more can you do there because there seems to be some risk to the margin opportunity going forward?.

Yes Steve, I do want to be – I want to clarify something. I think we expect we have done really well in material productivity we expect material productivity to do even better going forward.

We can see that and what we call the deferred productivity as Randy said what’s done in Q1, but its hung up in balance sheet and we work its way in a positive way throughout the rest of the year. We’re continuing to partner with our suppliers to anticipate these potential pricing headwinds and the pricing is an anticipated pricing.

It’s not realized so we are expecting that environment is going to be tougher and we are managing it appropriately as when I want you to take away.

In addition we are saying if it continues to get more competitive we have to be more competitive and therefore the other actions that we are taking to make sure the long term our margins are still very high..

On the comment about – concerned about cost cut getting into growth we are very cautious about touching our growth resources but what we are doing is, I am personally redoubling my efforts with our platform, we’re using our precedence to make sure that those investments we made are paying off.

I didn't see enough read out of some of them in the first quarter..

Okay. And I think it’s also leads into sort of the broader question on M&A that you put out there which is clearly you are on the hunt for attractive M&A at this point in the current environment.

But how are you thinking that about that as well given all the pressures that you are seeing yourself and what makes an attractive acquisition given the weakness that you are seeing out there?.

One thing is that given how difficult and uncertain things are sometimes opportunities become available that weren't available before so it’s actually a good time to be looking but to your question how are we sure that we are ready, we that's one of the reason I put in the comments that we did in the prepared remarks on the small acquisition we just made, -- this is a good example, our thermal building solutions businesses is a growth business.

We have some great innovations there and had a great year in growth last year. We expect to have a great year growth this year. This business built on is augment that are offering gives us more to put through our distribution channel.

So, it fit those five questions, it fit our strategy well so there are strategy to drive growth, profitable growth it fit it well. The financials may think, we were able to do that deal with the comfortable set of financials that we know we can execute. We were the right buyers. We have the best fit that's why the financials work the best.

And the last two things, we don't do a deal unless one we understand how we are going to integrate into the company and then two, we know who is going to in-charge be -- the in-charge of the integration and we trust them to execute it well.

And so we are going to keep that – keep to that discipline and make sure that might start at the bottom and say which businesses are ready, which businesses are more strategically ready and capacity ready and we always do that but I think you should all count on this to continue to put that first..

And is Australia process on track the divestitures?.

Yes. .

Okay. Alright. Thanks..

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

Hey. Good morning. I am sorry to beat the old dead horse here but if we can just go to slide 13 where we have the forecast for organic by vertical.

The energy number has only really been taken down 1 point versus two months ago and we are talking about more concerns about pricing and moving into mid stream and downstream which I think many of us did expect that but nevertheless I am just wondering why we are only down 1 point incrementally from the two months ago guidance particularly given the order scenario that was laid out on an earlier slide?.

Yeah its fair question. Thanks for asking it.

I think its couple of things and couple of factors in here, Valves and Controls is experiencing more challenging entering into environment, we are also experiencing some key wins in technical solution primarily around industrial e-trace so these are down streams and later projects there are productivity related and we are starting to see a pickup in that area.

So, we do have a mix of where the projects are coming through our typical businesses but all in we have backlogs and those backlogs give us confidence that this is not only appropriate number that we will ship this year..

Yeah we also don't think that the – we think - -we don't think the MRO declines on the first quarter this sounds like one orbit plan, is going to be as acute as it was in the third quarter, as it was in the first quarter..

Alright. Thank you. And the other – my follow-up would essentially be on the share repurchase so I know we are kind of back into the M&A hunt mode and all that which is great I think I am wondering though is that why would we wait on share repurchases given this environment.

Do we, you say if we don't find anything then you are kind of – you buy shares sort of a guess that was implied for the second half of the year you have a ton of balance sheet capacity why would we wait for that?.

We feel optimistic.

We have been working for fair amount of time as Randy said we have what we call platforms or businesses underneath the four segments that are high performing both in revenue and also on the operating side and we want to continue to feed the core and we have enough in the pipeline that would give us the feeling that we are going to execute on some of those throughout the year if in fact we don't feel that those are going to come through we are not going to execute clearly we would take a look again at share repurchases..

Right I mean we can only use the part or one so if we can't use our M&A then we will have through that but if we use that when we won’t have M&A..

Right. Fair enough. Thank you..

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

Good morning guys. .

Hi Shannon..

Hey.

Can you give a little more color on the geographic difference in Valves and Controls, I mean, you mentioned that the fast growth regions were getting hit the worse maybe a little more kind of specific countries or types of projects just being on there and then in terms of North America being the only piece up was that basically just L&G being the area strength that was there a more positive in North America beyond that?.

Starting with that North America was strong in process in industrial as well stronger and L&G was a nice pick up.

We had a particular focus on North America and we have actually invested in coverage there and I think that actually helped in Valves and Controls when – few years ago when we first got into it, it looked like our coverage and our share in North America was weaker than it was in other so that's an investment that I think is actually has paid off a little bit.

It’s obviously – somewhat by the overall trends. But on the fast growth side both China and Brazil we’re down significant double-digits in the quarter. And Brazil I guess isn’t that surprising, but China was more surprising than we expected and that was in chemicals as well as in oil and gas in industrial..

Okay.

And then just maybe a follow-up on this global capital strike point, I mean, as you kind of made sense over the first quarter and talked to your customers what are the most cautious about or uncertain about that sort of driving the decision making is there one sort of macro concerns that's particularly weighing on people one or two things you tend here?.

Well, I think the oil and gas industry is one of the biggest drivers in capital spending in the world and I think it’s the uncertain here on the knock-on effect and there is a lot of cuts and there is a high degree of caution and uncertainty about – well, there is projects that are getting delayed and won’t get done but just concern about what all that mean we believe that is the fact and that's why we think destocking.

When we see in industrial space where we kind of exclusively distributors we were pretty confident that there is destocking effect going on. But we also – we have seen delays in not just oil and gas we have seen continued delays in deferrals and power.

And I think that has more to do with the general need for electricity and the fact that the economy generally is just buttering along in the world and electricity needs grow with the economy so we have had a lot of power projects that are just delayed, delayed, delayed and the fact that percent delays in the first quarter in power were in the projects that we tracked whereas the percent delays was high in oil and gas..

Okay. Great. Thanks a lot..

And I would just add to that I think all the investment tasks could be considered now in the fact of where are the cost basis and while ago you wouldn't have thought of investing in Europe and look at the new competitive nature of how the European factories on the global basis are competitive again and all that gets paused to people to say where do I put my investment and what is my likely return is going to be.

So I think there is a lot of uncertainty out there that needs to be worked through. I think we feel good that energy as long term is a great investment cycle and we are going to see that rebound and we also think the industrial cycle long term will rebound. We are not just planning for 2015..

Got it. Great. Thank guys. I appreciate it..

Your next question comes from the line of Nathan Jones of Stifel. Your line is open..

Good morning Randy, John, Jim..

Morning..

There has been a lot of talk about the pricing pressure that you guys are feeling and are planning on feeling, can you discuss a little bit more where the opportunities are for you to put pressure on your suppliers in terms of pricing to participate in the pain if you will?.

Yes, I think clearly global commodity prices are not increasing as Randy mentioned we don't want to use the word deflation yet but it feels like we are heading a little bit more into deflation area environment and so we are put our main suppliers on notice that we all have to work competitively to reduce our cost structures and certainly in the long cycle businesses we usually are participate in the “going in and asking everybody to participate with you” so we have our supply base primarily in those long cycle businesses that we certainly put on notice early, we tell them where we are in the quoting cycle and they are prepared, they being in the same headlines we all are and they know what’s coming so we just all have to be more productive and we all have to participate to win the orders..

So couple of things, if I am just going to add to that is the decline in oil prices has led to some good declines in prices in resins. We want to make sure that we are getting the benefit of that.

The change in FX means say we are buying something in dollars today if we can get it from supplier who is making in the Euros or the Canadian dollar that can be a transactional benefit to us. So, I mean that's those are the kind of things that we have been working as we said because of the productivity gets defer to the balance sheet to the shipment.

So, I mean, we actually feel pretty good about our material productivity, we feel good about the actions our team is taking even beyond what they have already booked in the balance sheet..

Nathan I think just to finalize this question I don't think this is unique to us and that's my point.

I think the industry in itself is going to go through it together and so we are all going to be dealing with the same dynamics and I think we are prepared for it and we are anticipating to be prepared for it and we are making sure that all our partners are prepared for it..

Okay and my follow-up you talked about increasing pricing pressure in Valves, you talked about the residential and commercial part of flow and filtration thinking you saw a greater than market decline due to holding price.

Can you talk about where the decision or how you think about the decision to hold the price and lose share versus cut price to protect share in various parts of the business..

To clarify the on the point about where we are being very discipline that's in water, that's in large pumps infrastructure. Large infrastructure pumps.

It wasn't I might haven't – I am going to have it blend it together with a sentence before the residential and commercial but just to clarify that comment was about basically our large engineered flow pumps and they had loss on pricing, we felt took some things on lower margins so we changed that and we have more discipline now.

We make those products in Europe. Those are more competitive we make those products in North America and in Mexico and well Mexico is good in North America is less competitive. So we are trying to keep pricing disciplines that reflect our margin goals but also where we make things in that infrastructure space.

On the residential and commercial side, I would say we haven't really seen pricing pressure. We feel pretty good about that.

There are some of the areas that were weaker in residential or not in North America, Europe and Middle East but we think Europe is actually showing some signs of life in residential and commercial that we didn't see it clearly in the first quarter. But we saw some promising signs.

So, I would say that pricing is really more of a concern in energy and in industrial not in residential and commercial..

Okay. Thanks very much..

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

I’m all set guys, my questions have been answered..

Okay. Thanks Jeff..

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

Yes. High good morning.

Couple of more on Valves and Controls just when it comes to the MRO and slowing that you noted are you seeing any in the customer base trying to in-source that service component to try to save cost or is that economically beneficial for the customer to do?.

Right. I don't think, we haven’t seen any kind of trend in that regard at all because ours is mostly replacement in parts there is some service, in sort service but on the replacement which is replacing whole valves or whole servicing on existing valves that's I mean the parts for service valves.

They have come back and our service revenue was not the issue. It was the parts and replacement valves that was down..

Okay. That makes sense.

And also just on the pricing front are you seeing re-pricing of existing backlog or is it that the pricing pressure really on the new bids that you are pursuing?.

New bids only..

New bids only.

Okay and then lastly are you seeing any trends where for larger projects you are seeing the customer base or potentially EMC substitute start to substitute maybe some of the domestic higher quality suppliers of Valves and Controls with – maybe in some of the non-critical applications with some of the lower cost and potentially lower quality suppliers potentially out of Asia?.

We have seen that before the decline in oil prices, we saw some more uses on – particularly on with close of the commodity products throughout the more commodity products and we expect that particularly where companies go to the EPCs for fixed bids. The EPCs have for some time used that as a focus to try to drive profit into their box frame.

So that doesn’t always pay off in launch in Valves – don't work but we have seen that in the Middle East. We have seen that in Asia for a long time and we expect that will just continue..

That's it from me. Thank you..

Your next question comes from the line of Brian Drab of William Blair. Your line is open..

Hey good morning. There is one more left I guess.

You talked about the 100 million in cost cuts and the timing of that and that we are going to see it I guess more likely in Valves and Controls infiltration but I am just having I don't know how much color you can give on it having trouble figuring out where do you find that much in cost cuttings when you are so successful in developing cost synergies and attacking that after the merger if there is any more detail around the types of moves you can make that will be helpful?.

Yes, I think the discipline is, we forecast where we are going to be in organic growth and we certainly look at right sizing labor and the variable cost associated with what those declines would be and then we also take a look at our fixed cost structures and our plans on where we want to be on standardization and we accelerate those based upon where we are on our ratios I mean when you are declining you got to hold margin and to hold margin you got to take your cost out at the rate of sales and then sum.

So again we are – we have $6.5 billion in the company in sales and when you take a look at this as a percentage overall cost we are still relatively modest as far as the cost take out on the percentage cost and we have been pretty clear that the more we saw on the standardization front the more opportunities we actually saw in front of it..

The way we look at it is we benchmark against the best and you can look at our businesses and you can see two of our GBUs that do not have margins close to the best of the peers and that would be on filtration solutions GBU in our Valves and Controls GBU. So these are not plans that we invent in the moment.

These are long range plans that we accelerate it. The – we have ambitions to get to the valves and control business to be the best among the bests in right margin so that's a roadmap that we have contemplated for some time and it’s just the matter of in this environment that you accelerate and we have done that before..

Right. What's the long term target there Randy for that business if you could remind me. .

Well we have talked in Valves and Controls I mean I don't want people to think I am hallucinating given the first quarter we just had you know valves and controls was well above 15% margin we got it to 45 with lots of more opportunities.

So we have talked about a number of well north of 15 but I don't want to give that again because I think it might lack credibility right now..

Understood and then John what percentage of your cash is broad versus in the U.S.

today?.

Well, I mean two roughly – keep in mind we are outside the United States, so it’s not as relevant but we have roughly $100 million of cash that we hold in any given time under 150 and most of that is international are outside the U.S..

Okay. Thanks..

Your next question comes from the line of Christopher Glynn of Oppenheimer, your line is open..

Yes thanks. Hey good morning. So you made an effort to sort of ring-fence the price pressure dynamic.

How do you feel about that exercise of being able to ring fence it in the guidance?.

I am – I guess Chris I would say again we don't think it’s going to be unique to us and we think we are in the forward looking piece of it and I think if you are in this industry and space as you are not anticipating and I think it’s going to be a challenge later and so we feel like we have pushed the business to accept the reality of where we are and to get on with the solutions that would be required to still maintain competitiveness and bake the margins that we expect within that environment.

We are hopeful we’re wrong, but I think the worse case is if we are wrong we feel like there is upside to it. I wouldn't want to be anticipating it not coming and then have to rely on the back half of the year to take the cost out.

So, I think the fact that we are dealing with it now and right sizing where we think the businesses are, I think it’s going to put us in much better position for 2015 and 2016..

Fair enough and then just quickly the MRO side I think would be debt pressure more concentrated in the first quarter could you just elaborate briefly on that?.

Well, I mean most MROs is maintenance related and you can defer maintenance for a little while but you can't defer it forever and I mean there are – these are industries that care a lot about safety and so we believe that its MRO side is one that should be at least zero, and it wasn't it was negative and it has been positive right up until the first quarter.

So that's why I mean I kind of view it as the same thing of destocking in distribution that can't go on forever..

Right. It makes sense. Okay. Thanks..

Was that last question or – okay one more question. Thanks..

Your last question comes from the line of Josh Pokrzywinski of Buckingham Research, your line is open..

Hi good morning guys and thanks for taking question.

Just back on the comment on MRO Randy, if you can help me out on Valves and Controls it looks like first half to second half there is about maybe 500, 600 basis point acceleration in core growth actually looks like the comp gets a little tougher so maybe from your earlier comment Jim and I can follow up on the math there but how much of that acceleration would you call MRO kind of normalizing versus some visibility have in the backlog just trying to dimension out some of the drivers there?.

Yes, I think it’s right sizing the shippable backlog and timing that out I mean I think there is most certainty as you move into Q2, Q3 and Q4 with what that backlog produces.

We are not expecting a significant order rate in the back half of the year to be helping our revenues this year and we think you can't unless you are going to cancel the job you can't push these projects out for a while some of these are so far along and that will be – we’re pretty confident that we ship, it’s just the matter of the timing of when they are going to ship.

So clearly we are taking a look at current run rate and you can look at the current run rates that we are seeing in Q1 and Q2 and take a look at the seasonality bumps that we normally see we are not expecting those seasonality bumps that usually happen to Q3 and Q4 at the full year capital projects finish out to be consistent with where they were in prior years..

Okay.

I guess if you have to think about it backlog visibility versus MRO normalization half and half, 60:40?.

We are probably most confident about the MRO which you know in any given years call it a billion dollar of business and we feel like that's within a deviation certainly going to be closed to right around where it was last year if not slightly better on a core basis.

And then, the projects are coming out of the shippable backlog from that shipment timing..

Got you. Alright. Thanks John..

Alright. Thank you all..

Alright thank you. And Johnny if you can give the replay number..

Thank you for participating in today's earning conference call. This call will be available for replay beginning at 11 o'clock central time today April 21, 2015 to midnight on May 29, 2015. The conference ID number for the replay is 22709435. The number to dial for the replay is 8558592056. And this concludes today's conference call.

You may now disconnect..