Ladies and gentlemen, thank you for standing by. Welcome to the Q3 2019 Pentair Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker's remarks, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. If you would like to withdraw your question, press the pound key. If you require further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Jim Lucas. Thank you. You may begin.
Thanks, Dorothy. Welcome to Pentair's third quarter 2019 earnings conference call. We're glad you could join us. I'm Jim Lucas, Senior Vice President of Investor Relations and Treasurer, and with me today is John Stauch, our President and Chief Executive Officer, and Mark Borin, our Chief Financial Officer. On today's call, we will provide details on our third quarter 2019 performance, as well as our fourth quarter and full year 2019 outlook as outlined in this morning's press release. Before we begin, let me remind you that any statements made about the company's anticipated financial results are forward-looking statements subject to future risks and uncertainties, such as the risks outlined in Pentair's most recent Form 10-Q, Form 10-K, and today's press release. Forward-looking statements included herein are made as of today. The company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances.
Actual results could differ materially from anticipated results. Today's webcast is accompanied by a presentation which can be found in the investor relations 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 in order to ensure everyone an opportunity to ask their questions. I will now turn the call over to John.
Thank you, Jim. Good morning, everyone. Please turn to slide number four, titled Executive Summary. We are pleased to deliver solid third quarter performance, in particular, a return to segment income growth and ROS expansion, and building on our performance from the second quarter. We are maintaining our full year EPS guidance. We have seen price cost stabilize, and we are encouraged to see further signs of top-line stabilization in our important aquatics business. We continue to invest in our two key strategic growth priorities, advancing Pool growth and accelerating residential and commercial water treatment. These investments are centered around building out a consumer experience inclusive of our brand, channel, innovative products, and services.
We continue to believe we are well-positioned to return to core sales and income growth in 2020, and I will talk a little more later in the call about our optimism about our long-term strategy and prospects. I will now turn the call over to Mark to discuss our third quarter results and updated full year outlook. Mark?
Thank you, John. Please turn to slide five, labeled Q3 2019 Pentair Performance. For the third quarter, overall sales increased slightly, we saw core sales decline 2%, segment income grow 1%, and adjusted EPS increase 7%. We'll provide more color on the individual segment performance shortly. Below the line, we saw an adjusted tax rate of 15%, net interest other expense of $7.7 million, and our average shares in the quarter were 168.6 million. The tax rate in the quarter reflects our long-term strategy spread across a lower income base in 2019, resulting in an expected full year adjusted tax rate of 17%. Finally, free cash flow was just over $150 million and in line with normal seasonal patterns.
We were pleased to see segment income grow and ROS expand despite the softer top line, and we believe this is a reflection of price cost stabilizing following the headwinds of significant inflation we discussed in prior quarters. Please turn to slide six, labeled Q3 2019 Pentair Segment Performance. This slide lays out the third quarter performance of our three segments. As expected, our Aquatics segment experienced a 5% core sales decline against an extremely tough comparison. Following rather abnormal weather during the first half of the year, it appeared that weather in much of the country was more normal during the quarter, and the result was an improved sell-through. Aquatics saw segment income decline 9% and ROS contracted 60 basis points, but still came in north of 25%.
As we have repeated throughout the year, we remain focused on exiting 2019 with channel inventories more in line with historical levels. Filtration Solutions reported core sales growth of 4% with solid contribution across all business lines, but particularly within the smaller food and beverage business as we shipped out some of our improved backlog in both beer and sustainable gas. The integration of both Aquion and Pelican remained on track, and both businesses performed in line with our expectations. Segment income grew 17% for Filtration and ROS expanded 50 basis points to 16.5%. In Flow Technologies, core sales declined 5% during the quarter. We continue to see strong headwinds in our ag business, both OEM and aftermarket. Despite the soft top-line performance, segment income grew 4% and ROS expanded 170 basis points to 17.1%.
As a reminder, Flow was hit hardest by tariffs and broader inflation in the second half of 2018. The comparison in the quarter was its easiest of the year. While we continue to see mixed results across the three segments, we are most encouraged by signs of stabilization in price cost, as well as only one more quarter of tough top-line comparisons for Pool. Please turn to slide seven, labeled Balance Sheet and Cash Flow. Our balance sheet continued to strengthen. The third quarter delivered another seasonally strong quarter of free cash flow. During the third quarter, we had one bond mature. We have one other bond maturing in the fourth quarter. As a reminder, we successfully issued a 10-year note during the second quarter.
Between our healthy free cash flow and improved leverage ratios, our balance sheet remains well-positioned to fund both organic and inorganic growth opportunities. Please turn to slide eight, labeled Q4 2019 Pentair Outlook. For the fourth quarter, we anticipate core sales to be roughly flat. We expect aquatic systems to be down approximately 1%-3% as we continue to focus on making sure channel inventories return to more normalized levels by the end of the year. We expect core sales growth in both filtration solutions and flow technologies to be essentially flat. We anticipate segment income to be up approximately 6%-8% as we expect price cost to further stabilize. We continue to drive productivity. We expect adjusted EPS to be in a range of $0.64-$0.66 per share. Below the line, we expect corporate expense to be approximately $14 million-$15 million.
We expect our fourth quarter adjusted tax rate to be around 17%. We expect net interest other expense of roughly $8 million and shares to be approximately 169 million. Please turn to slide nine, labeled Full Year 2019 Pentair Outlook. For the full year, we expect core sales to be down roughly 1%. We expect total sales to be essentially flat with roughly 2% contribution from our two acquisitions, offset by a 1% headwind from FX. We anticipate segment income to be down around 3%. We continue to expect our full year adjusted EPS to be approximately $2.35 per share. Other items embedded in our guidance include expected corporate expense of $60 million-$63 million, an adjusted tax rate of 17%, net interest other expense of $35 million, and an average share count for the year of roughly 170 million shares.
While there are undoubtedly many moving pieces to our 2019 path to expected flat EPS, we continue to be encouraged by signs of top-line stabilization and further price-cost improvement. We are encouraged by the performance the business are delivering in light of the top-line challenges faced this year. I would now like to turn the call back to John.
Thank you, Mark. Please turn to slide number 10, labeled Executing a Consistent Strategy. We continue to be focused on driving our long-term strategy, and we believe there is a lot of evidence that the focused investments we are making are the right investments and driving results. Most people would agree that global water quality is a challenge. While many companies are participating in offerings to solve this global issue, we have chosen to focus primarily on the residential and commercial markets. There is little argument that consumers can benefit from taking ownership of their own water experience. They can do it to their own taste and with solutions that meet their individual needs and preferences. Pentair has a variety of solutions to help consumers treat, move, and enjoy water. In fact, Pentair is one of the few total solution providers to residential customers.
Also, when we aligned on our strategy nearly 2 years ago, it started with our leading aquatics franchise. With over 5 million pools installed in the U.S. and over half of them being over a decade old, there's a large installed base to serve. We have built a strong business focused on new product development and strong dealer loyalty. The introduction of the variable speed pump nearly a decade ago created an awareness around energy savings, and the result has compounded with other product categories from LED lighting to hybrid heaters. We believe the continued adoption of automation, which is small today, roughly 275,000 pools versus an opportunity north of 2.5 million pools in the U.S., creates a new avenue of growth where we have a leading position.
Within residential filtration markets, the acquisitions of Aquion and Pelican earlier this year moved us from being a leading component supplier to now being a provider of systems and solutions. We have learned quite a lot in our short time owning both of these businesses, and we believe there are many paths to creating value as we help consumers solve their water challenges in their homes. On the commercial side of the business, we have historically enjoyed a strong position in the food service area. Increasingly, we are focusing on total water management with customers, and we believe this presents an opportunity to better position us with many of our existing and potential customers.
Within the commercial office water space, customers are increasingly looking at opportunities to decrease the use of plastic bottles, and we have a number of technologies today that can serve this space, and we believe there are opportunities to further expand in this area. Outside of the residential and commercial verticals, we have a number of technologies we have developed around nano and ultrafiltration. As we develop new IoT products, we see even more opportunities to solve customer challenges. For instance, within the beer industry, we have approximately 150 plants globally that use our digital BMF system that enables our customers to become more sustainable, lower costs, move from static to dynamic live reporting and improve overall operating performance. We are transitioning this technology into the sustainable gas industry, and we believe there are opportunities to extend this technology to other parts of our portfolio over time.
We also continue to believe there are multiple paths to drive consistent, sustainable growth, especially in our core residential commercial businesses. Our recent acquisitions allowed us to move closer to the consumer, and while we have built a strong aquatics business, we believe that by better focusing on the consumer, not only the dealer, it will enable us to maintain an already healthy growth rate in one of our best businesses. We believe that we have the right portfolio, the right strategy, the right culture, and the right technologies to further our position as a leading water treatment company. With a strong core to build from and a healthy balance sheet to support both organic and inorganic opportunities, we look forward to demonstrating our strategy to our shareholders in Q4 and in 2020 and beyond.
I'd now like to turn the call over to Dorothy for Q&A, after which I will have a few closing remarks. Dorothy, please open the line for questions. Thank you.
At this time, I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Steve Tusa with J.P. Morgan.
Hey, guys. Good morning.
Morning, Steve.
Morning, Steve.
Hey, can you just break down a little more what's going on in the Flow business? The revenues were way off versus our model, but the profits kind of held in. I know there's some dispersion in the margin profile of some of those businesses. That was one, I think, in the first quarter that was tough for us to kind of figure out. What's going on in that segment? I think the other two are pretty straightforward. What's going on in this segment?
Yeah, Steve, let me speak to the revenue mix. I'll let Mark get into the details. During the end of Q2, we saw a little false positive on some of the ag orders. Right out of the gate in Q3, we just saw that ag did not recover at all. We had anticipated a little bit more recovery sequentially in Q3. It just flat out didn't happen. Now we've adjusted heading into Q4 next year, the fact that we don't see ag recovering at all. I think a lot of the global data would suggest that we've probably figured it out right now. That was a little bit of a bounce in Q3 that we had expected that didn't happen.
How big is ag, and isn't that relatively profitable? Shouldn't that have had a kind of more negative impact on the margin? What am I missing on that front?
Yeah, no, Steve, it's Mark. That's a great question. What we saw positive signs of here were two things, really. You see price costs getting better. As I said in my prepared comments, Flow was hit hardest by the inflation pressure. We see price costs turning positive in Q3. Also productivity. We touched on that in Q2, that although we didn't see the productivity reading out in Q2, we saw signs that gave us a high degree of confidence that we would start to see that in Q3, and that's really what happened. You're right. Being down in ag, from a mix perspective, would push margins down and income down, but we were benefited by better productivity and improved price cost.
How big is ag for you guys?
Ag would be somewhere in the $200 million range per year.
Okay. Then one last one just on aquatics. Pool made some pretty positive comments that their channel's clear. Can you kind of validate that comment, or are there other considerations? Thinking about next year a little bit, I would think you guys have some easy comps here coming up in the first half of 2020, or is there something else that we should keep in mind when thinking about kind of the trajectory in the next year?
Yeah, Steve. I think you're right. We do track one of our largest customers' earnings calls, and we agree that inventory is definitely getting more normalized here, and our goal is between now and the end of year to make sure that it gets into that normalized pattern. I do think, though, that the pricing this year is relatively more normal, which will not suggest that any of the channel would reach to do the buy-aheads that we saw last year with a much more elevated pricing level. Mark, I don't know if you want to add anything more.
No, I agree. As we've said, we continue to believe that by the end of the year, we'll exit with normal levels. We think of 2020 more in line with the historical normal seasonal stabilized perspective.
Great. All right. Thanks, guys.
Thank you, Steve.
Your next question comes from the line of Nathan Jones with Stifel.
Good morning, everyone.
Morning, Nathan.
Just maybe thinking a little bit about where the return to organic growth comes from in 2020. I think we've probably beaten the Pool business to death and can all understand why that should return to growth. But if we're having a look at the last couple quarters' results, organic sales have been down with positive impacts from price. This quarter, you're down two with three points of price and volume down five. Outside of the Pool business, with what I would imagine are moderating price tailwinds and some negative volume trends here, where would you expect the growth to come from in 2020 outside of Pool?
It's a good question, and I thank you for asking it. I think first of all, beyond Pool, we also had some channel inventory in both filtration and Flow that was built up for some of the same buy-ahead patterns that happened in last year's Q3 and Q4. This year's Q3 and Q4 have those difficult comparisons, and then Q1 and Q2 of next year have much easier comparisons across both filtration, Flow, and aquatics.
Okay. Some tough comp issues this year for the same reasons as Pool lead to some easier ones next year. That makes sense. Can you maybe talk a little bit more about some of these? You talked about focused investments being the right investments and driving results. Maybe talk a little bit more about where those investments are, what kind of results you're seeing them drive, and maybe specifically a little bit more about building out the channel for the commercial and residential filtration.
Yeah. We have three specific growth priorities in both Pool and residential commercial filtration. I'll start with commercial first. It's about having the best commercial systems and capabilities, and we're really excited about the technology that we're building to solve commercial office water opportunities. As you know, people are seeking carbonated water, and they're also seeking flavored carbonated water. Really excited about the investments we made on the technology side. While we're more than a year away from launching any of that product, our product is a really better solution that we think that the market will benefit from. We're excited there. We're also, through both the acquisitions and also internally within Pentair, we're having the best residential systems.
Smarter, more innovative valves technology, smarter water softener systems technology, hooking those to automation, and then having the services piece through the Pelican acquisition to complete that last mile. We're really excited about the progress of that in-home sales capability and the build-out of what we call our mobile resource centers, which are our vans that we go out and sell with. Huge progress there. On the Pool side, we continue to see technology advancement, new technologies around filtration, new technologies around automation. We're excited that that penetration rate will show up. When you look at the sell-through rates of Pool in both Q2 and Q3, they're back to the high single digits again. Once we get through this inventory channel issue and the Pool business normalizes, I think we're very positive that we'll see that return to growth next year.
On that commercial water filtration product, the flavored and the bubbly water, have you guys done enough work to talk about what you think the size of that opportunity is for you?
I think it's really fragmented. I think the overall momentum is there. I think what we want to do is make sure that we have the systems that can give you chilled, heated, sparkling, and as you know, our Everpure filtration is a big part of that overall component. We want to be talked about in the space, and we want to make sure we have the right systems that can solve any solution that basically a commercial customer has.
Okay, thanks. I'll pass it on.
Thank you.
Your next question comes from the line of Joseph Giordano with Cowen.
Hey, guys. Good morning.
Hey, Joe.
Morning.
John, I just wanted to clarify something you said earlier on Steve's question regarding Flow. I think you mentioned that there was some head fake kind of exiting QQ about ag that didn't materialize in the quarter. I was under the impression that once ag, like when we had that bad weather in the first half, that any recovery in ag was taken out of guidance. I'm just a little confused about, can you square that for me?
Yeah, there's two forms of ag. We have a precision ag spray business, and that we did address earlier. That is a very high margin offering. The other part of ag is more of the pivot ag spray and the irrigation side of the business, and that's specifically what I was referring to.
Okay, this is the irrigation, not the precision. Okay, cool.
Correct.
Okay. Can you talk about maybe some of the traction you're having with some of just the internal cost initiatives? Clearly, particularly in Flow, you're seeing the margins come through on a weak growth number. Maybe you've talked about them at a high level. Maybe if there's a couple examples you can take us through as to some things that are being done differently today than maybe a year ago across the enterprise, maybe?
Yeah, sure. One of the things we've talked a lot about as we separated was optimization and really looking at where did we have complexity and how could we get after complexity reduction. The Flow segment was certainly one of those businesses where we saw a high degree of that SKU rationalization, things that inherently drive up cost and drive down margins. The team really got after that as we exited 2017 and throughout 2018. We're starting to see those activities and actions pay off here in 2019. Also, we've also talked about some of the factories where we've had some challenges. We've been investing in automation and in other technology to replace and improve some of the older equipment and machinery that's used in some of those factories. That's also starting to read out early stages.
There's more of that to come as we think about 2020. We're again, seeing favorable signs and encouraged by what we're seeing.
Maybe last from me. I know it's too early to talk 2020, but if we just think about a situation where inventory is cleaned up through your partners and we could start ramping a little bit. When I think about free cash flow, that was a nice performance here in the quarter. How much of a headwind do you see that being into 2020 as things kind of ramp up and you have to start producing at a higher rate?
I think we still have opportunity to really focus on cash flow, and we continue to view cash flow targeting at approximating adjusted net income. We wouldn't change that point of view, even though as we grow, to your point, there may be some working capital type things that we need to invest in. There are opportunities in other places that we would manage and balance out to have that long-term target still maintained.
Great. Thanks, guys.
Thank you.
Your next question comes from the line of Michael Halloran with Baird.
Hey, morning, everyone.
Hey, Mike.
Morning.
A couple ones. First, just on capital usage here. Any thoughts to bringing back, being more aggressive on the buyback side again? Secondarily related to that, how's the M&A pipeline look? What's the willingness, ability to bring something in, and how are the valuations looking out there?
I think, clearly we're focused on execution right now, Mike. Part of that was making sure that we're delivering on our commitments on Q2, Q3, and Q4. That's our first focus area. I think there is the growing opportunities to invest in the platforms that I mentioned. We're continuing to look at those tuck-in acquisitions, as I would say, that feed more of what we've done already. You can never time those. You have no idea where they're going. We just want to make sure that we're protecting the balance sheet heading into next year and giving ourselves flexibility to do what we think is going to drive the most amount of value.
The pipeline on that side, though, John?
Good.
Good. All right. Just some thoughts on the price-cost side. It seemed like you were implying that the price-cost side should be a little bit more favorable moving forward from here. Maybe talk about puts and takes on the pricing side. Has that kind of flattened out a little bit relative to the commodity side, and how you're thinking about that moving into next year?
Yeah. Maybe the way to think about it is, we had significant price-cost headwinds as we talked about coming out of last year and into the beginning of this year. What I referenced in Q3 in particular was favorability, because we've got favorable price, and we have inflation moderating. As you move forward, that favorable year-over-year price will start to be a little bit more at a more normalized level versus the unusually high price increases that we had in 2018 that spilled over into 2019. It's more of a stabilization story rather than a benefit. It's just mitigation of what had been a pretty significant headwind. On the inflation side, one thing to always kind of keep in mind is inflation is not just the material or commodity inflation, but we certainly also have labor inflation, and we don't see that going away or moderating.
That will continue to be part of how we think about what our 2020 will look like.
Thank you. Appreciate it.
Thank you.
Thanks.
Your next question comes from the line of Jeffrey Hammond with KeyBanc Capital Markets.
Hey, morning, guys.
Hey, Jeff.
Morning, Jeff.
Hey. Can you just talk about what is informing the lower growth rate in filtration? Just as you look forward, we're hearing a lot about macro slowing and just where are you seeing some signs of slowing in your business outside of that ag space?
Sure. As I talked about in Q3, we saw a pretty improved performance in the food and beverage part of the filtration business. That moderates a little bit in Q4, that's part of the story. We do see continued stabilization and incremental improvement on the important residential and commercial side, both the systems and components businesses where the investments in those acquisitions took place. Overall, just more of a moderated view given the performance in Q3. Would expect to kind of, as we think about moving into 2020, a similar level of performance and starting to see some of the investments that John talked about reading out in improved core sales growth.
Okay, just on Pool, what are you assuming and what are customers telling you about kind of the normal early buy situation? Just, if we look into 2020, certainly you've got some easy comps and typically this business grows mid to high single-digits. Should we think of 2020 as kind of an easy comp, you can get back to those levels or above? Thanks.
On the first question, from an early buy perspective, we're seeing kind of a consistent early buy pattern. Last year was a little bit unusual because of the blend of the impact of the price increase. What we're seeing this year is more in line with kind of the historical trends. In terms of next year, as we've said, we're exiting Q4. You see the Q4 guide is what I would think of as back to a little bit more level of normalization, improved income performance, flattening of the top line, which had been decreasing. As we think about 2020, we're just going to really focus on getting back to what we believe would be performance in line with our long-term objectives.
Okay, great. Thanks, guys.
Your next question comes from the line of Deane Dray with RBC Capital Markets.
Thanks. Good morning, everyone.
Hey, Deane. How are you?
Morning, Deane.
Hey. Very well, thank you. Can we put a little finer point on the working down the excess channel inventory in Pool? If we had been thinking it was around a $60 million excess, and just based on commentary about expected 4Q normalizing, how much should we think about that $60 million having been worked off so far?
Yeah. As we talked, we worked down some of that inventory in line with sort of our expectations, and we continue to see that coming down further in Q4 and exiting the year at levels that are in line with more historical seasonal patterns.
Okay. On Pool, John, you talked about some of the new product development in filtration and Pool and automation. Just to set expectations, might you have some new automation offerings for the 2020 season?
Yeah, we do already, and I think we're learning how to sell it better. We believe everybody can benefit from that automation capability. It's a different type of sale, though. We believe the right products that can really help the user along, and we have to tweak our ability to sell technology. It's not like selling a product. It's more like selling a service or capability. We learned a lot this year, and I think we're encouraged by the progress we're making in Q3 and into Q4, and I think those products are going to really accelerate as they head into next year.
When you say sell a service, is that something that Pentair would benefit from on a recurring basis, or is that a pool dealer that would be part of their revenue stream?
Well, clearly the vision would be that everybody would benefit, right? That at the end of the day, most people buy technology on a more rented basis because they believe whatever they have is going to be obsoleted. We'd have to line the channel that way, Deane. Ultimately, we think that's going to be the right answer. We're launching in this quarter the new Pentair Home app, which basically is a broad umbrella that takes all of the suite of products that Pentair offers and allows it to be connected into that home app.
We're hopeful that as the consumer sees more and more things that are available to either connecting with Alexa or Google Home or Apple or whatever your device is, that you start to see the benefits of someone monitoring your water quality and then starting to buy some of the products and services that would attach to that.
That's good to hear. Just last one from me. When you talk about the commercial office water opportunity, we agree that it's still very fragmented. Are you thinking of a rental opportunity, or would this be equipment sales or both?
Today it's about having the right systems and likely us selling them. Deane, as you know, the market does rent them. The end solution providers do rent units. Don't know yet if that's the space that we want to be in. We introduced carbonated water some eight to 10 years ago. We were probably early in the market. We have all the technology, we deliver that for food service. How do we bring that into a commercial office environment in a productive way, if that's what people want? As you guys know, there's a lot of fickle drinkers. The first one is to get tea and coffee. Most all tea and coffee needs to be filtered so you don't scale the units or cause damage to those units. Our filtration plays a big part in that.
If we expand that filtration into other forms of water, we think there's a huge opportunity for Pentair. This is forward-thinking. We believe we have the technology where it's probably not a 2020 launch. It's probably somewhere in 2021.
Understood. Thank you.
Thank you.
Your next question comes from the line of Josh Pokrzywinski from Morgan Stanley.
Hi, good morning, guys.
Morning, Josh.
Quick question on price cost. I guess, with working down channel inventory and kind of generalized market weakness, some of that related to weather earlier in the year. I would imagine it's harder to get price, certainly, probably more room for incentives than to try to raise prices in the channel. Is that something we should expect to start expanding more rapidly from this point now that we've kind of cleared the season, cleared the channel overhang from an inventory perspective?
I think the best way to think about it is, as I said before, it's just more of a normalized level of price. As you know, a big chunk of the price that we see overall comes from the Pool business. They had unusually high price last year in response to inflation. This year, they had a price increase that would have gone into effect in September, which is the normal timeframe that those price increases go into place. I'd call that in a more normal historical level. Something similar in the other businesses. We didn't see any unusual reaction to price this year as a result of channel inventories, but we do see just going to a more normalized level given that last year's higher price was really driven by that incremental inflation.
Got it. I guess as it pertains to the aquatic season, just as we kind of wound it down there in the third quarter. Obviously, you had a slow start with weather, particularly in some of the warmer regions that would've been bigger contributors in the first quarter. Did any of that get made up later in the year? Just with the season maybe stretching out longer, not even weather related, but just thinking of folks are always going to be busy kind of May through August, but maybe they do an extra job in September. Is that something that you guys noticed and maybe sets up a comp we should think about at least in sell-through next year?
Yeah, I think some of it will. I don't think, first of all, the comp is meaningful enough. Yes, those pool builders will continue to work as long as they can in those areas, and they'll fill in jobs in the slower season that they would have otherwise not done. They've all will probably likely celebrate the holidays that exist in Q4. You're not going to see that same level of bill that you tend to see in the more summer seasons.
Understood. Thanks, guys.
Thank you.
Your next question comes from the line of Saree Boroditsky with Jefferies.
Good morning.
Good morning.
Could you provide some color on what you saw geographically? I believe last quarter you talked about Europe and China being positive. Did that continue in any expectations as we look forward towards the end of the year?
Sure. It did continue. We had commented earlier in the year that we saw some weakness in Europe, particularly on the filtration side. As we moved through the year in Q2 and then again in Q3 and we really see through the balance of the year, we saw improvement there. Europe now is back to moderating growth and China as well is returned to a reasonably good growth level.
Great. Just a more longer-term question on aquatics. How should we think about the impact from the variable speed pump legislation that goes into effect in 2021?
We believe in 2021, it should help our overall sales. Variable speed pumps for us today are probably just over half of our total pumps sold. They do sell at a higher sell-through value. We do believe as the transition happens, those of us who've been through these transitions before always have to though question, when are those dates going to really happen and will there be slippage? How does the inventory work its way through? We're not putting anything into 2020, obviously. We'll see if there's a relative bump in 2021. Overall, it should be positive to our business.
Great. Thanks for taking my question.
Thank you.
Your next question comes from the line of Julian Mitchell with Barclays.
Thank you. Good morning. Maybe just following up on that geographic point. You'd emphasized some of the weakness in ag, and we've talked a lot already about residential trends in the U.S. in the past few months. Just wondered if you could give any detail around what you've seen in some of the more commercial or industrial markets in the U.S., if there's been any particular shift in demand from month-to-month since July.
Nothing significant from a month-to-month perspective. 80% of our business overall is driven by the residential and commercial end markets. As we move through the balance of the year, we've talked about sort of the inventory impact, but beyond that, the underlying demand has remained positive, and we continue to see that kind of reading out through the balance of the year.
Thanks. On your sort of segment income bridge, I guess, on slide five. When we're thinking about the productivity portion of that in aggregate, it looks like it's probably, I don't know, maybe a $20 million tailwind or something for the year as a whole. If you could just sort of clarify if that sounds about right. When thinking about next year, do we think about some of those measures that you've accelerated around productivity pushing that number up? Or is that a pretty good run rate for the current demand environment?
Yeah, I think what you're seeing in Q3 is more in line with the level that we would anticipate. I think to remember kind of what makes that up, there's multiple elements. There's material productivity, which is where we're working on trying to mitigate some of the inflation headwinds. There's operating cost productivity. They would think about that as looking at opportunities to reduce G&A costs. There's factory productivity. What offsets that is also the investments we're making in the growth areas around R&D and selling, marketing, investments in technology, and things like that. As we think about this year and then into next year, we'll continue to look for increasing levels of productivity, but utilizing some of that to continue to invest in the areas where we see the biggest growth opportunities.
Thanks very much. One last quick one for me. Looking at the filtration operating performance, you had pretty healthy sales growth there in Q3. The incremental margin was around 20% or so. Is that a reasonable sort of placeholder for that business with its current mix? Do you see anything sort of one time within that figure?
I wouldn't call it one time, but this is where we do have the residential systems and also the consumer services, and we are significantly investing in those businesses, right? We're very encouraged by the top-line growth we have, and we continue to add back both digital marketing, advertising, branding, and R&D spend to really accelerate the long-term growth there. I think this is a more normalized pattern as we head into 2020, is benefiting from the growth and then reinvesting a portion of that income back in to fuel more growth.
Makes sense. Thank you very much.
Thank you.
Your next question comes from the line of Walter Liptak with Seaport Global.
Hi. Thanks. Good morning.
Morning.
Thank you. Wanted to ask the geographic question and just ask the comments about the EU filtration kind of moving up from moderating growth and China doing okay now. I wonder if we could just get a little more detail about why that is. When we look at macro numbers, Europe continues to get worse. China, the GDP numbers continue to weaken. What's going on with your sectors or with your market share that's helping those regions?
Let me talk about China first. Our China business, we said before, in China, Southeast Asia overall, is residential, commercial filtration primarily. Think about that being just north of $100 and some million dollars on an annual basis. The growth rates we're talking about are really about us starting from a relatively low base in a very enormous market in which we have a dedicated China team, and we have a dedicated factory, dedicated R&D lab, and we've really invested a lot in new product growth and marketing. We're winning in a space that may or may not overall be growing, but we have a lot of runway left in that area. In Europe, Mark gave you overall numbers, and that is appropriate. Within those overall numbers, there's things that are doing well in Europe, and there's things that aren't doing so well in Europe.
As we look at some of the global industrial product lines, we definitely saw slowdowns. When you take a look at some of the more installed base, residential, commercial aftermarket businesses, they're doing okay. In no way would we call it a robust market environment.
Okay. Can you help us with the size of the EU industrial business?
Yeah. 100? roughly $100 million. Yeah. 100 total for the year? For the year. Right. Not in a quarter.
Okay, great. To switch gears over to the R&D. Hearing about the investments. In 2020, or is it similar levels of R&D, but more focused around some of these growth opportunities, or should we expect some kind of a step-up in R&D spend?
Yeah, I think you're going to expect a step-up. I've said many times that we have the ability to invest a lot more in R&D, we'll feel better about that investment when we feel marketing's done the work to produce the roadmap of where our R&D will be best utilized. We're really excited about our automation platforms, we have a global innovation center around automation, a one Pentair solution that will work across the enterprise. Really excited about that roadmap. Then around our water treatment innovation center, really excited about the nano and ultrafiltration technologies out of the CPT acquisition, our X-Flow business, and expanding those into both residential and commercial. Very excited. Then, as I mentioned earlier, building systems capability that takes that technology and gives the overall solution.
Those are the double downs for me and the team. I'm going to accelerate that investment in 2020 and probably 2021. We're encouraged and excited by the products at the other end of that investment.
Okay. All right. Sounds great. Thank you.
Your next question comes from the line of Brian Lee with Goldman Sachs.
Hey, guys. Good morning. Thanks for taking the questions. Maybe just first one on price, going back to that topic to clarify a bit. I know 2019 was a bit abnormal with the three points here, and I know it's early for 2020, do you think it's reasonable to assume we just settle back to somewhere around a point in price for next year like we've seen in past years? Was the pricing this year late enough in the year where there's still some spillover into the early part of next year?
I think about it as slightly higher than that 1% that we've seen. Prior to 2018, for the few years prior to that, it had been right around 1%, but I'd call that historically low. Something in the 2% range is probably a little bit more in line with what would be historically normal, with a rounded range on that, 50 basis points-ish. Okay. I think it's too early to say. The businesses that went out in September, as Mark said, we were out in that range that Mark said, and we saw all those pricing stick, and were generally well-received by the overall customers, and those are more normal, and then we'll see how the others do.
Okay, great. That's helpful. Then just a second question, going back to Flow for a second. I know you kind of walked back the core growth outlook for that segment through the year, and you sort of did the opposite last year in walking it up through the year. How de-risked is the view here for 4Q, just given how lumpy it's been all year? Then as you think about 2020, is this a segment you'd expect to grow year-over-year along with the overall business? Thanks.
I can't call it de-risked. I can just tell you that it represents the last multiple quarters trends and doesn't produce any incremental upside sequentially. From things growing off of how they did the previous quarter. There is some year-over-year benefit as you look at Q1 and Q2 in this business next year. We'll see how confident we are when we come out with a guide of being able to drive organic growth in Q3 and Q4 of next year.
Okay, fair enough. Thanks, guys.
Thank you. Thank you.
Your next question comes from the line of Brett Lindsey with Vertical Research Partners.
Hi. Good morning, guys.
Morning. Morning.
Hey, just wanted to come back to Pool. You had talked about some of the technology and growth priorities you have there in Pool. As we think about those incremental costs and price moderating, but also some relief on raws and other spending, what's the right incremental margin range we should be thinking about next year as you maybe see a more normal top line?
This business has a fairly sizable drop-through. It's sales minus material and a really efficient manufacturing process, so good drop-throughs. I'm not going to give you an answer because this is a huge value contributor to Pentair, and I want to invest in this. I think we have some really exciting technologies in the pipeline here as well, and we'd like to put some investment back in the sales channel, primarily around the aftermarket side. I think we do a really nice job with our dealer channel covering both new pools and remodeled pools. I think our opportunity is in being farther down the aftermarket cycle with the services channel and making sure we're the company of choice for consumers in that services play.
Then also making sure that we go back to our roots, and I still say we are the technology leader, but we used to be significantly more advanced than we are today. We believe we have those technologies in the pipeline and need to drive them through a new product development phase, and that will be an investment thesis for 2020 as well.
Okay, great. Then shifting to restructuring, you took, I think, $6 million this quarter, $7 million last quarter. Are you budgeting more spending in Q4? Then just thinking about the payback, did most of that get realized in the quarter, or do you see some of that rolling over into 2020 from a savings standpoint? Thanks.
We don't include in our guidance an expectation around restructuring, but I would anticipate there would be some incremental restructuring again in Q4. The investments in restructuring that we've made this year, really wouldn't see those necessarily reading out now, but those would be part of how we think about 2020. As Mark mentioned, we're attacking some of the factories and some of the efforts within the factories. Those tend to have a little bit longer payoff than just structural changes to the business. They're the right investments. We do have a larger footprint than we need, and it isn't always geographically perfect. We've addressed some of that, especially in the Flow side, as Mark mentioned. While we're seeing the margin improvement, I think there's still an opportunity for more margin improvement down the road.
Okay. Geographically, where were those costs focused, the restructuring?
A little bit everywhere, yeah.
Okay. All right, great. I'll pass along. Thanks, guys.
Thank you.
There are no further questions at this time, I will turn the call back over to our speakers for closing remarks.
Thank you for joining us today. We are encouraged by our third quarter performance, and we continue to see further signs of stabilization in our core business. We saw further productivity improvement in the quarter, and we continue to build on our strong culture. We have been investing and will continue to invest in our key growth strategies as well as digital enterprise capabilities to better serve our customers. We have a strong capital structure, solid free cash flow, and we will continue to invest in our strategy to be the leading residential commercial water treatment company. Thank you for your continued interest. Dorothy, you can conclude the call.
Thank you, ladies and gentlemen. That does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.