Pentair PLC

Ladies and gentlemen, thank you for standing by and welcome to Pinter's first quarter earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Mr. Jim Lucas. Please go ahead, sir.

Thanks, Shelby, and welcome to Pintera's first quarter 2020 earnings conference call. We're glad you could join us today. I'm Jim Lucas, Senior Vice President, Treasurer in Investor Relations, and with me today is John Stout, our President and Chief Executive Officer, and Mark Bourne, our Chief Financial Officer. On today's call, we will provide details on our first quarter 2020 performance 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 reference to non-GAAP financials are reconciled in the appendix of the presentation. We will be sure to reserve time for questions and answers after our prepared remarks. I would like to request that you limit your questions to one and a follow-up in order to ensure everyone an opportunity to ask their questions. I will now turn the call over to John.

Thank you, Jim. And good morning, everyone. Please turn to slide number four, titled Executive Summary. This is certainly a historic time that we are experiencing. and the last few months have tried the patience of the entire world at Pantera. I would like to extend my sincerest sympathies to all that have suffered loss during this horrific global pandemic. I want to also thank all of our employees for their continued efforts to stay safe and protect each other, for taking care of our customers, and for continuing to focus on delivering the best financial results possible. I also want to take a moment to thank our COVID-19 crisis response team for all of their efforts to respond to this global challenge and a very special thank you to all of our manufacturing employees for their tremendous commitment to our customers and to Pentair. They truly represent the spirit of our culture, and I appreciate their dedication, their courage, and their contributions to the first quarter results. We were very pleased to deliver a justice for the quarter that was above the high end of our prior guidance range, inclusive of the challenges from COVID-19 that initially impacted our business in China earlier in the quarter, and then globally toward the end of the quarter. We also recently announced the key hires for CFO and for our previously announced segment structure. First, I would like to welcome Bob Fishman, who will become CFO tomorrow, May 1st, as part of an orderly transition from Mark Boren, who previously announced he would be leaving Pentair for another opportunity. Bob joins Pentair after a long, successful career at MCR, where he was a central part of the company's transformation from a hardware and systems manufacturer into a software and services provider. We also announced the hiring of Mario Davidio to lead our consumer solutions segment. Mario joins us most recently from Electrolux and brings a strong background from several consumer-influenced businesses focused on multiple channels. Mario will bring a growth mindset and a sense of urgency to our consumer solutions businesses. Jerome Pedretti, who has been with Pentair for nearly 15 years, will lead our industrial and flow technology segment. Jerome has held experiences at Pentair and has proven himself as a developer of talent. He also embraces our PIMS processes and culture and will utilize his experiences to improve the operating capabilities of the industrial and flow technologies businesses. Finally, we announced the elimination of the COO role and that Carl Frickman will help oversee an orderly transition with Mario and will also work with me through the end of the year as a special advisor. I would like to personally thank Carl for his leadership and partnership over the years. Turning back to market demands, while we formally withdrew our quarter and annual guidance at the end of March due to a lack of visibility, we are planning for significantly reduced demand throughout the remainder of 2020. We do not have clarity at this time around the potential impacts to each of our lines of business or when the markets will recover. Because of the lack of clarity, we are taking appropriate actions to adjust our cost structure while still keeping a focus on the longer term, as we expect that demand will eventually return for most of our businesses. Finally, we are focused on maintaining a strong liquidity position. Pentair has a long track record of being a strong cash flow generator, and our balance sheet is in a solid position. We understand that the remainder of the year will be a challenge and bring uncertainty. However, we believe that our strong operating culture and well-positioned businesses will will eventually prevail over this pandemic and its impacts on the economy. Please turn to slide five labeled COVID-19 update and focus. Our focus has been and will continue to be on the safety and well-being of our employees, while also being mindful of serving customer demand to the best of our abilities. Our business in China and Southeast Asia saw considerable negative impact in the first quarter. but we did not see much impact in Europe or the US until later in the quarter. While we have seen our operations in China return to more normalized levels, demand still has not returned to China and Southeast Asia to levels before the pandemic. Outside of China, we have seen softening demand to start April, and we took actions to reduce the bottom line impact of expected revenue declines. In the short term, we are focused on cost reductions in line with lower revenue levels. We feel good about our balance sheet, cash flow, and liquidity, and believe that we are well prepared to survive the storm. We remain focused on our long-term goals and strategy, and we will continue to prepare to take advantage of opportunities when business recovers. Please turn to slide six, labeled Consumer Solutions. I wanted to spend a few moments on our portfolio exposure and what demand trends we are currently experiencing. Consumer Solutions is a $1.6 billion segment comprised of our pool and our water solutions businesses. As you can see on this slide, Consumer Solutions is approximately 75% residential, and approximately 75% of the revenue serves the installed aftermarket base. Our pool business is a leader in the North American pool equipment business. There are approximately 5.5 million pools installed in the ground. Our dealers continue to operate in most geographies, and we expect the aftermarket business which represents roughly 80% of our pool business, to see some short-term softness, but not to the extent that we might expect will occur in the new pool construction and remodeling parts of the business. While we had a solid start to the season in March, we have seen some softness to start April. We believe that inventory levels in the channel are in line with historic levels, but we'll be monitoring demand throughout the season. Our water solutions business is made up of components, residential systems, and commercial systems. Within our components business, we have not yet seen many changes within the important wholesale channel. Residential systems, which includes the Aquion and Ellicott businesses we acquired last year, are somewhat dependent on in-home visits and retail traffic. While we have not yet seen a material drop off in demand, there are concerns over consumer behavior in the short term. Finally, our commercial systems business has large exposure to restaurants and hospitality, and has seen significant slowing of demand, as expected, with the closures of businesses in these industries. While we expect some short-term disruptions for our consumer solutions segment, we continue to believe that water quality will remain a key focus for consumers and other commercial businesses, and we anticipate this business will be well-positioned when markets eventually recover. Please turn to slide 7, labeled Industrial and Flow Technologies. Industrial and Flow Technologies, or IFT, is a $1.3 billion segment comprised of our residential and irrigation flow, commercial and infrastructure flow, and industrial filtration businesses. As you can see, IFT is a more diverse segment than consumer solutions, with approximately half of sales tied to various industrial markets. IFT does, however, generate approximately 65% of its sales from the installed aftermarket base. Within residential and irrigation flow, we have seen some slowing among our distributors, but this is more in the retail than professional channel. This business is where we have some exposure to agriculture, and while the OEM exposed business is down, our aftermarket business is performing better than it did a year ago. It is important to note that the majority of the residential and irrigation flow portfolio consists of products that are break and fix in nature and tend to be less discretionary purchases. Our commercial and infrastructure flow business manufactures larger engineered pumps. It tends to be a backlog driven business. Our commercial businesses have seen some slowing of orders, but backlog has not yet been impacted. Within infrastructure, which is the smaller piece of this business, we are seeing strong backlog, but we'll be watching orders for any signs of slowing, given this is a long cycle business. Our industrial filtration business is comprised of a number of product lines that serve a wide variety of applications. For instance, we have a strong niche in beer membrane filtration and other components of the beer industry. We also have a sustainable gas business that recycles CO2. We continue to feel comfortable about our overall portfolio given our large install base and limited industrial manufacturing exposure. Our products are solutions that help customers solve needs and will be prepared to serve demand when it returns. I would now like to turn the call over to Mark Bourne to discuss our financial position and our results in more detail.