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PENTAIR PLC  (NYSE:PNR)
Q1 2019 Earnings Call
April 17, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Zetania, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pentair 2019 First Quarter 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)

I would now like to turn the call over to your host Mr. Jim Lucas. Sir, you may begin your conference.

James C. Lucas -- Senior Vice President, Investor Relations and Treasurer

Thanks, Zetania, and welcome to Pentair's first quarter 2019 earnings conference call. We're glad you could join us. I'm Jim Lucas, Senior Vice President of Investor Relations and Treasurer, and with me today is John Stauch, our President and Chief Executive Officer; and Mark Borin, our Chief Financial Officer.

On today's call, we will provide details on our first quarter 2019 performance as well as our second quarter and full-year 2019 outlook as outlined in this morning's press release.

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

Forward-looking statements included herein are made as of today 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 Investor Relations section of Pentair's website. We will reference these slides throughout our prepared remarks. Any references to non-GAAP financials are reconciled in the appendix of the presentation. We will be sure to reserve time for questions and answers after our prepared remarks. I would like to request that you limit your questions to one and a follow-up in order to ensure everyone an opportunity to ask their questions.

I will now turn the call over to John.

John L. Stauch -- President and Chief Executive Officer

Thank you, Jim, and good morning, everyone. Please turn to slide number four, titled executive summary. As we shared earlier this month, our first quarter of 2019 reflected cold wet weather in many parts of the country, and this had an adverse impact on our first quarter sales of our high margin pool and Specialty Ag Spray businesses. This weather pattern combined with distribution inventory that was created to avoid our heavier than usual price increases related to 2018 tariff impacts created a significant impact to the bottom line.

The slower pull-through of demand in Q1 related to weather and pool means that we expect inventory will now be worked out of the channel in Q2 and Q3, causing the further reduction to our full-year guidance. While these two events create a unique impact on the business, we feel that the situation is isolated to 2019 and our overall thesis for our pool business remains healthy and intact.

On a more positive note, we completed two strategic acquisitions during the first quarter that further our strategic initiative to accelerate residential and commercial water treatment. Both acquisitions are performing well and the integrations are on track.

I will now turn the call over to Mark, who will provide more detail on Q1, Q2 and the full-year forecast. Mark?

Mark C. Borin -- Executive Vice President and Chief Financial Officer

Thank you, John. Please turn to slide five labeled Q1'19 Pentair Performance. For the first quarter we saw core sales declined 4%, segment income fall 16%, and adjusted EPS was down 12%. We will provide more color on the individual segment performance shortly.

Below the line, we saw an adjusted tax rate of 18%, net interest other expense of $8.5 million and our average shares in the quarter were 172.5 million. Net interest other expense was a bit higher than planned due to the two acquisitions closing earlier than expected. Please turn to slide six labeled Q1'19 Pentair Segment Performance. This slide lays out the first quarter performance of our three segments.

Following robust growth in 2018, which we believe was somewhat elevated as distributors bought inventory ahead of price increases, as we commented on our fourth quarter call. First quarter core sales in Aquatics declined 6%. Segment income in Aquatics declined 13% as the produced top line led to under absorption in the quarter. Core sales declined 6% in Filtration Solutions, but segment income was flat due primarily to positive mix.

Within the core residential and commercial business, we saw two areas of softness that we believe are short-term in nature. First, we experienced lower component sales as Aquion is now represented as inter-company sales and is no longer reflected as external sales. Second, Europe saw ongoing weakness, but the comps are easing. While this had an impact on our first quarter sales, mostly due to timing. We continued to see positive growth prospects for the key residential and commercial piece of filtration.

We note that the Food and Beverage and Industrial businesses were on plan for the quarter. Flow Technologies reported flat core sales, but that does not capture the story of the 22% segment income decline. While price helped the residential piece of flow. We saw our specialty business, which is exposed to agriculture crop spray, face significant top line pressure. Specialty is one of the most profitable product lines within flow and the sales mix contributed to the income decline in the quarter.

We are rightsizing the cost structure specialty to the adjusted demand levels now expected for 2019. Please turn to slide seven labeled, balance sheet and cash flow. Our first quarter saw cash flow usage in line with seasonal trends, as we tend to build working capital in advance of the important residential selling season, primarily in our Aquatics segment.

In addition, we closed on two strategic acquisitions during the quarter and saw our debt level increased as a result. While our debt level increased from the end of 2018, we expect cash flow to turn positive in the second quarter and we anticipate debt levels coming down as cash flow improves throughout the year. While we did not repurchase any shares during the first quarter, we remain committed to buying $150 million in 2019.

Please turn to slide eight labeled Q2 2019 Pentair Outlook. We anticipate second quarter core sales to be flat to up 1%. We expect Aquatics Systems to be flat to down 1%. Filtration Solutions to be flat to down 2% and Flow Technologies to grow 2% to 4%. We anticipate segment income to be down approximately 5% to 7% as some of our more profitable businesses continued to see short-term top line pressure. We expect adjusted EPS to be in a range of $0.63 to $0.66 per share.

Below the line, we expect corporate expense to be approximately $14 million to $16 million. We expect our second quarter tax rate to be 22% as we anticipate a true-up during the quarter. We also expect net interest other expense of roughly $11 million and shares to be approximately 171 million.

Please turn to slide nine labeled Full Year 2019 Pentair Outlook. Slide nine looks at a different components of our updated 2019 outlook. For the full year, we expect core sales to be flat to up 1%. We continue to expect price of roughly 3% for the full year. We expect total sales growth of roughly 1% to 2% with roughly 3% contribution from the recently announced acquisitions offset by a 2% headwind from FX.

We anticipate segment income to be flat to up 2%. Our full year adjusted EPS range is $2.30 to $2.35 per share. Other items embedded in our guidance include corporate expense of $60 million to $65 million, a tax rate of 20.5%, net interest other expense of $38 million and an average share count for the year of 171 million shares.

I would like to turn the call back to John.

John L. Stauch -- President and Chief Executive Officer

Thank you, Mark. Please turn to slide number 10 labeled Full Year Guidance Update. Before I discuss our longer-term outlook, this slide is meant to be a helpful look at what has changed since we provided our initial 2019 guidance. While we do not like to use weather as a reason for our sales miss. The reality is that cold wet weather had a pronounced impact on two of our businesses, pool and agricultural precision spray. The main change from original forecast is our very profitable Aquatics business.

In 2018 Aquatics delivered higher than average growth of 11%. We anticipated that some inventory was pulled ahead of the price increases. But as we're talking about what has happened to the start of the year. Wet and cold weather delayed pool construction activity in several key markets such as California, Texas and Arizona. The inclement weather also impacted pool openings in other parts of the country, primarily the Sunbelt [ph].

As a result sell-through in our distribution channels was impacted and therefore inventories were not reduced at the levels we would have expected, if the pattern would have been more consistent with historical trends when weather was not a factor. Of importance is that we have not seen any significant changes in demand trends within the key Aquatics markets. Our dealers continued to report strong backlog and while weather created delays, we expect inventory levels in the channel to come down as activity resumes in the second and third quarters.

Within Flow Technologies, we saw our higher margin agricultural precision spray impacted as many parts of the country were underwater to start the planting season. Given these delays and the limited number of months in the season, we are not anticipating a rebound in activity and adjusting the cost structure of this business accordingly.

With Aquatics and the Specialty business in flow experiencing slower top line growth rates in 2019. This has led to reduced expectations for segment income and adjusted EPS growth. We do believe this is a short-term issue, but unfortunately the weather related delays were compounded by the higher inventory levels in the distribution channels.

Please turn to slide 11 titled Segment Positioning. We wanted to take a moment to speak to our three segments, and why we believe we are well positioned for the longer term. Aquatics Systems is a leading franchise where we believe long-term demand trends remain in place. We expect to continue to invest in dealer engagement and consumer pool.

We have been expanding aftermarket products including in the faster growing automation space. We have built a strong business. And while the growth rate in 2019 is not up to historical standards. We believe that averaging 2018 and 2019 is more reflective of the longer-term growth rate of this attractive business.

As we mentioned earlier in the call, we strengthened our residential and commercial water treatment business with two strategic acquisitions. Aquion brought water treatment systems capabilities and an affiliated dealer network, while Pelican brought a water conditioning systems capability and an established e-commerce platform.

In 2019, we will experience a modest impact to the top line, as former component sales to Aquion are now recognized this inter-company sales. We continue to focus on digital marketing and engaging consumers to build our brand.

Flow Technologies continues to be a business where we are focusing on leveraging our core PIMS competencies and improving margins. While parts of the Flow portfolio have been impacted by inventory and weather issues. We are accelerating operations, sourcing and structural changes to improve our overall cost structure to create a solid foundation for 2020. Please turn to slide 12 titled, Long-Term Value Creation Goals.

This is an updated version of a chart, we have referenced in the past, but an important slide as it highlights our longer-term goals. With last year separation and our emergence as a pure-play focused residential and commercial water treatment company, we remain committed to delivering more consistent performance.

We continued to believe that we have a portfolio capable of delivering low to mid single-digit core sales growth over the cycle. With the portfolio capable of delivering positive price coupled with a relentless focus on productivity, we expect segment income to grow mid to high single-digits.

We generate strong free cash flow and have committed to repurchasing 150 million of our shares annually. We believe that this should result in top quartile EPS growth and disciplined capital allocation would add upside to a strong base performance. We recognized that consistency is the key to being recognized as a top quartile performer and we remain committed to achieving these long-term goals.

I would now like to turn the call over to Zetania for Q&A. After which I will have a few closing remarks. Zetania, please open the line for questions. Thank you.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Steve Tusa with JPMorgan.

Stephen Tusa -- JPMorgan -- Analyst

Hey, guys. Good morning.

Mark C. Borin -- Executive Vice President and Chief Financial Officer

Hey, Steve.

John L. Stauch -- President and Chief Executive Officer

Good morning, Steve.

Stephen Tusa -- JPMorgan -- Analyst

So, just curious as to what really kind of changed from when you gave guidance and I guess late January, early February to today, I mean, I missed it as well, but pool was very clear that they were not going to have the greatest first quarter on the planet and with the de-stocking impact, you guys actually had guidance like above what they said they were going to guide. I don't know what that is. That's either a disconnect. There is a disconnect somewhere. What happened there? Why didn't you guys just come out in January and say, hey, you know, first quarter was going to be -- is going to be weak given these dynamics?

John L. Stauch -- President and Chief Executive Officer

Yes, I think, it's a fair question and a good question, Steve. I think the different dynamics are easy to sit here now and look backwards at what inventories in the channel. But as we raise prices last year primarily related to the tariffs. We knew there was a little bit of inventory in the channel being built, but that's all based upon what you expect a sell-through is through our dealers into the markets that they serve.

And so we had anticipated that the inventory would be dealt within Q1, but the significant drop in the sell-through produced more inventory in the channel. Therefore it didn't make sense to continue to sell into the channel and that was really what happened later in the quarter, Steve.

Stephen Tusa -- JPMorgan -- Analyst

No, I understand that and I'm just saying like, is there something in the FP&A function here that you guys aren't kind of picking up what the channel is saying because again like it was a public company telling you what the growth rate was going to be. And if there was de-stocking in the first quarter then you guys would have been below that growth rate instead of guiding to something like 4% to 6%, and then going around the conferences and kind of not really insinuating at all that things were weak over the course of the quarter. Because I think visibility here is a question that I'm getting from investors all the time and I think there's just a bit of a confidence issue that people have that you guys aren't picking up the right tea leaves in the channel.

John L. Stauch -- President and Chief Executive Officer

Yes, again, I wish it was that easy, Steve. I think we're looking at four days of inventory on hand, and there's a lot of inputs in there and I do want to remind everyone, this is more than a distributor. Right, I mean, the pool market and also part of this is on distributors and flow as well. It's not just all pool. And there is lots and lots of distributors and lots of estimates that go into a four days of inventory on hand.

And I think we didn't know until late in the quarter that we were in the situation we weren't as soon as we knew, we went out and told people and we've dealt with it accordingly, and we're taking out the cost and we're taking all the actions that we can to position ourselves the best we can for next year.

I don't want to damage a great business like pool and I think we're off doing all the right things to grow share and pull demand in that particular business. And I think it's demonstrated that success consistently over a series of years and I do want to remind you that the tariff changes and the significant price increases was part of this issue as well and those don't happen often.

Stephen Tusa -- JPMorgan -- Analyst

Sure. On filtration, what was the -- why was that weak because, I mean, I think we were expecting some weaker sales in flow given the flooding and all that kind of stuff, which is completely legitimate issue everybody is kind of seeing the weather and the flooding out there that's definitely not specific to you guys, but filtration was definitely weak. Can you maybe just talk a little bit more about what happened there and you guys cut guidance there as well on revenue?

John L. Stauch -- President and Chief Executive Officer

Yes. It definitely was slightly weaker than we expected, Steve. I think, weather impacted as well primarily on the service and the installs. The timing of the acquisition was positive as far as the reported acquisition, but it also changed the way the inter-company sales moved from us to those two acquisitions, could we sell the both of them. And then we did experienced slightly weaker European demand, which we have adjusted our full year guide to reflect.

Stephen Tusa -- JPMorgan -- Analyst

That also would be helpful to know that you are going to kind of like have a little bit less of an organic impact from these deals that could have been communicated better probably at the time of the deal, just some feedback. That's about it. Thanks a lot.

John L. Stauch -- President and Chief Executive Officer

Thanks.

Operator

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

Nathan Jones -- Stifel -- Analyst

Good morning, everyone.

John L. Stauch -- President and Chief Executive Officer

Good morning, Nathan.

Nathan Jones -- Stifel -- Analyst

I'm going to follow up on the pool business here. I understand it's seasonal, I would have thought that customers would have been making these decisions spending decisions on an annual basis. And if we had poor weather in the first quarter that might differ revenue out of the first quarter into the second quarter or third quarter. Can you guys talk maybe a little bit more about the dynamics there and why you're not just going to catch that revenue up, I mean, I can understand why the spray business doesn't catch up. But I'm just a little confused on why that pool revenue wouldn't just shift from one quarter to the other rather than disappear altogether?

John L. Stauch -- President and Chief Executive Officer

Yes, it does. I think, clearly, if we didn't have the inventory situation in the channel that we have part of the Q1 miss would be made up and likely Q2 and Q3, Nathan. I mean there is limited labor.

So, people don't go out and necessarily hire more. They're going to slide jobs a week or two or so in the schedule, and so they tend to do as best they can to make them up in the season. What we're really reflecting in the outward quarters is the fact that we still have to deal with the inventory in the channel.

So, I do think the dealers will make up the demand, I do think that our channel partners will see that demand come through and it's more muted on us because of the inventory build that occurred from the Q1 sell-through.

Nathan Jones -- Stifel -- Analyst

So, does that mean there was more inventory in the channel and you guys had predicted when you reported 4Q. I mean you said you thought there was 30 million of pre-buy in 4Q '18 ahead of the price increases. Did that end up being higher than you expected , which is part of what contributes to this 2018 was higher than it should be in 2019 is lower than it should be?

John L. Stauch -- President and Chief Executive Officer

Yes, I mean, what we anticipated to be about a point of headwind for overall Pentair is now a couple of points of headwind. Now, again, I'm reminding you that it's not just pool, there's a little bit in the Flow Technologies distribution channels well related to the weather. But, yes, and then as I was mentioning, we were looking, as you look the days of inventory on hand forward-looking in Q4, it felt like 30 because of the lack of sell-through that happened in Q1 that number expanded and it's got to be dealt within Q2.

Nathan Jones -- Stifel -- Analyst

Okay. I just want to follow up on Steve's question about maybe looking inwardly at your own forecasting tools. Have you run a root cause analysis on this thing kind of looked at the FP&A processes to see if there's things that you guys can do to improve the predictability results here?

John L. Stauch -- President and Chief Executive Officer

Nathan, yes, I mean, as you'd expect. We have our PIMS tool kit and that doesn't just apply to how we run the operations. It applies to how we run our back office functions as well. So, we are using our root cost countermeasure tools to try to understand what are the things that we could have had better visibility to and gotten more out in front, but as John said, sometimes, right, it's a little bit easier to do that when you are -- when you got hindsight information to look at, but that's the information that we need to think about, and how do we put that more at the front end rather than seeing it at the back end. So, absolutely we're working on that and looking for improvements across the board.

Nathan Jones -- Stifel -- Analyst

Is there anything that you found that you could share that could change could improve those kind of processes? Are you still in the progress?

John L. Stauch -- President and Chief Executive Officer

That would be such an easy answer, if that was it, I mean, there is no way we could predict the Q1 weather patterns.

Nathan Jones -- Stifel -- Analyst

That's fair.

John L. Stauch -- President and Chief Executive Officer

I mean, California, Arizona and Texas I mentioned are such significant markets to the pool business and what happened there was so unusual as far as the wet, cold weather and that stops production, that stops pool builds for a period of time because it can't move machines in. So, I don't know what we could do, I mean, we always run sensitivity analysis on our forward-looking analysis, but that's not one we would have predicted.

Nathan Jones -- Stifel -- Analyst

I should qualified that question to be outside of weather effects and things that would be obviously unpredictable.

John L. Stauch -- President and Chief Executive Officer

The answer is no because I mean we found out afterwards, as we shared in our Q4 call, that we felt there was inventory in the channel, and that inventory would have normally burned off in Q1. The Specialty Ag business was also uniquely impacted and that will happen throughout the process in Q1 as well. So those two things led to the Q1 challenges and we've not sensed, not putting a forecast of the recovery in pool, and we not put any recovery of the Specialty Ag in the outlook, and then we've adjusted demand to be what we think are on the lower ends of our forecast models, and then we're working the cost actions to go build the foundation for 2020 and that's the only way I can think of reacting to the situation.

Nathan Jones -- Stifel -- Analyst

Okay, fair enough. I'll pass it on. Thanks for taking my questions.

John L. Stauch -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Joe Giordano with Cowen.

Joseph Giordano -- Cowen -- Analyst

Hey, guys. Good morning.

John L. Stauch -- President and Chief Executive Officer

Hey, Joe.

Mark C. Borin -- Executive Vice President and Chief Financial Officer

Good morning, Joe.

Joseph Giordano -- Cowen -- Analyst

So I don't want to keep asking the same question, but the one thing that's confusing to me a little bit. Heading into the quarter when you had your look at inventory and pool, I fully understand that changes because weather on a days basis because the demand side of it changes, but like on a gross level of inventory that number is a fixed number. And so if we're saying that this is all largely going to like shift quarters on the revenue side, that's where I don't get why the overhang doesn't like kind of fix itself sooner. Because, yes, we could change like what we thought was 40 days is really 50 or something like that because the denominator changes, but the top, the actual amount of inventory was a fixed number of units. So, that's kind of where I struggle with. I don't understand that.

John L. Stauch -- President and Chief Executive Officer

That's fair, I mean, I think the one thing I'll remind you is that if it was just a product sale. It was not dependent on labor required to install it. I do think you'd see a quicker recovery, but the labor is not excessive, right, I mean, it's not going to like you're going to go out and add more labor to build more pools in the short-term. So it will come through the channel clearly, and we do think that, that will spread itself over Q2 and Q3, but the Q1 hit us is going to be reflected as an inventory reduction in Q2 and Q3. It won't affect the channel that same way.

Joseph Giordano -- Cowen -- Analyst

How much is that like is that actual construction element weighing down because always we talk about this business being like that's not really a big piece of it at all. So, I was just curious as to how that?

John L. Stauch -- President and Chief Executive Officer

Well, every dealer, but every dealer is out there either installing new pool or they're also out there doing the aftermarket aspects or scheduling the aftermarket pool product install. So they generally are the same people. And they're going to do their best to get those pools in place and so there will be a delay on both ends. The aftermarket and the new pools.

Joseph Giordano -- Cowen -- Analyst

Okay. And then on the forward guide to that business. 2Q implies like more of a seasonal sequential ramp than normal, which I guess maybe some of that is the snap, a little bit of a shift in that demand. But the second half guidance is essentially flat year-on-year versus last year and we keep talking about how much pull forward there was, and that was a plus 12 comp. So, how comfortable are you with the back half being flat year-on-year and what kind of visibility do you have?

John L. Stauch -- President and Chief Executive Officer

Yeah, Q2 and Q3 as we talk will be impacted by the inventory coming down and then Q4, we expect kind of you just look at it sequentially, it will pick up and get better, and we'll see some of that recovery coming through and when we look at it for the full year, we are confident that the full year expectation is appropriate, and as John said, when we factored in, everything that we know today, as we look at the out quarters.

Joseph Giordano -- Cowen -- Analyst

Okay. And then if I could just shift quick to last one on filtration, just to follow a little bit on what Steve asked initially, to me that was like the biggest surprise, was the magnitude of the miss there. It's not pool, it's not flow and it was a pretty sizable miss versus the initial guide. So, your comment on lower component sales like now being inter-company makes sense, but those I assume were kind of factored in because you announced those deals before you gave the initial guide. So, can you maybe talk through what some of the little bit more detail there?

John L. Stauch -- President and Chief Executive Officer

Yes, let me just frame that, I mean, the inter-company sales are roughly about a point, overall, total filtration solutions for the year, OK, which will give you an impact on kind of what it is per quarter. Keep in mind, we did not have the acquisition as a contribution in Q1. We had at closing after Q1. So, these two things, you're seeing the benefit of the acquisitions, but we had not forecasted in the quarter, the impact of the inter-company sales, but the real impact that we saw was a little bit of slowing in Q1, where the weather impact is, we do expect to catch that up in Q2 and then the European trends are not where we wanted to be and that's really the reflection that we added to the full-year forecast. I don't think we know that, I think, we're anticipating it and we are planning for it.

Joseph Giordano -- Cowen -- Analyst

Okay. Thanks, guys.

Operator

Your next question comes from Mike Halloran with Baird.

Michael Halloran -- Baird -- Analyst

Hey, good morning, guys.

John L. Stauch -- President and Chief Executive Officer

Hey, Mike. Good morning.

Michael Halloran -- Baird -- Analyst

So, question on the margins in the flow side. So, talk a little bit about the inefficiencies in the mix side, please. And then also when do you think that can normalize back to what your previous run rate suggestions were and how long does some of these headwinds under?

John L. Stauch -- President and Chief Executive Officer

Sure. The biggest contributor to the margins and flow is the mix impact from the decline on the Specialty Ag Spray business at a higher profit component of that overall portfolio. So, that's the biggest driver. And then the other driver is just the timing and how price works its way in throughout the year. As all their price actions take hold. We had talked last quarter about the couple of factories, those are stabilizing, and we see those not having a negative impact to margins during the year and improving as we get through the balance of the year.

Michael Halloran -- Baird -- Analyst

Sounds good. And then when we think about the second half of the year here. Just frame what's changed now versus your previous guidance, obviously, on the Aquatics side. The assumptions on the top line is coming in a little bit. Obviously, we're adjusting a little bit through some of the costs on the filtration side that are no longer external sales, anything else you would point to that's changed in the back half of the year versus the previous guidance?

John L. Stauch -- President and Chief Executive Officer

Sure, I mean, I think the overall, when you think about it, not a lot has changed. That would be high characterized kind of headline. We've talked before about just the timing of inventory and how that works off, but and then specialty the business that we referenced, right, the softness there. We have not projected that is going to improve as we work through the balance of the year. And so those are probably the two biggest factors, when we think about what's different, but overall really the back half of the year is not significantly different than what we had previously even thinking.

Mark C. Borin -- Executive Vice President and Chief Financial Officer

We've also not assumed like any benefit from tariff relief in this outlook. So, that's consistent with the previous outlook. And we've also most of the operations and sourcing and the targeted actions this year are not expected to have 2019 benefits, but they generally are expected to offer contributions in 2020, meaning, we're driving the activities this year and assuming it's going to take a longer time to realize it and therefore really drive them as a 2020 foundational benefit.

Michael Halloran -- Baird -- Analyst

So, in other words, if you hit your plan, your expectation is that the run rate exiting 2019 is slightly lower than what you're originally expecting, but that meaningfully lower like the front half trajectory would imply?

John L. Stauch -- President and Chief Executive Officer

That's correct.

Michael Halloran -- Baird -- Analyst

All right. Thanks, guys. I appreciate it.

John L. Stauch -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Deane Dray with RBC Capital Markets.

Deane Dray -- RBC Capital Markets -- Analyst

Thank you. Good morning, everyone.

John L. Stauch -- President and Chief Executive Officer

Hey, Deane.

Mark C. Borin -- Executive Vice President and Chief Financial Officer

Good morning, Deane.

Deane Dray -- RBC Capital Markets -- Analyst

Hey, I might have missed this, but are you able to separate and quantify the impact of weather this quarter from the inventory dynamics?

John L. Stauch -- President and Chief Executive Officer

We didn't specifically quantified earlier, Deane. But think of it as $30 million to $40 million, if you think about the majority of the Q1 impact is really driven by weather, which as John said delays the bleed-off of that excess inventory that then happens in Q2 and Q3.

Deane Dray -- RBC Capital Markets -- Analyst

Got it. I just want to make sure that part had been quantified. And then, is there any ripple effect on pricing, I know, you called out the 3% pricing assumption, but with an incentive to work inventory down, is there going to be any compromise on pricing and what might the dynamics be there?

John L. Stauch -- President and Chief Executive Officer

No, no, the overall pricing profile stays the same as you referenced. We talked about 3% for the year and so nothing changing from a price perspective.

Deane Dray -- RBC Capital Markets -- Analyst

Got it. And just last one for me is, it's more of a business model question, and maybe it's just an observation. But as Pentair has refocused the portfolio to a water pure-play, you've lost that benefit of earnings diversification that you had when -- and that was part of the company. So, now we are, we see this vulnerability to weather that really maybe just as magnified versus what -- company structure was before. Is this variability or vulnerability just something that comes with the more focused portfolio and had that been part of the framework that you're looking at for the company, Pentair, as it is today.

John L. Stauch -- President and Chief Executive Officer

Deane, I think, it's great observation. The answer is, for the first question is, yes, I mean that is definitely exposed more vulnerability on weather impacts. Now, what we got to do is build more diversification into our portfolio to account for that, I mean, we did see spots of that, I mean, we did have good China quarter. I think things in China have -- had improved. We had a little bit of softness in Europe. Normally that wouldn't have happened, but I think the diversification of portfolio something we will focus on and ensure that we do not subject ourselves to the effect of weather patterns and the variability that they can cause.

Deane Dray -- RBC Capital Markets -- Analyst

Got it. Thank you.

Mark C. Borin -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Your next question comes from Scott Graham with BMO Capital Markets.

Scott Graham -- BMO Capital Markets. -- Analyst

Hi. Good morning.

Mark C. Borin -- Executive Vice President and Chief Financial Officer

Good morning.

John L. Stauch -- President and Chief Executive Officer

Good morning.

Scott Graham -- BMO Capital Markets. -- Analyst

So, kind of a follow-on to that question. Would it be fair to say that even though Aquatics is really the flagship the best business, the highest margin and all that. That the business will be built more going forward through organic means aftermarket consumables that kind of thing and then your acquisitions would be more focused on the other two segments?

John L. Stauch -- President and Chief Executive Officer

Yes, I mean, I think, the Pool business is well positioned, and I think we have a lot of organic growth runway remaining, and I think we continue to innovate there from a new product perspective, and we continue to have good intimacy with our channels and our consumers and understand what they have.

So, I think, that's going to be more of a organic strategy as we go forward. As evidenced by the two acquisitions that we just did. Our goals in filtration solutions is to build out a close to the customer model and also make sure that we're doing our part to drive demand in the channel. The overall penetration rate of filtration systems in homes is relatively low.

And although it's better in the commercial office space and/or commercial restaurant space. It's still not where we think it should be or can be and so most of our acquisition activity will be focused about how do we drive that demand and how do we get closer to the customer to drive that demand in filtration.

Scott Graham -- BMO Capital Markets. -- Analyst

Yes, thank you for that, John, that helps. My follow-up is really not to beat the horse even dead or here, but would you be able to maybe answer this question because you indicated that there doesn't seem to be much of a change in demand on the pool side. I'm not quite sure what you meant by that and maybe the question specifically would be what was sell-through by your dealers in the quarter?

John L. Stauch -- President and Chief Executive Officer

Yes, when we see, when we talk to our dealers and we hear from our -- from the builders and understand sort of what's going on out in the market, backlogs remain high, business remains solid. So, when we talk about, we are not hearing anything from an underlying perspective that the market is slowing. It's based on those discussions in that insight and that's really what kind of what informs the way we're thinking about that, I mean, sell-through from the information that we have access to remains strong. I think that it would expect an impact in Q1 from weather, but as we said that starts to turn around, and as we move into the heavy season here in Q2 and Q3. So, again, underlying trends and demand we're not seeing anything that would indicate softness there.

Scott Graham -- BMO Capital Markets. -- Analyst

So, your -- from what I think I'm gleaning from this is that your distribution channel is kind of normalizing right now?

John L. Stauch -- President and Chief Executive Officer

I mean I can't speak to that, but I can tell you what Mark saying, the sell-through is accelerating, right. I mean the March sell-through is definitely toward the high from the dealer channel and then we also know the dealer channel is going to make up. As we mentioned, most of that weather loss in Q1. They're going to do their best to make that up in Q2. Why that's muted to Pentair is because there is that inventory in the channel that needs to be worked out before we're going to see the benefit of that recovery of the channel shift.

Scott Graham -- BMO Capital Markets. -- Analyst

That makes sense. Thank you.

John L. Stauch -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Josh Pokrzywinski with Morgan Stanley.

John L. Stauch -- President and Chief Executive Officer

Hey, Josh Pokrzywinski.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Hey, good morning, guys.

John L. Stauch -- President and Chief Executive Officer

Good morning, Josh.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Just a follow-up, just a final point on pool that I think Mark raised earlier. I want to not miss it in passing that the business should normalize by the fourth quarter. I guess just given everything we've seen from tariff pre-buy even your call-outs about the inventory position exiting the year. I guess mathematically looking at guidance, you do have to take up the growth rate by the fourth quarter. Is that explicitly something that you're calling for and I guess why not take a more conservative track just given some of the surprises this quarter?

John L. Stauch -- President and Chief Executive Officer

I think we have, Josh, I mean, I think if we take a look at what our new estimates are that sell-through demand throughout the year. We are assuming taking inventory down to at or below normalized historic levels, right. It is still a growing market and it's still a growing industry, and so you'd expect inventory to actually be accelerating to this period. I think what we wanted to do is make sure we forecast on the downward end. And I know it looks like Q4 is out of the norm, but we would expect our normalized patterns to continue and Q4 usually a pretty good quarter for Pentair.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Got it. And then I guess just following up a little bit on Deane's question on pricing. I guess looking holistically at price cost productivity, I know, you kind of think about that those three different legs of the stool. I would imagine, there was some drag there from all the disruption this quarter. But thinking about that total bucket, the rest of the year, how should we think about that gap closing improving or getting worse. I would imagine something happens in the world as it pertains to rebates our pricing power given volume, but just thinking about it holistically should that get better or worse from here?

John L. Stauch -- President and Chief Executive Officer

Yes, I mean, you hit on it. It does, it does get better as we move through the year, which is in line with sort of how we expect it to move. Just with the timing of when price is impacted with rebates and other things, but as we said on our earlier guidance and we continue to believe that effectively price and inflation will offset each other. So, we continue to view that as the overall way to look at the guidance and that's a full year statement. So , we see that and we sort of see that starting to turn as you get into Q2, Q3 and Q4.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Got it. And if I can just sneak one more here, more of a question philosophically on how you guys get impacted from a weather perspective. If I think back to 1Q of '18, I think, some other folks in the broader construction ecosystem called out weather then in January. Was there anything in the comp that would have said 1Q of last year wasn't particularly smooth sailing on the weather front?

John L. Stauch -- President and Chief Executive Officer

No, Josh, I mean, last year's Q1 actually was one of our strong organic growth quarters of the year. I think we benefited from some of the tax changes that occurred and demand was strong out of the gate. So, I would say, we don't think that weather had a significant impact on Q1 of '18 at all. Usually it happens early in the quarter, it's not as big of a deal because those things can be made up. I mean, really what we're talking about is the end of January and February was significant weeks in a row of a consistent pattern in the states where it matters to us.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Got it. All right. Thanks, John.

Operator

Your next question comes from Jeff Hammond with KeyBanc Capital Markets.

Brad Vanino -- KeyBanc Capital Markets -- Analyst

Hey, good morning. This is Brad on for Jeff. Just to clarify something, in the first quarter, it seems like cash flow is particularly weak. I understand some of the abnormalities going on there, but just on a full-year basis what's your confidence in hitting the target?

John L. Stauch -- President and Chief Executive Officer

Yes, I mean, Q1 cash flow as you referenced is traditionally our weakest quarter. As a reminder, Q1 of last year was when we were going through this separation. So, we were, there's noise in '18 and sort of the visibility to what a run rate level of Q1 cash flow for the separate water business would look like. So, this I think is the many respects sort of the new view of what Q1 looks like and we'll start to turn that in Q2 and go and turn positive in Q2 and then continue that through the balance of the year. So, remain confident in our ability as we target cash flow to equal adjusted net income.

Brad Vanino -- KeyBanc Capital Markets -- Analyst

Okay. That makes sense. And then just on the strategic initiatives and investments you have going on, you talked about in the last call some flexibility to kind of throttle those back should demand kind of weaken a little bit, just given what happened in the first quarter, have your strategic investments changed and plans for those for this year and kind of does that have any kind of trickle-down impact over the longer term?

John L. Stauch -- President and Chief Executive Officer

No, I think, we are focused on still building out a portfolio that we think has a lot of runway around organic growth. Couple of small additions that we're looking to do again on the tuck-in side on the residential and commercial filtration side to continue to build out our portfolio and then from an organic standpoint, continuing to make the consumer aware of what Pentair can bring to the table and then how we bring that through our channel partners and how we give the consumer what they want, that's what the strategic investments are and we're going to continue to invest in high priority areas throughout 2019.

Brad Vanino -- KeyBanc Capital Markets -- Analyst

All right. Thanks for the color.

John L. Stauch -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Brian Lee with Goldman Sachs.

Rebecca Yuan -- Goldman Sachs -- Analyst

Hi, guys. This is Rebecca Yuan on for Brian. Thanks for taking my question. So aside from a weaker demand in Europe that you pointed out. Have you seen any slowdown in your end markets? And can you maybe speak to the growth trends you're seeing or any broader macro comments?

John L. Stauch -- President and Chief Executive Officer

No, we haven't, I mean, we did as evidenced by our particular outlooks for the year adjusted to what we call the lower end of the ranges for some of our revenue forecast that we could get ahead of the cost curve, and work on the foundational aspects. But, as I mentioned, I think, we're starting to see a stronger China as we move forward here in 2019, and we think we got maybe one more quarter of headwinds in Europe, some of the slowdown started in Q3, Q4 last year for us in our particular markets, and overall we think that our end markets continue to be solid, and I think our position in those end markets are solid.

Rebecca Yuan -- Goldman Sachs -- Analyst

Okay, thanks. And then just as a follow-up for some of long-term goals that you highlighted. Can you maybe give us an idea of the time frames really like three years or five years?

John L. Stauch -- President and Chief Executive Officer

We'll continue to move rapidly to build out the portfolio in those strategic growth areas, I mean, yes, this is a three year to five year vision, and we want to move aggressively and fast as we can to achieve that vision. But there's a combination of organic growth efforts that we're doing with marketing and sales and new product development organically as well as a series of tuck-in acquisitions that we would do over time, you can never time those and obviously, we continue to try to grow the funnel, but executing them as not always within our control.

Rebecca Yuan -- Goldman Sachs -- Analyst

Okay, thanks.

Operator

Your next question comes from the line of Walter Liptak with Seaport Global.

Walter Liptak -- Seaport Global -- Analyst

Hi, thanks. I want to ask a capital allocation question. The share repurchase, it looks like there was no share repurchase done in the first quarter and with the shares that you guys talked about, it looks like 80 million in the second. Have you started on the share repurchase yet this quarter?

John L. Stauch -- President and Chief Executive Officer

We can't really comment on the timing of when we are in the market doing share repurchases. But as I said in my comments, we're committed to the $150 million for this year and would expect to execute that from now to the balance of the year. You're correct, we did not do any purchases in the first quarter and generally that's because as we talked about cash flow, we utilize cash in the first quarter. And so we think it's most prudent to manage the plan buybacks in Q2, Q3 and Q4.

Walter Liptak -- Seaport Global -- Analyst

Okay. And with the share repurchase, can you be opportunistic with it, could you do a bigger amount in the first -- in the second quarter or do you have to spread it through the rest of the year?

John L. Stauch -- President and Chief Executive Officer

Short answer is yes.

Walter Liptak -- Seaport Global -- Analyst

Okay. All right. Great. Thank you.

Operator

Your next question comes from the line of Julian Mitchell with Barclays.

Julian Mitchell -- Barclays -- Analyst

Hi. Good morning.

John L. Stauch -- President and Chief Executive Officer

Good morning.

Julian Mitchell -- Barclays -- Analyst

Maybe just a question on something below the top line for a change. You talked on slide 13 about optimizing the cost structure in the operational footprint. And it was notable that your SG&A to sales rose quite a bit year-on-year in Q1. Is there anyway that you could quantify the scale of the savings program, when we're thinking about the sort of base number for 2020. And then also looking at the sort of operating profit in Q1, the GAAP profit was about 30% lower than the adjusted segment profit. It looks like there was an asset impairment charge in there. So, maybe just give some background on that charge?

John L. Stauch -- President and Chief Executive Officer

Sure, I'll handle the first one, and I'll let Mark handle the second. I think when we talk about going forward, what our actions are, I mean, the first and foremost, I think, making sure that our sourcing activities are connected to our business units and quite frankly the product lines is the number one priority, because we have to have the anticipation of what's happening in the commodities that we're buying, and be able to make the determination of either cost out in the sourcing side or value added -- value engineering on the cost side or be able to price appropriately and give our distributor partners enough heads up that those pricings would come.

The second one is the operational footprint. Some of our businesses have way more capacity than they need and that capacity might not be in the right regions and so getting after the operational footprint is the second largest priority.

The third one on the operating structure is making sure that we are adjusting our cost investments to the priorities of the company and not what we feel is the priorities of the individual product lines of the businesses and that is a huge opportunity for us, and as Mark mentioned, we're going to rightsize the areas that are affected by what we call more cyclical trends, where they're not going to recover anytime shortly. That's really the cost efforts, I don't want to quantify it yet, because they're fairly sizable targets internally that we expect to go after and get as the foundation for 2020 and at appropriate time we'll share what those benefits are.

Mark, you want to handle the second part?

Mark C. Borin -- Executive Vice President and Chief Financial Officer

Sure. The asset impairment items, think of those is relating to the optimization and some of the actions and activities that we talked about in 2018. Part of that was exiting certain businesses. In this case, these are a couple of cost-based investment businesses, so they're not businesses that are part of what we're running as Pentair, but small investments and we wrote those down in Q1 based on an updated view of what we would be able to sell those assets for, but so it's not something new, it's really just a continuation of some of that work that we talked about last year and as we finalized that and get those things behind us. That was an adjustment that we had to record.

Julian Mitchell -- Barclays -- Analyst

Thanks for the color and just my follow-up would be around the top line in Flow Technologies. The core sales was sort of flattish in Q1 guided to grow 2% to 4% in Q2. It sounds like Ag is still going to be weak, so maybe just talk a little bit about how much of a reacceleration in the resi parts of Flow you expect and what types of products were really affected by the excess channel inventories in Flow?

John L. Stauch -- President and Chief Executive Officer

Sure. So maybe a couple of things. So, in Flow, there's really three parts of that business, the residential and irrigation, the commercial and infrastructure, and the specialty business. So, as you said, specialty is -- pulls numbers down, but then we do expect to see the residential, irrigation and commercial infrastructure parts of the business start to pick up, as we move through the balance of the year, some of that comes from price. So, a lot of the price impact that we're projecting for the year is coming from the Flow business and particularly in the residential side and that starts to read out as we move into Q2, Q3 and Q4. And so those are the -- those would be the biggest drivers. The residential irrigation business would have been impacted in Q1 somewhat by the channel inventory and weather and that starts to correct itself as we get into Q2, Q3 and Q4.

Julian Mitchell -- Barclays -- Analyst

Thank you very much.

Operator

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

Brian Drab -- William Blair -- Analyst

Hey, good morning. Thanks for taking my questions. Just a point of clarification. I'm not sure that it was clear, what exactly was the weather impact on the filtration business and which markets where you're seeing that in the most?

John L. Stauch -- President and Chief Executive Officer

It's just as you think about the installs of water treatment and water conditioning systems, they were affected by some of the weather patterns and those are like days, right. So, we pushed, you didn't get to do in a day. So, they pushed out their installs weeks or so and that's why we feel that all recover in Q2.

Brian Drab -- William Blair -- Analyst

Okay. So, just made it harder even though these are, and this is all primarily inside jobs installing food and beverage filtration system, installing something, it's in a factory, it's in a facility.

John L. Stauch -- President and Chief Executive Officer

Yes.

Brian Drab -- William Blair -- Analyst

You're saying that weather in general just kind of dampened, sorry, about the pun, which kind of dampened that activity. Is that what you are saying?

John L. Stauch -- President and Chief Executive Officer

It was minor in filtration, but yes.

Brian Drab -- William Blair -- Analyst

Okay. And then can you quantify at all what growth or decline overall you reported in Europe and in China for the first quarter?

John L. Stauch -- President and Chief Executive Officer

Yes, I mean, China had a recovery and was up double-digit, and in Europe where we're talking about modestly down.

Brian Drab -- William Blair -- Analyst

Okay. You broke up a little bit on end my on China. You said it was -- what you said in China?

John L. Stauch -- President and Chief Executive Officer

Double-digits and then we were modestly down in Europe.

Brian Drab -- William Blair -- Analyst

Got it. Okay, thank you very much.

Operator

Your next question comes from the line of Andrew Obin with Bank of America.

Andrew Obin -- Bank of America -- Analyst

Hi, guys. Good morning.

John L. Stauch -- President and Chief Executive Officer

Good morning.

Andrew Obin -- Bank of America -- Analyst

Just a simple math question. So if I look at the guidance on Aquatic Systems before for the year and where you ended up. It seems there is eight percentage point difference, which is I think for the year is a little bit over $80 million. And if I look at the delta for first quarter versus what you're guiding and versus what you reported. So, it seems $30 million. So if I think that $30 million is a combination of a little bit too much inventory and weather that sort of implies that non-weather related stuff is $60 million for the remainder of the year. Is that how I should think about it?

John L. Stauch -- President and Chief Executive Officer

On the outer end, yes. You got it right, meaning, the inventory did not get worked down in Q1 as we've said and that inventory will be worked down in Q2 and Q3, and so, yes, you got it right. So, the weather impact for us. You've got it quantified correctly. The rest of it is the inventory burn that we're expecting in Q2 to Q3 and using the outer end or the lower end of the projections as you do that math. So, yes, you got it right.

Andrew Obin -- Bank of America -- Analyst

And I'm just struggling with the concept. So, you said, if you can't do pools in Q1. So, you can hire people to do pools in Q2 and Q3 because it seems you say there are labor constraints and I'm just struggling to understand the concept, I apologize.

John L. Stauch -- President and Chief Executive Officer

Yes. So, again, we're talking about a couple of things. Certainly, they will do their best to work as fast as possible to build those pools in Q2 and Q3, but as I've said, we're not going to benefit from that because we have to work our inventory down through our distributors and dealer channels. And so that will recover in the industry, but because Q1 demand was so soft and the inventory did not get reduced in Q1, we are planning on reducing our inventory in Q2 and Q3 as all of that activity that you mentioned get happening in the outer end of the market.

Andrew Obin -- Bank of America -- Analyst

Got you. Thank you so much for taking my call. My question, sorry.

John L. Stauch -- President and Chief Executive Officer

Thank you.

Mark C. Borin -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

And your final question comes from the line of Damian Karas with UBS.

Damian Karas -- UBS -- Analyst

Hi. Good morning, everyone.

John L. Stauch -- President and Chief Executive Officer

Good morning.

Damian Karas -- UBS -- Analyst

So, follow-up on Aquatics. You highlighted some of the areas in the US that were most impacted by the colder weather and the inventory de-stocking. Just thinking about your expectations for the further de-stocking over the next one to two quarters here. And then what ensues, could you give us a sense on whether you're really expecting a similar level of activity across all these regions or could there be some dispersion or any unique regional circumstances that you're perhaps factoring in?

John L. Stauch -- President and Chief Executive Officer

We're not factoring any unique dispersion or circumstances. What we're doing is trying to get below this and get to the bottom of the range. And so we're assuming that the inventory gets worked out. Obviously, it's not perfect. The inventory is not ideal or perfectly balanced by region or all those other things, but we feel like we need to work to get this inventory out of the channel.

We have a great business. It's a business that has performed historically at the upper single-digit growth range, and we believe it's going to perform again to mid to upper single-digit growth range, and so what we want to do is, get it rightsized from the inventory perspective work on our demand pool to the consumer. Our new product development in all our great marketing and sales activities and make this business the right business, the great business that used to be in 2020 and beyond. That's what we're doing.

Damian Karas -- UBS -- Analyst

Okay. And, yes, sounds good, makes sense. And just on CapEx. So, you've guided that $10 million higher. Just wondering if you can give any additional color on what led you to up the budget there. And just any color on where you're planning to spend this?

John L. Stauch -- President and Chief Executive Officer

Yes, I think, we've gone out and made sure that our businesses understand that. Capital is a important factor in driving productivity. It doesn't matter if it's not on -- it's on the software or the front end marketing and sales-related activities as well as automation in the factories and capital investment in the factories to drive productivity. So, just a philosophy of Mark and myself that we need to use capital to help drive productivity and we wanted to make sure that the businesses have the capital they need to do that.

Damian Karas -- UBS -- Analyst

Got it. Thanks for clarifying.

Operator

I would now like to turn the call over to Pentair for any closing remarks.

John L. Stauch -- President and Chief Executive Officer

Thank you for joining us today. We continue to invest in a prioritized growth initiatives around advancing pool growth and accelerating residential and commercial water treatment. We are driving operations, sourcing and cost out actions where appropriate particularly in our Flow Technology segment. We have a strong capital structure, solid free cash flow generation, and we will continue to invest in our strategy to be the leading residential and commercial water treatment company. Thank you for your continued interest. Zetania, you can conclude the call.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 59 minutes

Call participants:

James C. Lucas -- Senior Vice President, Investor Relations and Treasurer

John L. Stauch -- President and Chief Executive Officer

Mark C. Borin -- Executive Vice President and Chief Financial Officer

Stephen Tusa -- JPMorgan -- Analyst

Nathan Jones -- Stifel -- Analyst

Joseph Giordano -- Cowen -- Analyst

Michael Halloran -- Baird -- Analyst

Deane Dray -- RBC Capital Markets -- Analyst

Scott Graham -- BMO Capital Markets. -- Analyst

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Brad Vanino -- KeyBanc Capital Markets -- Analyst

Rebecca Yuan -- Goldman Sachs -- Analyst

Walter Liptak -- Seaport Global -- Analyst

Julian Mitchell -- Barclays -- Analyst

Brian Drab -- William Blair -- Analyst

Andrew Obin -- Bank of America -- Analyst

Damian Karas -- UBS -- Analyst

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