Good morning. My name is Don, and I will be your conference operator. At this time, I would like to welcome everyone to the Pentair Q4 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions) Thank you. Mr. Jim Lucas, you may begin your conference, sir.

All right. Thanks, Don. And welcome to Pentair's fourth quarter 2012 earnings conference call. We're glad you could join us today. I'm Jim Lucas, Vice President of Investor Relations. With me today is Randy Hogan, our Chairman and Chief Executive Officer; and John Stauch, our Chief Financial Officer. On today's call, we will provide details on our fourth quarter and full year 2012 performance, as well as our first quarter and full year 2013 outlook as outlined in this morning’s release. Before we begin, let me remind you that any statements made about the company's anticipated financial results are forward-looking statements subject to future risks and uncertainties, such as the risks outlined in Pentair's 10-K for the year ended December 31, 2011, and today's release. Forward-looking statements included herein are made as of today, and the company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances. Actual results could differ materially from anticipated results. Today's webcast is accompanied by a presentation, which can be found in the Investors section of Pentair's website. We will reference these slides throughout our prepared remarks. All references today will be on an adjusted basis, unless otherwise indicated, for which the 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 and recognition there are other call this morning we will target to be done in just about an hour. With that, I’d like to request that you limit your questions to one and follow up, and get back in the queue for further questions, so that everyone has an opportunity to ask their questions. I will now turn the call over to Randy.

Thanks, Jim, and good morning, everyone. Let me begin with our fourth quarter performance which is on slide three. This marks the first quarter for Pentair since we successfully closed our merger with Flow Control at the end of September last year. As you saw in this morning’s press release, there are quite a number of moving pieces with the size of its merger. Our objective is to give you needed insights into our company, so we will provide detail on how the merger cost impact the fourth quarter results, and John will cover some of the larger one-time events in his prepared remarks. I will discuss our operating results on an adjusted basis to better address the core operating performance of our businesses. Before I begin to discuss the fourth quarter results in detail, I want to spend the moment explaining why the numbers are presented in the manner they are. For the full company results, the fourth quarter of 2012 includes Flow Control’s results combined with Pentair, as compared to the fourth quarter of 2011 which includes of course only Pentair results. As we discuss the segment results, however, we will present the results on a pro forma adjusted basis as if the results were on apples-to-apples comparative basis. You will find reconciliations of this for the segments in the appendix at the end of the presentation. With that here are the numbers. Fourth quarter revenue increased 103% on a reported basis, but excluding the impact of Flow Control and FX core revenue was flat in the quarter. Adjusted operating income grew 59%, while adjusted operating margins contracted 240 basis points to 8.5%. Majority of the margin compression relates to transition costs incurred during the quarter, which we discussed in detail on our Investor Day in November. As…

Thank you, Randy. Please turn to slide number 12, labeled reported to adjusted 2012 items. As result of the merger and integration activities, Q4 and full-year 2012 results include a little bit of noise. Therefore, we want to provide some additional clarity around those items so you can better understand our adjusted operating performance. As a reminder, as Randy mentioned earlier, the key financial numbers by quarter and by reporting segments are included in the press release for 2011 and 2012, excluding the impact of these items. Our adjusted EPS for 2012, which reflects three quarters of Legacy Pentair alone plus one quarter including Legacy Pentair and the Flow Control acquisition were $2.39 for the year. Acquisition related costs, which include deal costs, customer backlog and inventory step-up, plus a few other items for a loss of a $1.41 per share. This was in line with our previous estimates. I would like to remind you that we expect the inventory step-up and customer backlog to continue to the first two quarters of 2013. Restructuring totaled $0.35 of EPS with the majority coming in Q4. To date, we have identified approximately 85% of our expected $75 million of repositioning actions for 2013. And we expect to take a few more actions in Q1 that we’re closing the gap under 2013 expected benefit. These actions will primarily be around functional standardization and back-office consolidations. The next item to discuss relates to trade name impairments associated with our brand migration strategy and greatly reducing many of the complications that occur by trying to maintain numerous brands. Many with limited perceived value yet require a lot of cost for growth and maintaining. This is a non-cash charge and we are happy to be carrying these smaller brands in our portfolio as we accelerate --…

Thanks, John. Please turn to slide 18 labeled also summary. To close, let me tell you why we are better position entering 2013 just to wrap everything up. While the fourth quarter had a lot of moving pieces resulting from the acquisition. We are also busy accelerating actions in the quarter to deliver cost benefits and grow synergies in 2013, and we’re really on track. PIMS adoption by Flow Control has exceeded our expectations today and we see a lot of opportunities improve in areas such as delivery and cost, but also driving working capital improvements. We continue to see some win shifts and some tailwinds emerge particularly in North American residential market where the peers were no longer bouncing along the bottom after six of that and now rebounding at a moderate pace. Infrastructures grown its backlog and we continue to see strength in energy and food and beverage. Our balance sheet remains strong and our focus in the near-term will be on share repurchase and dividends, some businesses we have such as aquatics and thermal management, which are already well down the standardization path. We are in the right to grow through bolt-on acquisitions. As other business units progressed on the standardization path, they too will have bolt-on acquisitions re-enter their mix. But the principal focus in 2013 for the whole company is delivering on our and executing our plan for integration, standardization and growth, and as always, we’re going to remain discipline in our capital allocation strategies. So operator, we are ready for questions. So -- take the first.

(Operator Instructions) Your first question comes from the line of Scott Graham with Jefferies.

Good morning, Scott.

Hey. Good morning.

Yeah.

Just a one question and one follow-up, you guys made a comment about the power market, kind of being sluggish right now, but expecting an improvement as the year progresses? Could you give us little bit of more color on why you think that? And then I have one quick follow-up?

Yeah. In power -- and power is an important market particularly for Valves & Controls. And there was a real slowdown in building a power plant and they are big in Asia and they are big all over the world. And we are seeing an increase in activity, bidding activity in that space which gives us some encouragement.

Okay. Great. And you indicated that the some of the branding and other transition costs that you were accelerate in the fourth quarter? Did that come in as expected as you indicated on your from your Analyst meeting and your last quarter guidance?

Yeah, Scott, it did.

Very good. Thanks.

Thank you.

Your next question comes from line of Jeff Hammond with KeyBanc Capital.

Hey, Jeff.

Hi. Can you hear me?

Yeah. We can.

So, I just want to understand this pension change a little bit better. What’s kind of the annual cost savings and what’s kind of reflected in your ‘13 guidance around that change?

Yeah. Jeff, let me just step back. I mean, as you know when you do a large merger like we did, these losses are put to purchase accounting on the target company and we were doing accounting acquire. So we were going to take all the market-to-market and put it in purchase accounting for Tyco. It seemed like a logical thing to do and we entered Analyst Meeting, we were going to do this and in conjunction with putting those losses behind us, we have fully funded the plan and moved to a fixed strategy. So, as we look at ‘13 guidance on a go-forward basis, it always reflected the benefit of this. Now, I can't predict what it would be or wouldn’t be, Jeff, because I don't know how the market gains were worked out and what that positive or negative was. So, Legacy Pentair on an annual basis, we were looking somewhere maybe around $7 million, $8 million operating income a year of headwinds associated with these.

Okay. So the guidance is unchanged because you were contemplating that. But what’s kind of the year-to-year delta of the change?

It’s just hard to say. I mean, I would have said the $7 million to $8 million is reflective. But maybe what we might have avoided in the short run. But as the benefits pick up, we also avoid the benefits in the long run. So really don't know how to predict that.

Okay.

So the change was becoming affective, we are fully bonded, removed to fix whichever relatively small adjustment every year that we take into mark-to-market because we no longer are subject to the uncertainty related to the investments within the plan.

But that was intact with anyone, yeah.

Okay. That's helpful. And then just quickly on the growth rates, you are looking for 1% growth in the first quarter and 4% in the full year. And I understand the cadence on the cost savings. But I mean on the top line, what are you seeing that give you confidence in kind of this reacceleration as we move through the year versus the weaker 1Q?

Yeah. Well, fourth quarter was -- we saw 4,000 projects, we saw some strength in our residential but not all of it. So we are more cautious. That’s the one reason where we see 1% in the first quarter, as we don’t think it’s just a throwing a switch from the fourth quarter and first quarter as the projects blew up. But we haven’t seen cancelations. And there is really good fundamental growth in the economy and particular in residential. And so as I said, we think energy, particularly oil and gas looks good. We think North America Residential looks good. In the food and beverage space, we saw a lot of projects that just got delayed and whether it’s fiscal cliff or whatever reason, companies -- they didn’t cancel these projects, they just delayed them. So as the world gets little more certain, we think that they may be coming back and we’ll welcome when they do.

Okay. Thanks, guys.

Thanks, Jeff.

Your next question comes from the line of Christopher Glynn with Oppenheimer.

Thanks. Good morning.

Hey, Chris. Good morning.

Just one more on the pension being fully funded, that sounds great. I think you said 90% kind of fixed income in the composition. I’m wondering if that's -- the returns on that are enough to maintain fully funded status.

It’s certainly a great question. Once we get to 100%, we hope it will be and really what we are dealing with is that your discount rate movement should reflect the bond purchases, Chris. And then I mean, we’ve done our best to try to hedge it but you can never be 100%.

And to match it’s certainly not possible. With interest rates where they are today, it was just a great time to borrow the money and to fund it. And our employees, we had a lot of questions becoming a Swiss company and technically Tyco buying Pentair, lot of our employees were retirees asking questions about what about my pension. So it’s a nice improvement in the employee relations too.

And, Chris, as you know it doesn’t affect you on a rating agency basis. And I think what we didn’t want to do is have to manage this as a potential cut or benefit into the earnings stream going forward. And I think now it allows us to focus on the operational performance of the business and deliver on the $5 per share that would drive into in 2015, and the way that I think you would expect us to.

Okay. And the transitional costs, call that a couple hundred basis points gets $35 million or so. So pertaining to that, just wondering if we could allocate those dollars roughly by segment, and is the transitional costs all accounted for now in the fourth quarter.

Yeah. We try to get as many of them into Q4 as possible. I mean, I don't know if we can ever be certain that we included it all, but I can tell you we will mentioned it to you in Q1, meaning the businesses what they couldn’t get into Q4 have absorbed them and their plans for next year. They are broken out in the back, Chris, but I will say that I don't think in those numbers, we fully captured all the thermal and Valves & Controls because I don't think they were aware of the process in which kind of we look at, what’s in their results versus what’s in corporate. But they are focused on branding, primarily. They were focused on things related to our confidence level on customer collections, and also our ability to think of potential warranty issues and to address those and that makes up a majority of it. And as I mentioned before, you can see the difference in the back.

Okay. Great. And you said you won't be calling them out going forward, John.

It would not be my inspection. It would not be Randy and ours intention to share with you transition costs in Q1.

We want to get -- we want to get back to -- I mean our whole objective here was to get as quickly to a normal base of well operating companies. So we’ll just get back to being an operating company and as quickly as possible.

So, Chris, just to remind you, this was signed exchange on Tyco. This was accelerating the migration away from the Tyco packaging the brands. This was addressing within the Legacy Pentair water business. The small brands that weren’t funding anymore, and that’s what we got after. And we gave our businesses a six-month head start to try to get all that behind them and it’s our intention and view, that that's done.

Okay. And then lastly, I think you're intending about $20 million more restructuring in the first quarter. Restructuring is very small in the fourth for Valves & Controls, so is that that where kind of the first quarter charge is likely to locate?

Without calling a particular segment out, I think there is more potential cost structure which really was a result of where the cost were between corporate and the segments. And we believe on the functional standardization journey, there’s opportunities there. The other areas that we are finishing and completing our fast growth market alignment and deciding what sales office and what region will best be serving the overall Pentair, and we see an opportunity around real estate consolidations and the likes in those regions that we also expect to get completed during Q1.

Great. Thanks for the color.

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

Thanks and good morning.

Hey, Steve.

Hey. Just first question. So, I guess you hate your hundred day plan on January 9th, right. That was the intention and I’m reading the words and your dialogue about the benefits, the lean and sourcing benefits delayed to second half. Just give me a sense for what was delayed in tech as expected and what was not expected?

Let me address the narrow part of that question and get back to the broader one. Basically, at anytime you have, we have very low turns in our new businesses. And anytime you have any kind of labor saving, anything that goes through cost of goods sold has to go through inventory. So actions taken don’t show up. If you have four turns, you kind of wait at least the quarter. If you got two turns you get to wait six months before if something -- before a cost benefit flows through to the P&L. That’s number one.

That shouldn’t be a surprise, right. Randy?

No.

That part was not a surprise.

That’s why we are on track to hit our 90.

Yeah. Okay.

Basically, as I look at it halfway through the year, we actually we did better on financing, we did better on -- we are in better shape on tax, we are in great shape on corporate costs. We got a lot of momentum on that 90, I think 75 and the 90s really in hand already and the other 15 we know, we know how to get. So, I wouldn’t want anyone to think that we think we delayed on anything because I don’t believe we are.

And then the broader question, I guess is that addressing sort of as you step back and look at your hundred day plan?

Steve, I mean just to reiterate what Randy said, I mean I always had the sourcing and the lean savings back end loaded in the plan. And then the other thing that’s earlier in the year is we do have a couple of small plant closures that we are working on, which as you know provides a small headwind. And the tax rate is very important to us, especially for ’15. So we are going to spend the investment required in the first half for this year to position ourselves for making sure that we realize that lower Swiss tax rate long-term. Other than that from a timing perspective, everything as Randy said is on track and we control the destiny on the cost out on the repositioning and we feel good about it.

Everything in our control is on track or ahead. The only thing that isn’t good as I would like would be the end markets.

Right. And to that point, your price productivity and mix ended up 40 basis points less in volume and inflation on the out margin impact, right. And I was trying to reconcile that with the growth number of $3 million up, so it’s all FX I take it on the volume side or just maybe help a little bit. As you think about volume and inflation being offset by price productivity and mix, maybe go into the components a little bit, that might have been a little more than you thought.

Yeah. I mean I think some of that productivity is being distorted by a little of the transition costs, Steve. I think going forward, we do think inflation continues to be sub to in the first part of the year, first half of the year and then just gets slightly above 2% in the back half of the year. We are planning on about a point of growth, a point of price I’m sorry for the full year. I think we hope to do better than that. I mean, if we get more MRO activity in the Valves & Controls business and more standard product in thermal, I think we will do better than that. It is the projects that tend to compress the pricing. So, I think we are in line with what we are saying and I think what we were saying, and what Randy is sharing with you is that there is a piece that we can control. And we’re pedal to the metal on that, doing everything we can and then some to make sure that we send the right message internally around cost control, making sure we get the repositioning done and making sure the market alignment is lined up. We are hopeful the markets are better. And there is reason in the business units for them to believe that they are. We would just like to make sure it's guaranteed versus something we are planning for and that does come.

Maybe just sneak one last thing. On the business unit portfolio side, as you look at the new portfolio when you are considering not just where you'll add bolt-ons overtime as the business units earn it as you’d point out. On the flip side, with that maybe calling out the specific units, are you actively pursuing processes or early-stage processes in terms of pruning the portfolio where it makes sense?

Yeah. I think we mentioned at the Investor Day that we actually -- we talked to all the businesses. The level of materiality for our business is $50 million bucks now. If it can't be $50 million or more than I really don’t want to waste any strategic or capital interest on them. So that’s part of our strategic review this year. There is a couple that we have underway now, smaller business $20 million, $30 million that are in process of being sold now. And I expect that once we get our full round of strategy reviews through with the seven business units that we may identify some more.

Okay. Great. I will pass it on. Thanks.

Thank you.

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

May be just first. I know you guys…

Brian, how are you?

I’m good. How are you doing, guys? Just question on, now, that you guys have a quarter under your belt, you guys are able to kind of dive into the businesses and go to market more as a cohesive brand and whatever you attempt, you may do that. Maybe you could talk about the early indications of abilities to cross sell where you’re seeing the opportunities, anything that submerged to date or things that might be more of a challenge than you previously expected.

Well, we've identified and we talked before about food and beverage product line where we sold a combination of the Pentair legacy products in food and beverage along with some keystone valves and there was a real win-win. I mean, we ended up getting twice as much volume on that project. Maybe they would've done one separately but for sure there were one together. And so in that -- in those process industries like food and beverage, there is some real good -- and I would call them right now they are project work. We don't yet have -- and this is the next step to put in a process, so that that happens regularly. So that gets into who gets the sales credit, how is the gig covered, all of that. That’s work that they actually talk least and the growth team will be working along with each of the GBUs. We think energy is another place where we see some good cross-selling. We’ve got some leads in process technologies, basically separation technologies as a result of the Valves & Controls people. Again some early wins and how do we institutionalize those in terms of profits. So that’s -- I think we validated that there is a lot of cross-selling opportunities, some exciting cross-selling opportunities in the Middle East as well around what I would call middle-easternized products from the Far East that would be a capability we have there, we can be launching. And so again it’s taking those ideas and institutionalizing them to drive the growth, that’s our focus.

Got you. And John, if I could just ask real quickly, just on FX. So you guys actually reduced the expected headwind for ‘13 but you still see it as a one-point challenge to revenues. I mean, with the €135, why do you expect to see an FX headwind at all. I would've thought it would be a tailwind at this point?

Yeah. Just to clarify, it rounds to 1, it’s actually 50 basis points and all we do is take the euro as one of the currencies at the end of the period and forecast it forward. And you're right, I mean the euro won't be that much of a tailwind. There were times when we’re slightly higher than that but there is other currencies in the portfolio being $2 billion exposed to fast growth markets. There is other currency fluctuations that make up of the remainder of that 50 basis points that we’re referring to.

600 plus Australian dollars.

It was lot more modest than last year and right now a huge headwind as we had in the year at this particular position?

And if I could ask, just sneak one more quick one and I know you guys talked about pension and talked about the funding and the employee relations but I mean, what interest rates are actually starting to creep up here. I mean, you just split a $192 million funding that back up. I mean why wouldn’t you just want to grow out of that?

Well, I think that that is a strategy. We certainly considered it. I mean there are other points in the scenario especially over the last three years that you could have looked back and said that same thing and it didn’t exactly go in your favor. But I want to remind everybody the really reason we did it is, half the company which was Tyco, we were going to have to adopt this anyway by putting it into purchase accounting. And then we get into a situation of trying to create a path where everybody's on the same plans. Everybody is in the same position, there is no favoritism within how we look at those plans and its just make sense to adopt moving forward. The other thing is in putting branding behind us, putting the restructuring behind us, now pension is behind us and it's not something that this company needs to concern itself with anymore on these North American domestic plans and certainly not something our shareowner has to think from year to year is that going to be a tailwind or benefit. I don’t think any of us can predict where that’s going to go. If the interest rates going to go up like you're right and our returns are going to go up, I mean those are natural hedges to other things that occur, right. So this is all part of a constant look at what’s the appropriate capital allocation strategy for the company. And if you think about it, we had a whole back $200 million of any form of investment to cover this from the way the rating agencies looked at it any way. So that was what I think on that money. So when you’re not earning anything on cash, it seems a lot easier to fund it, put that headwind behind you and move on with what we feel we do best, which is the operation results of the company.

Got you. Thank you very much guys.

Thank you.

Your next question comes from the line of Josh Pokrzywinski with MKM Partners.

Hey, Josh.

Hi. Good morning, guys. Just a couple of clarification questions here. First in the analyst day presentation, you guys talked about share count at 203 million squiggle for the year and now worth 205 million. Is that -- am I missing any kind of offsetting guidance or is that just kind of a bias now that maybe a couple of pennies lower in the range?

I think our range is still intact with that. I mean, obviously those are the types of puts and take that are going to occur. We can't predict what the buybacks are going to be. We’re still on pace to buyback the 400 million in addition to what we bought before. And there is going to be fluctuations on what the purchase impact is and where the share price puts the dilution. But all the assumptions are the same other than the math that creates what the end point is, Josh.

Okay. That’s fair. And then just -- can you walk me through the progression and technical solutions, obviously, exiting the year at a pretty healthy margin rate given where you’re planning on starting. How should we think about the cadence of that and then as we look out into, I’ll say, 2014 but pick any normalized year. Is that -- should that be more linear going forward?

Yeah, I think, I mean, first of all Pentair had a seasonality that I think our shareowners and certainly us get used to. And being 40% exposed in North American residential in legacy Pentair, we saw a pretty big kick up in Q2. And we still have that same amount of money into less percentage of the company, so Q2 will be a season that continues. What we’ve learned about the new business is sort of as follows. I mean, Valves & Controls are the capital dependent business and their strong quarters are in the second half of the operating year as those capital expenses of their customers and as Randy mentioned get agreed upon and then get less.

One thing, I’ll add though in this capital, it comes in tens of thousands of transaction.

Sure. And so it’s a lots of these projects. So they’ll tend to be more backend loaded, Josh. And that plays on the seasonality. Thermal, which is a business that we love, has a very strong Q3 and Q4 in our system and that’s primarily because they are weather dependent and they stock up the distribution channel and there is a seasonality in that business. And finally valves which is the other business we acquired in Australian market. And as we know the seasons in Australia are different than what they are here in the United States. So I don’t think we picked up anything that helps our Q1 seasonality. We certainly picked up businesses that helped Q2 and Q3 and Q4. And I think that needs to be understood and as I mentioned earlier, we’ve got a timing of the repositioning savings in the way we have to recognize the sourcing benefits that we know as Randy mentioned. We’ll have to flow through inventory and those tend to be backend loaded here.

Got you. Understood. And then just one last one, on inflation, I know, it came up on the analyst day but it’s looking like a pretty big year-to-year drag in '13. I’m sorry, if you already addressed this. How much of that is kind of material cost versus employee inflation that you can see coming?

Yeah, I mean, we are annualizing somewhere around three-ish percentage on employee costs and that varies by country and region obviously and areas like China and India are seeing enormous inflation. But overall that’s what the employee base is. I think we have planned material inflation somewhere in the 1.5% to 2% range that is slightly higher than we’d been experiencing and realizing and candidly who knows, right. I mean, I think this is the way we plan for it and then we go out in every negotiation we deal with individually. There is an expectation that there will be modest inflation in the back half of the year higher than what we experienced in the first half.

As the economy

As the economy does better.

Sure. But I would imagine the offset to that though is that price is probably a little bit better as well?

It’s probably.

It seems like the -- at least the cycle so far, however you want to define a cycle, I guess, that the upside surprise is that price has done a lot better job offsetting inflation than maybe it did in the past.

That’s true. That’s correct.

Josh, the other thing I would say is I think Randy and I and hopefully you guys who give us credibility for this. They are very faster learners but there is lot to learn about the new businesses. And we need to understand them, we need to understand their patterns. We need understand the commitment levels, the project execution, the timing in delays and that’s in our particular outlook as well.

Understood. Appreciate. Thanks guys.

Thanks.

Your next question comes from the line of Deane Dray with Citi Research.

Thank you. Good morning.

Good morning, Deane.

Good morning, Deane.

There's been a lot of questions about the pension move. I just maybe I missed this, but is this the same international pension standard that Honeywell moved to four years ago?

It is.

Okay. Great. Because from our perspective, the timing on this seems right for you guys. In fact, you are fully funded, that is a big plus. And this whole move to going to fixed in the assets is the move that everyone else is trying to get done. So kudos to you to having done this now and the timing looks right. And just a couple of operating questions for me. This is the typical time that we would be asking about pool, but I'll say it in Aquatech’s. What is the early buy? Was there any activity there? And you made a comment about inventories being low, but just if you could flesh out those comments, please.

I think the inventory comment -- pool, Aquatech’s is doing quite well, had a quiet good early by, which I think portends well for the season. The comment about inventory is really looking at the pump in the filtration channels. Those are the ones that we’ve been looking for some rebound in residential. Haven’t quiet seen it in pump yet but see it now in filtration and treatment. So there was, what those inventory comments were about -- and I don’t know John how we fill about the channel and pool.

I mean I think we fill good, Deane. I mean, as Randy mentioned, I mean it grew double-digit again in 2012, Aquatech’s did. They had a -- in fact, they regularly buy and I think the overall pool channel feels fairly optimistic about mid-to-high single digit growth again next year. It is affluent buyer and these are warm weather states where it’s almost a must to buy them. So I think that part of the industry we feel really good about. As we’re tracking housing starts and as Randy mentioned on filtration pump, we’re mindful of urban build versus more rural and suburban and the impact that has on well and water softening components. At the same time, we still have a significant opportunity of point to use filtration that comes with all purchase.

The exciting thing for Aquatech’s is, it looks like certainly Florida and Arizona, two of the biggest pool markets in the country and two of the markets that were slammed the most in the housing downturn are beginning recovery which means that will be on top of the innovation -- the innovation thrust that has been driving the growth in that business. So we feel good about that and about where they are in aquaculture as well.

Hey. That’s all good to hear. And then maybe I missed this in earlier comments, but what was the impact from the Sandy storm, specifically on both the sub pumps and the retail side, some of the bigger dewatering pumps? And can you quantify what the impact was?

Yeah. I’ll be specific to the pumps because it’s the only place we can really measure and track it. But we thought we saw $10 million to $12 million optic on the pumps that we sell into the North East on revenue. As you know Deane, those are under highest margin pumps but it was nice to see some lift and so that’s kind of how we framed it.

Great. Thank you.

Your next question comes from the line of Hamzah Mazari with Credit Suisse.

Good morning. Thank you. Just hade one question, on the Valves & Controls business, do you guys have a sense of how much better the margin profile is of what you’re currently booking in that business versus maybe a year ago and maybe if you could also address how much of that business you think is after market. Any color you can give would be helpful? Thanks

Yeah. I mean, I think this well known at the bookings and the large orders in oil and gas across the industry don't bring the margin that rest of the segmentation as Randy mentioned bring. So as those become less of a component in the overall backlog, the overall margin should get better. But there is still future margin pressure from the large oil and gas jobs that that have been booked in the past and were mindful of that in measuring to that. The MRO activity is picking up and it represents when we think about after-market service and book and ship business that represents right around 50% of the overall shipments within a year.

Okay. Great. Thank you very much.

Thank you.

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

Good morning.

Hey Brian.

Good morning.

Just a question on the revision of the 2012 revenue, so looks like originally we’re expecting 7.5, any revise that this 7.3 roughly and the fourth quarter was in line. So you said, you excluded some big projects, may be I missed but can you give a little more detail around which segments those projects we’re in?

Yeah. And again this is a pro forma but I don’t want you have to dig through it. But there is a large project in technical solutions north of $100 million that shipped in ‘11 and ‘12, which we removed. There is no shipments planned for that project at all in ‘13 or any large projects in ‘13 for that matter. We also removed divestitures and technical solutions that will make up the delta that you're seeing. And then in the Valves & Controls side, it was primarily just related to as I mentioned earlier the sanctioned country revenue

And disposition.

And one disposition.

Okay. Okay. On the technical solution side, that wasn't in the legacy business was it? That was in the Thermal Control business?

No it’s in thermal.

It’s in the thermal side.

So I just -- I'm curious as to what -- how you can -- why you had to adjust for that business typically is the business where you’re going to see large projects. It’s just the inherent in the nature of that businesses, isn’t it?

Yeah. I mean but I think as they comment as they’re large. I mean obviously we will share what they are and what we’re doing with. I mean I think the other.

We’re not in a position to talked about that project. We were involved in it and anything going forward, we will be able to talk about it.

And we just didn’t want to mention fourth quarters in a row, I mean.

Yeah. Okay.

We would have to stay without these projects here though it was, so inability of looking at the pro forma numbers. We also took out the operate income associate with those project as well. So that we would be able to concentrate on the revenue required to hit the targets and therefore the conversion on the operating income side.

Okay. And then I just one other thing that I may have missed your discussions but the inventory step-up and customer backlog, your forecast for the fourth quarter at one point was $80 million, came in at 180, if I’m looking at the numbers correctly is it. Can you talk about that change and maybe categorizing different?

Yeah. I think there might be categorizing more differences there. I mean I think the 180 -- there is a higher degree of impact on Valves & Controls. As you know, we have to take all the projects and basically strip all the margin out of all those and that one came in a little bit higher and that makes up most of the component of that change.

Okay. I follow-up more. Thank you.

Thank you.

Your next question comes from the line of Garik Shmois with Longbow Research.

Hi Gary.

Hi. Thanks. Just a couple of real quick housekeeping question for me. Can you provide me an update as to much new U.S. residential now represents for your business?

Roughly 20% of combined revenue.

That will new residential as opposed to…

I’m sorry. That will probably closer to 5%.

5%. Okay. Thank you.

5% or less.

And then just a question on the buybacks. You are on track for $400 million through the end of January. I'm just wondering if you could provide a little bit more color on how you are viewing buybacks through 2013, maybe the cadence of buybacks as you move through the year. Is it going to be more seasonal in line with cash flow or could it be more linear?

The way we are thinking about is more value average, so probably doing it more ratably over the year, it’s planned here and what I think is likely.

Okay. Thank you.

Your next question comes from the line of David Rose with Wedbush Securities.

Good morning. This is actually a follow-up to a prior question on the inventory. If you could, my understanding was the inventory and backlog would be amortized through Q3 in 2014 respectively, backlog through 2014. And given the increase in backlog for Q4, how does that dynamic change then? I understand the call that you are now going to be finished by Q2, the step-up and the backlog.

That’s our goal, yes. I mean, we are trying to aggressively get it all out and get it behind us on the first half of 2013. I mean, we’ll update you if we feel there is a leakage in the Q3 right now but the real issue is to try to put the noise behind us and look on to the numbers that represents the full drop to the EPS.

Was there any inventory obsolescence that we saw in the fourth quarter then?

Yeah. There was a little bit of that.

Ballpark, I mean, was it meaningful?

$3-ish million, probably.

Okay. And then lastly, if you could on the fast growth markets that, you have some pretty bold numbers compared to what historically you’ve been excited about. So maybe you can provide a little bit of more color in terms of did the dynamics within those fast growth markets Latin America, China, India, yeah, what are we…

I think we think we have significant opportunity, we are focusing on six fast growth regions and if you kind of go around and you think of Latin America. I think we are being a little bit more modest is, Randy has given direction to the team and we are actively working to have higher levels of sustainable revenue growth around large more impactful projects and/or product lines.

Yeah. Initiatives.

Initiatives, and I think what we’ll see is, a focus and a prioritization on those particular vertical markets some of it Randy highlighted energy, power, mining, oil and gas, industrial process, where we think we can bring an aggregated sale to the end customer base and begin to position ourselves into a lot more of a sustainable business model, then some of where we have gone with a particular product and there has been not a follow on localization of that product, so I think we are going to see a lot of strategy work done here in ’13 and I think we positioned our fast growth markets, there still be a contributor, but we want to be profitably contributing and I think we have the ability under the Pentair sales offices to do so.

I would just add, we the numbers right now are the summary of what did you say, they are not saying not about what market back ideas are and that’s a big objective as we put these businesses together in the fast growth region. We have 2600 employees now in China. Where do we want to be in China, I mean, would that kind of scale, we are further along actually in the Middle East on that thinking, we are probably enough 1500 employees, and we are further along there and we -- clearly the opportunity China and Southeast Asia seeing. So we haven’t really -- the numbers not yet informed by our strategic intent.

Okay. Thank you.

Your next question is a follow up question from the line of Jeff Hammond with KeyBanc Capital.

Hi, guys. Just to be clear on the guidance change on revenues, so that the $100 million lower revenue, I guess the $7.6 versus $7.7, that’s purely a function of prior year comps?

Yeah. The year-over-year expectations are the same, and obviously as we dug in and got to know some of the components of the revenue, Jeff, there is clearly some revenue that will be primarily at the divestitures and the sanctioned country. And then as we mentioned earlier, we stripped the large project out. The numbers are there with and without it and you guys can certainly look at it, however, you feel it best serves you. We just did as we wanted to focus on going forward and talking about the cadence of building the revenue and growing. We want to make sure you had the basis to what you are launching from.

Okay. But if you kind of applied the 30%, 35% incremental to that, what’s kind of offsetting that within the unchanged guidance?

I don’t think there is a lot there other than some of the components of that revenue were all that profitable, which I don’t think the 30%, 35% will reflect all of that. And I think one of the things as I mentioned that we’ve taken out is also the 20-ish million dollar impact of the sanctioned country write-offs associated with no longer providing those products to their customers and I think that changes the base a little bit there too, Jeff.

Okay. Thanks, guys.

Thank you.

All right. Thank you.

And there are no further questions at this time. We will now turn it back over to our presenters for any closing remarks.

Okay. Thank you. I think we are done. So you can give them the calling numbers. Thank you all for listening.

And this concludes today’s conference call. You may now disconnect.