Ladies and gentlemen, good day and thank you for standing by. My name is Lee Wei and I'll be your conference operator today. At this time, I would like to welcome everyone to the 2nd Quarter 2018 Pentair 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.
Thank you. I would now like to turn the call over to your host, Mr. Jim Lucas, Senior Vice President, Investor Relations and Treasurer. You may begin your conference.
Thanks, Leeway, and welcome to Pentair's Q2 2018 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 Stout, our President and Chief Executive Officer and Mark Boren, our Chief Financial Officer. On today's call, we will provide details on our Q2 2018 performance as well as our Q3 and full year 2018 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 10 Q, Form 10 ks and today's press 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 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 1 and a follow-up in order to
ensure that we have the right to go. Please turn to slide number 4, titled Executive Summary. Overall, we are pleased with our 2nd quarter performance, which marks the Q1 we have reported since completing the separation of Invent. Despite a slow start to the quarter, we reported core sales growth of 3%, ROS expansion of 90 basis points to 21%, adjusted EPS grew 18% to $0.71 and we generated $364,000,000 of free cash flow. Also in the quarter, we took some of our cash flow and bought back $150,000,000 worth of stock or about 3,300,000 shares.
For the full year, we have maintained our core sales growth expectation of 3% to 4%. We are still expecting ROS expansion of approximately 50 basis points to 18%, and we are raising our adjusted EPS guidance to approximately $2.31 reflecting the benefit of purchased shares as well as slightly better operating performance offset by slightly worse FX impact. With half of the year now behind us, we feel more confident in our ability to deliver earnings that should be above the high end of the guidance we provided at the beginning of the year. I would now like to turn the call over to Mark to discuss the Q2 results and update you on the details of
our full year 2018 outlook. Thank you, John. Please turn to Slide 5 labeled Q2 2018 Pentair Performance. As John mentioned, core sales grew 3% with Aquatic Systems and Flow Technologies delivering growth and Filtration Solutions declining modestly. We will provide more color on the performance of all three segments shortly.
Segment income increased 8% while ROS expanded 90 basis points to 21%. Adjusted EPS grew 18% to $0.71 per share while our adjusted tax rate remained 18% and our share count came in at 178,600,000 shares, benefiting in part from the 100 and $50,000,000 in shares we repurchased during the quarter. Free cash flow was strong in the corner at $364,000,000 which was in line with normal seasonal patterns. Please turn to Slide 6 labeled Q2 2018 Pentair segment performance. This slide lays out the performance of our 3 segments with trends somewhat similar to what we saw in the Q1.
Aquatic Systems delivered robust 10% core sales growth in the quarter and income grew 7%, while ROS contracted 50 basis points. ROS was negatively impacted in the quarter by growth investments and inflation as the business selected not to implement any off cycle price increases. We continue to have a favorable outlook for aquatics and believe the business is well positioned entering the second half of the year. Filtration Solutions saw core sales decline 2% as strength in our North American residential and commercial businesses was offset by declines in our industrial and biogas product lines in the food and beverage business. Segment income for filtration grew 7% business.
Segment income for filtration grew 7% and ROS expanded an impressive 140 basis points to 20%. This is due in part to the business mixing up as we continue to move away from lower margin project business and further remove complexity from the segment. Flow Technologies had 2% core sales growth, segment income growth of 10% and ROS expanded 130 basis points to 18.4%. North America remains strong driven by improvement
in our commercial pump business. We saw continued
strength in our specialty business and similar to filtration solutions, we saw improvement as we exited or walked away from lower margin business. Please turn to Slide 7, labeled balance sheet and cash flow. This is one of our favorite slides of this quarter as free cash flow was a very positive story and the balance sheet is further improved as we reduced our debt levels with the cash received as part of the nVent spin off. In fact, our debt is now at a level not seen since 2010. Considering our free cash flow generation expected for the remainder of the year and our current debt levels, we believe we are well positioned to invest in the business, look at attractive strategically aligned tuck in or bolt on acquisition targets and continue to return cash to shareholders.
We have bought back $300,000,000 in shares year to date and we would remind everyone that we have raised our dividend for 42 consecutive years. Please turn to Slide 8 labeled Q3 2018 Pentair Outlook. We anticipate 3rd quarter core sales to grow 4% to 5% in Aquatic Systems, up 8% to 9%, filtration solutions up 1% to 3% and Flow Technologies growing 2% to 3%. Segment income is anticipated to be flat while ROS is expected to decline roughly 50 basis points. This is due principally to higher inflation, including the impact of tariffs and the timing of price increases we are implementing in the Q3, but we do not expect to fully read out until the Q4.
Below the line, we expect the adjusted tax rate to be around 18%, net interest and other expense to be approximately 8,500,000 and our share count should be around 177,000,000 Adjusted EPS is expected to be approximately $0.52 per share. Please turn to Slide 9 labeled second half twenty eighteen adjusted EPS outlook. As mentioned on the previous slide, we are seeing increased inflation across the portfolio and as a result, we are implementing price increases in all three segments during the Q3. We have announced the price increases and we are currently implementing them, but we do not expect to see the full benefit of the increases until the Q4. As a result, we expect to see more pressure on 3rd quarter margins, but benefits in the 4th quarter.
In addition, second half earnings are expected to benefit from the shares we bought back in the 2nd quarter. While there are some anticipated shift in earnings from the Q3 to Q4, we are still raising our outlook for the full year. Please turn to Slide 10 labeled 2018 Pentair Outlook. This slide is when we first introduced our at our Investor Day in February and we wanted to provide an update at the halfway point of the year. The overall sales number is in line with our initial forecast for the year, while segment income has moved up, but the walk to get to each of these numbers has changed.
We continue to look for core sales growth of 3% to 4% for the year with price being a little more favorable. FX has gone from appearing to be a nice tailwind to being modestly positive for the year. The right hand section of the slide has seen a significant increase in our outlook for inflation and we are now looking at $20,000,000 of incremental growth investments, which is down from our initial target of $25,000,000 We are not dialing back the investments, but the timing of some of the investments for this year were slower in the first half and we wanted to update our full year forecast to reflect this revised timing. Please turn to Slide 11 labeled full year 2018 Pentair Outlook. As previously mentioned, our full year core sales growth outlook remains to 3% to 4%.
We expect Aquatic Systems core sales to grow 8% to 9%, filtration solutions to be flat to up 1% and Flow Technologies to increase 2% to 3%. Segment income is expected to be up around 8%, while ROS is expected to end the year around 18%, which would represent an increase of roughly 50 basis points. Below the line, we expect the full year adjusted tax rate to be around 18%, adjusted net interest and other expense to be roughly 33,000,000 dollars and shares to be around $178,500,000 For the full year, we now expect adjusted EPS to be around $2.31 per share and we continue to target free cash flow to approximate 100 percent of adjusted net income. I would like to turn the call back to John.
Thank you, Mark. Please turn to Slide number 12, titled Pentair's Strategy Summary. This page is the same slide we showed you at our Investor Day and in the Q1 earnings discussion. The good news is nothing has changed and all I'd like to do is remind you that we are focused on our desire to be a pure play water company, drive focused organic growth strategies and utilize our precious capital wisely to create incremental shareowner value. Regarding capital allocation, we remain committed to maintaining our investment grade rating, reinvesting in our most attractive core businesses and paying a competitive dividend yield.
We'll also look at a balanced approach between M and A and intelligent buybacks with our M and A decisions being informed by overall valuations and the quality of assets available as well as our ability to integrate them successfully. Please turn to Slide 13, labeled focus strategies. As we prioritize our growth opportunities, we believe this allows us the best opportunity to drive differentiated growth in what we believe is a very attractive water quality space. I'd like to give you a quick update on our progress regarding 2 of our most important focused strategies. The first strategy is advancing pool growth.
During the Q2, we launched the segmentation study to better understand the behaviors of pool consumers. We believe we made great progress on winning more dealers to allow for greater aftermarket penetration and we completed an in-depth study of how to accelerate our efforts in the expanding automation space and better penetrate the home the automated home platforms. Also during the quarter, we launched our next generation of automation called IntelliConnect. Our second key growth initiative is accelerating residential and commercial water treatment. In the Q2, we kicked off a consumer segmentation study here as well to better understand the residential water needs of our end consumers and made great progress driving dealer loyalty back to Pentair through our TrueBlue dealer initiative.
We also concluded our strategic roadmap of innovative product offerings and how to expand our service offerings in both residential and commercial water treatment. More to come in these two areas, both on the organic priorities and potential acquisitions as we continue to dial in our clear priorities to differentiate ourselves to customers. I would now like to turn the call over to Li Wei for Q and A, after which I'll have a few closing remarks. Li Wei, please open the line for questions. Thank you.
Thank you so much. So we have our first question comes from the line of Scott Graham from BMO. Your line is now open.
Hey, Scott. How are you doing?
Hey, John. Good morning. Hey, Jim. So I just really I apologize for jumping on a couple of minutes late, so I missed the early. I just wanted to maybe ask you a broader question.
I know you've talked about and I heard you at the end here 2 to 3 years of movement toward more of a sales model involving
reaching deeper and this
kind of thing. I was just wondering if you can kind of give us some gates on that, John, sort of like when do you expect to be where type of thing?
By the end of this year,
with your channel partners, what you expect to have accomplished by the end of next year, that kind of thing? Because obviously, there's a big opportunity here to connect more closely with customers than you have before. I know that that's what you want to do. And I'm just kind of hoping you can kind of give us how this lays out. Maybe if you have any type of benchmarks, any type of metrics that you use internally to measure yourselves on this end of this year, end of next year kind of thing?
All right. Thanks, Scott. Yes, I mean, I just want to remind everybody we're 85 days in. And I think the best way to express is we were where we thought we'd be at this stage. I think we're really excited about our strategy.
But more importantly, our commercial excellence process that we've rolled out and really utilizing the commercial excellence process to drive our prioritized growth. And so as an example, making sure that we understand that we serve a traditional dealer channel, distribution and dealers, but we also have to influence the consumer. And so this consumer segmentation work that we're doing is to inform us of what are the buying behaviors of the consumers that we service and how do they want to be served and then helping our dealers run their businesses better so that they can take advantage of what those consumers want. I think in the pool business where we do roughly $900,000,000 of revenue in pool and we have about $800,000,000 that's in the U. S.
We have a lot of scale and we have a good offering and we have a really good business model. We have to go through our next sets of businesses, which for us would be our residential commercial water filtration, which is just under $600,000,000 And then also our residential pump business, which is just under 400,000,000 dollars And we have to have that same model, Scott. So, I have high expectations for the team clearly, but to answer your metric question, it's going to be accelerated organic growth. And that's the one measurement we're trying to drive here and then making sure that's profitable and we're getting the same drop throughs. So we've got other metrics, how are we doing on dealer conversions, how are we doing on turning leads into sales.
The earlier indication suggests we're becoming more of a growth culture. But again, I just want to be balanced here. It's 85 days in. So it's hard to call victory on it. But I love the attitude, I love the way the team leaned in and I really am appreciative of how they're doing it.
The other thing I would tell you Scott is, as we move to a growth culture, I was proud that the team worked the price angles the way they are. I mean, we saw some of our competition going off cycle with price increases. We considered that. But we also thought that it would be better if we were to wait, reflect and go on our normal cycles so that our dealers and our customers can prepare for those price increases, quote their jobs and not have to suffer the consequence of us going off cycle. So it is hurting us here a little bit in Q3, but I'd say in the long haul, we think that that's going to help us out in Q4 and into next year and our customers are very appreciative of the way we've responded with our price increases.
Right. And as just my quick follow-up to that, one of the things that we you and I talked about recently was that there's going to be a cost to this. And I certainly, it's a welcome cost to get more sustainable organic on a go forward basis, particularly given your markets are pretty positive. I guess my simple question is, and I heard you say this, you want to keep the same drop
through.
That's obviously a key point. So are you out there internally kind of telling the business units, hey, this is kind of if you want to spend this, you have to fund it with that? Or is that more of a corporate kind of funding?
Yes. I think the funding that we're working on is the focus priorities and the 2 that I took you through. And most of that is more what I call enterprise funding, meaning we all know what we're spending the money on and we have ability to measure it. We're willing to some slightly lower margin revenue. I don't think we want to just be margin focused, but at the same time, we want to make sure that as we grow our revenue, we're not adding complexity and we're making sure that that growth leads to shareowner value and that's critical to us.
I mean, we are a public company. We're here for the benefit of the shareowners and we have to serve our customers in a way that's good for all. Got it. Thank you, John. Thank you, Scott.
Thank you so much. And your next question comes from the line of Joe Giordano from Cowen. Your line is now open.
Good morning, guys.
Hey, Joe. Good morning. Good morning.
Hey, John, maybe if you could
take us through some of the more obvious like immediately accretive things that you've done to kind of drive margins in business and like particularly flow like margins there look pretty good considering where the growth was. So what are some of the things that you were able to put through very quickly that are seeing like kind of early results?
Yes, I'll hit it quickly and then Mark can chime in as well. But in filtration it's about mix. As you know we've had some really interesting businesses and we still have those interesting businesses and we love the technology of those businesses. But we're a lot more focused on where we actually make money and where we should be spending our time and energy. And I think you're seeing that in the benefit there.
In flow, to flow's credit and I really appreciate all the hard work by the team, we've introduced the optimization efforts, getting out of some product lines and getting out of some geographies that were not only not making money, but constraining resources and challenging the resources of the SBU. So by being focused on these core businesses, we've actually been able to really improve the mix in both of those two businesses. And I think you're seeing that in the margin expansion in the quarter.
And is there anything that you call out kind of between the 3Q and 4Q split? I mean, generally, I think those quarters for you are fairly similar in terms of margin. It looks like maybe a bit more of an acceleration into 4Q. Is that just timing of initiatives that you're putting through? Is there anything more specific you call out there?
Yes. Really, the key driver of the Q4 ramp is that's when price kicks in. So price comes in at the back half of the end of Q3 and then we see it fully implemented in Q4.
So we've publicly announced our price increases here in the last week. Those go effective mid September ish for most of our businesses. That's a normal cycle by the way. And that is what Mark said, we're not giving the benefit in Q3, but we expect to receive that benefit and then some in Q4.
And then just last for me on the Aquatic side. I mean, there was obviously some fear in the market given some comments made earlier by the Cool Corp. It seems like you're not just the numbers that you put up, but the guide, it seems like you've gotten through that. Is the channel seem pretty clear? And I know Cool Corp comments for the second half seem pretty robust.
So I'm curious as to like what your view on the channel is there? And any maybe update on some of the newer technologies in that business on the automation side and how that's progressing there?
Yes. So, yes, we just had a slow start in April. I mean weather was not as we hoped it would be. And I think the team did a really good job responding and making sure we got all the shipments and all the demand service in the back half of the quarter. The outlook for pool is very, very strong and I think we're reflecting that in our current guidance and demand continues to be almost full up in that business and things are progressing nicely.
As far as the new products, yes, we got a couple of really good products that we're launching. We launched a new hybrid heater and we have another version of a heater got a high efficiency rating. So those are 2 products that we've been working on for some period of time. And we're really excited by IntelliConnect, which is a lower price point. And the purpose of that is to really make sure that automation gets more penetrated across pools.
The penetration rate for automation across all the 5,000,000 pools is less than 10% right now. And we really think by raising that penetration rate gives us the ability to really upgrade our products and capabilities. What's really cool about IntelliConnect is it connects to all of the other Pentair products in filtration and pump and flow, which gives you the ability to control those devices. But also and I think this is the real breakthrough, it connects to all of the products in the industry if Pentair makes it or doesn't make it within pool. And we do think that that is what's necessary to really increase that penetration rate.
And then it also gives us the ability to connect with the consumer and begin to think about their experiences with Pentair versus maybe their experiences with some of our competitors in the industry today. So we're very excited by that.
Thanks guys.
Thank you.
Thank you so much. And your next question comes from the line of Mr. Steve Tusa from JPMorgan. Your line is now open.
Hey, guys. Good morning.
Good morning. Good
morning. On Filtration Solutions, what was the weakness in industrial? What can you give some color on that, the projects you said were down?
Yes. Food and beverage, it's in the it's in a sustainable gas area where there's a merger that's taken place that's not yet completed and those investments have substantially stalled. It's also in the food and beverage space regarding beer and the de investment in some of the global breweries that are out there. That's the weakness.
Okay. And then just more specifically, I'm not sure I might have missed this, but what is now kind of the guidance on price cost for the year?
Meaning?
Price cost like material inflation versus pricing?
Yes. So it's in the slide, Steve, I'll point it out for you. So full year, we're getting $0.19 of price and inflation is $0.35 is on Slide 9.
Okay.
And about twothree related to material and about onethree of that being related to I'm sorry, what do you
mean? 2 thirds of it is material and a third of it is labor.
Okay. And as far as the timing of these price increases, I mean, have you already kind of gone out with some of these in early in Q3 here or is it more kind of back end loaded?
I just I shared that too, Steve. We went out with everything so far, but they're not effective till mid September. And that's why we're getting slightly in Q3, and then we expect them to have more of a benefit in Q4 related to those price increases. Okay. Great.
Real quick to you, I shared this. I think it was important that we listen to the channel, we listen to our customers and our customers were asking for non off cycle because they're out there with quotes, especially in the pool industry you're quoting 6 to 9 months ahead of time. We just didn't feel it was right for them to absorb that price without having a heads up that it was coming. So we feel that this is giving 60 days notice is what's appreciated by the channel and I'm proud of the team for bringing that forward and for us exercising these price increases in a way that everybody can get behind.
I mean isn't is your competition not putting price through? Like I mean in HVAC, they didn't really seem to have that kind of problem of conditioning the channel. They went with kind of a mid season unusual mid season price increase. Is there something going on in the industry that kind of drove that kind of behavior? I mean, it's just a little unusual to kind of ask your customers and then oblige when they say that they don't want a price increase.
Yes. I mean, they didn't say it didn't. The issue is, I mean, it's any job that was quoted, and I do know the industry you're referring to, that's more of a break and fix. And other than the new construction jobs that they're working. But if you're installing a pool for instance and you quoted the customer, those price increases costing off cycle are coming completely out of your pocket.
You're not passing it along. If you have the ability to know that price increase is coming and even though it's a significant price increase as we're going forward, you at least have the ability to know how to approach your next set of jobs and you're not losing on the jobs you originally have. So I don't know about the HVAC industry, we're not in it. But for our industries, we think we did it the appropriate way.
Okay. So just a different industry dynamic. All right. No problem. Thanks.
Thank you so much. And your next question comes from the line of Mr. Deane Dray from RBC. Your line is now open.
Thank you. Good morning, everyone. Good morning.
Good morning.
Hey, I'd like to start with Mark and get some perspective on the free cash flow this quarter, which was significantly above expectations. I think part of it, the explanation is both we should be looking at this as a first half as opposed to a second quarter. And aren't we also now seeing the Pentair as a water pure play and the pool sort of the build in of inventory in the Q1 and then that gets comes through in the Q2. Just want to make sure that's we're just seeing the seasonality to this. And is it a first half comparison is more appropriate?
Thanks.
Sure. That's right. You kind of answered the question there. A couple of things. 1, what we're seeing now is Pentair on its own with nVent in discontinued operations.
And that includes the cash associated with the separation and discontinued operations. So what you see in our numbers is the continuing operations, which is really reflective of the ongoing business. And as you said, the pool business really has that big seasonal cash influx in the Q2 at the end of the Q2. So on a year to date basis, we're at about $160,000,000 and then we see to get to the 100 percent of net income, which is about $410,000,000 that will be a little bit more ratable in the back half. Think of it as 125 ish per quarter to round out the year.
But yes, we
felt very good about the
cash that came in, in the quarter and where we are on a year to date basis.
Got it. And then just shifting back to price increase and price cost, just a couple of clarifications. The first being, wouldn't it make first of all, I get why you're not you didn't put the go off cycle with pricing and that makes sense to us. But the idea here is wouldn't you maybe get some pull forward as you get some dealers doing some pre buy ahead of the price increase and wouldn't that benefit the tail end or benefit Q3 more? So that question and then what's the impact of tariffs and how you calibrated that?
Sure. So maybe first just on the timing of the price increase. So as John referenced, we announced it last week effective middle of September. And to clarify, the normal cycle of price increases is mid September for the pool business. The other businesses are typically at the beginning of the year.
So in fact, the timing of the increase in the flow and filtration side was accelerated for the very reasons that we talked about. And so that as we said, that will start to pick up at the end of September and then be fully in our Q4 numbers.
Tariffs?
Oh, and tariffs are included in our number. And frankly, the reason why we're not breaking those out separately is we really think of tariffs as just a form of inflation. And when you look at the direct impact, that's not really the most significant piece. What we're really looking at is the indirect and the indirect, indirect. So trying to make assumptions around what do we think is going to be passed through to us and really what are other suppliers that may not be impacted by China, how are they going to use that as an opportunity potentially to raise price to us.
So we factored all of that into our inflation assumptions for the back half of the year and for next year as we think about the price increase that we put in place here. Now, and we're going to stay agile and continue to look at things as they develop. And as I said, because this was off cycle and flow and filtration, if we need to reevaluate further, we certainly have the ability to do that.
Got it. And then last question is, we had the opportunity a couple of weeks ago to meet with Pentair at Singapore Water Week and then at in Shanghai to see your big commercial beverage customer. And just in reflecting what your opportunities are in China and Asia Pacific, John, under focused strategies, it looks like maybe it didn't fit on the page, but there was a third priority earlier in your outlook that talked about the China opportunity in Asia Pacific broadly. So if you could just bring us up to date on that, I'd appreciate it.
Yes, it's still a very important priority. It's more longer term. As you know, Dean, it's $160,000,000 in China Southeast Asia today. We think it can grow at a very significant rate. And as you probably saw and I really appreciated you spending the time out there, we got to control our own destiny, especially around the Internet and the fact that we have to think of MSRP or list price and then work back off of that and really understand Tmall and jd.com and make sure that we've got our capabilities and we're controlling our own destinies around that.
So in the near term, I would expect a little bit of disruption as we start to manage a lot of that product descriptions and how we want to demonstrate our products in the marketplace and control the consumer and the customer experience. But in the long run, we're very excited about our growth opportunities there and really are excited about the market and our ability to serve it. We do have the right products. I think we're well positioned, especially around foodservice. And I'm really proud of the way the team is leaning in and driving those results.
Thanks for bringing that up.
Thank you. Appreciate it. Thank you.
Thank you so much, Mr. Trey. Your next question comes from the line of Mr. Steven Vanacker from UBS. Your line is now open.
Thanks and good morning. And John congrats on the Q1 as a standalone. That's great.
Thank you, Steve. A lot of work went into it, as you know.
I do. I do. I just want to first hit on the capital deployment comment that you made in light of debt levels also coming down fairly quickly here. As you look at those priorities at this point and we look at the share repo, etcetera, is that should there be an expectation in the investment community that given the pipeline and given where you are in sort of building a standalone right now that the repurchase could accelerate even further?
No, Steve, I think, first of all, we did buy back some stock and I think we want to be agile with our capital allocation strategy. And if we see an opportunity or we feel that we're not what the value we think we can drive is not properly reflected in the market. I think we're going to use our capital in that way. At the same time, I do think we have the ability to really build some great businesses here. And we want to continue to build out those funnels and those pipelines of opportunities.
And as those opportunities become more and more realistic, we want to be able to act upon them and then integrate them in a way that the shareowner benefits significantly from. So we're active, we're looking, we're encouraged by the direction of the funnel right now and the potential discussions that didn't seem likely 6 months ago and now we're starting to see more discussions happen. As I think, some of these owners of these properties looking forward and it might not feel as robust to them and on a look forward basis it did just 3 months ago before there was maybe global supply chain challenges, to use a fancy word there. But I think the opportunity in front of us, Steve, is great. And I want to be flexible with our capital and use it in the shareowners' best interest.
Okay. Well, I was going to ask about Aquatic. But given that answer, if you look at filtration and flow control versus Aquatics on the M and A pipeline that's out there, and given the levels of consolidation globally and all of that. I mean, should we expect activity on the filtration side more, the flow or how are you thinking about that?
I think we should look at it as water filtration is our 2nd biggest business next to pool and it's a business that's definitely worth investing in. I think some of the themes about getting closer to consumer, meaning how do we connect through automation and how do we maybe connect through the services realm are a couple of themes that we would think are likely to occur as we build out the M and A pipeline, Steve.
Okay. And just one other question on clarification maybe for Mark is on that tariff answer that you gave. Does that mean in the pricing increases that you've already taken that you were contemplating sort of the 301 tariffs but nothing further at this point? Because it was a little unclear to me sort of which part of the tariffs you've already kind of baked in that are that the current price announcement that you've talked about cover versus some of the ones that are maybe I don't want to use your word that are still uncertain that are out there?
Yes. So the our price and our view of inflation overall is reflective of all of the tariff information that's currently out there, whether it's actually enacted or not. And frankly, the second or the 3rd round or the most recent round that was announced a few weeks ago has very little impact to us. But we did take a look at that and feel that we have that covered, but again, very small dollars.
Steve, at some point, we'll be having tariffs on all of everything that we get out of China, right? There's very little left to tariff more.
Okay. All right. Very helpful, guys. Good luck. Thanks.
Thank you so much. And our next question comes from the line of Brian Lee from Goldman Sachs. Your line is now open.
Hey, guys. Good morning. Thanks for taking the question. Just had one, most of mine have actually been covered. But on the guidance specifically, Mark, here, you're moving around the sales growth outlook for aquatics and filtration quite a bit here and then you're also coming off a quarter where ROS beat by a pretty healthy margin.
So wondering why there's no change here to the full year ROS use across the board and by segment. And I guess curious is that some conservatism for the back half given some moving pieces around price, cost and but particularly for aquatics given the better growth expectation here, I was wondering how you're thinking about the ROS targets here through the back half of the year? Thanks.
Yes, sure. As I said in my remarks, the numbers themselves are pretty similar, but the way we get to the numbers are quite a bit different. So, it is some of the things that you mentioned. As we talked about Q3 with inflation kicking in and the impact of tariffs coming in, but price not yet being there, that's really the biggest driver of why as you look at margins across the 3 businesses and overall why they tend to not be expanding as much as you might otherwise think. And then we see that ramp and improve a little bit in Q4.
And we're continuing to invest. So I talked about the fact that in the first half, timing and the pace of our growth investment was a little bit lower than what we had originally planned. But we're still very committed to investing for growth. And in the back half of the year, we were maintaining the growth investments in those key parts of the business that we think we have the biggest opportunities.
All right.
Thanks a lot. That's all I had.
Thank you.
Thank you so much, Mr. Lee. And your next question comes from the line of Nathan Jones from Stifel. Your line is now open.
Good morning, everyone. Good morning. Good morning.
John, you talked a little bit about exiting some low margin revenue, I think particularly in filtration at the moment, but you've also talked about opportunities to do that in flow. Can you guys comment just a little bit on what potentially the drag to your core sales growth numbers for fiscal 2018 are from voluntary exit of some of this revenue, so we can get maybe a little bit of a better idea of what core sales growth really is?
Yes, that's all just to be clear, all of that is being handled in the divestiture.
Right. So it's about About
a point.
About a point, about
just shy of $40,000,000 for the year.
So those the filtration targets of 0 to 1 in flow, 2 to 3 are actually independent of those exited
product lines?
That is correct.
Okay. Productivity goal for the year, I think is about 28,000,000 dollars I know you guys had been disappointed in 2017 with productivity, though I think a lot of that resided in nVent.
Is that
a number that you can see accelerating as we go through 2019? Is it a number you're happy with, you think that can be improved? Or just any color you can give us on future productivity expectations?
Sure. One thing I'd remind you is that the productivity that's reflected, it's on Page 10 of the presentation, that does include the $20,000,000 of growth investments. So it's really something closer to $50,000,000 But that said, we certainly think that there remains opportunities to get after further productivity. And as we talked about before that $20,000,000 will then be embedded in the underlying numbers of the business. So it will still be there for continued investment in the future, but it won't be a year over year headwind.
Are there specific initiatives that you're looking at the moment to improve productivity?
Yes. I mean, I think we're just to remind you, I mean, productivity is also thinking about OCOGS, right, of manufacturing efficiency and we're we've got a higher freight costs going through, which we're working on those elements as well. And I think that we feel that we have a path to accelerate organic growth and we're going to get that leverage on top of the existing field. So these, but if you look longer term, I mean automation is a theme, more intelligent factories is a theme. I mean we've got a lot of things we're working on Nathan.
But as far as large cost out initiatives or incremental restructuring, we'd like to say that that's generally behind us.
Okay. That's helpful. Thanks.
Thank you so much. And your next question comes from the line of Jeff Hammond from KeyBanc Capital. You may now ask your question.
Hey, Jeff. Hey, thanks guys. Good morning.
Just to be clear on the investment. So I think you were saying 25% and now you're saying 20%. So it's pretty de minimis what the deferral is?
That's correct. Yes.
Okay. Okay. That's helpful. And then just on filtration, I know you cited the industrial project weakness, but it just seems like in a pretty good global demand environment, growth still seems to be problematic, anemic. So do you need to see to kind of start to see better growth within that business?
Yes. So just to be clear, we have an industrial filtration business within Filtration Solutions as well and that's doing really well, obviously with the recovery of oil and gas and a lot of the global manufacturing. It's specifically the piece exposed to the food and beverage, which is beer, Jeff, and also our sustainable gas offerings that also go into that industry via a couple of gas management companies that are in the process of a merger. So that's where we're really seeing that headwind. And yes, what do we need?
We need to make sure that the residential and commercial portfolio, which has done well, continues to become a higher percentage of the revenue. It continues to grow at a rate greater than it's currently growing today. So it's the focus within the portfolio. And I think the focus is health margins. You're not yet seeing it on the core growth in filtration.
We understand that and we got to get that going.
Okay. And anything in food and beverage that would indicate that starts to get better or these gas management companies indicating that they would be picking back up into 2019?
Only in the sense that if you think about where those projects are in the whole scheme of things, you're looking at about $30,000,000 $40,000,000 right now, right? So as a percentage of the overall portfolio, come down substantially, but it's not necessarily I mean, you take the worst case scenario of that and you'll see it's not that much
of a headwind going forward. So the headwinds that we saw in the first half of the year, we don't anticipate continuing in the back half of the year, mainly because of the comps and because as John said, the business is shrunk to a point that it's a lot smaller. So. Okay.
And then just, back on Aquatics, I don't know if I missed this. Did you see any pre buy impact or just maybe talk about sell in versus sell through?
No change in the normal buying habits and process, no increase in any kind of early buyer or timing of orders. So a pretty normal process and the sell through was strong.
Okay, great. Thanks guys.
Thank you, Jeff.
Thank you so much, Mr. Hammond. And your next question comes from the line of Julian Mitchell from Barclays. Your line is now open.
Hey, guys. This is Ronnie Weiss on for Julian. Good morning. Good morning.
I know you don't want
to get into 2019 guidance yet, but back on the growth initiatives, as I think about them being pushed out, should we think about these growth initiatives being a multiyear initiative? And given the volume is a little lighter than initially expected, can we see acceleration into that into next year? 2018 is the peak of what you guys are going to be putting into that?
No, I mean we set out to spend around $25,000,000 and we knew that it would be tough to spend it all wisely given the fact that you hadn't we would ratably didn't get there in Q1. So what we're doing is really reflecting where we think the full year spend will likely be. We're running these ideas and we're a lean company, which is process rich, but we also want to be a growth culture, which is much more innovative. But innovative ideas still have to run through a standard process and you have to test these ideas and we're doing that and to before we launch a brand new product for instance we'd like to have consumer feedback on it. That takes time.
And so we're gathering that consumer information and deciding if consumers actually want what we think they want. And once we have that, we move on to the next phase and move on to the next phase. So yes, do we expect to ramp this a little bit next year? Probably as far as investment. But as Mark said, we've ramped 20 incremental this year.
If you put it on a scale next year, maybe it's 5 ish incremental, maybe it's 10. So you're still going to have a ratable impact that's positive next year as part of the year over year investment there. So I'm not worried about it.
Understood. And then you guys mentioned some mix benefit for filtration. I was just wondering if you could quantify how much of a margin uplift that was for the quarter and kind of how much it should be for the year?
Yes, benefit is
on the income side about 1 point, 1.5.
Great. Thanks guys.
Thank you.
Thank you so much. And your next question comes from the line of Brian Drab from William Blair. Your line is now open.
Hi, thank you. Most of my questions have been answered, but I just wanted to get clarification on the pricing. I know there's been a lot of questions on pricing, but in terms of the 3 business segments, which price increases are going through on cycle versus off cycle? And when is the normal cycle for those prices increases to go through? I know, Mark, you mentioned some were accelerated.
Can you just clarify that?
Sure. And so the Aquatic Systems business is always follows the pool season, which is September to September. So those price increases are normally in the September timeframe. It's the other two businesses that for the most part within the businesses, the normal timeframe would be the beginning of the year. So early January would be
the normal timeframe. So those 2 with the announcement here in July with an effective target of mid September have been accelerated. And just to clarify my point there, we're hopeful we're going forward with 1, that reflects what we need in 2019 as well and we're doing that in mid September as Mark said. And so that's hopeful that this stays as the pricing necessary and that those businesses can get on with that expectation in their forecast and our customers can react to that in the appropriate way.
Okay, thanks. And then just a last quick one is on Slide 7, 2018 forecast D and A of 183,000,000 dollars I think I just need to think about this more, but I mean $21,000,000 in D and A in the second quarter, how do we get to $183,000,000 for the year? I assume that has to do everything with the split, but thanks.
I think that's wrong number. We'll update it. It's $90,000,000 ish for the full year. So yes.
Okay, perfect. Thank you.
Thank you so much. And your last question comes from the line of Wardlow Liptak from Seaport Global. Your line is now open.
Hi, thanks. Good morning, guys. I wanted to ask, we've talked a lot about aquatics, but I wanted to ask about market share gains. It sounds like with the more focused strategy that you may be gaining market share, this 9.5% growth is pretty good. I wonder if you could help us understand what was market growth, what was market share gains?
I mean, we're estimating that we call it incremental penetration or differentiated growth is probably somewhere around a point and a half to 2 points. And the rest would reflect the general volume and the price that we're getting.
Okay, good. Right. And so there were some price in there. Can you split that out volume versus price?
I think it was we don't do that. No, just price is just about 100 point.
Okay, great. And then in the restructuring charges, it looks like you're done with the charges now year to date. And I wonder if you can help us to understand what the restructuring charges were for? Is that part of the productivity benefits that you're already receiving or is that going to show up in the back half? You talked a little bit about productivity already.
I wonder if this is part of that productivity that you're talking about.
Sure. The restructuring is really the it's the end of the program that we started last year and into this year associated with the separation of the businesses and optimizing the portfolio as we were standing up the standalone water business. And a lot
of that relates to the some of
the business exits and the product line exits that we've talked about. So those are underway and certainly we would expect will drive further productivity as we move into 2019.
Okay, great. Thank you.
Thank you so much, ladies and gentlemen. Presenters, there are no further questions at this time. You may continue.
Thank you. So thank you for joining us today and I hope you agree that we delivered a solid second quarter and we're demonstrating our ability to use agility and prioritization to meet our commitments. Building up a track record of meeting and exceeding commitments, we hope to earn the trust and right to pursue a compounding strategy that allows us to not only achieve core growth and earnings, but also utilize our strong cash flow and capital structure to pursue strategic targeted and accretive acquisitions. Thank you for your continued interest. And Leeway, you can conclude the call.
Thank you so much, presenters, and thank you, ladies and gentlemen. This concludes today's conference call. We appreciate your participation. You may now disconnect.