Pentair PLC

Good day and thank you for standing by. Welcome to the Q4 2021 Pentair Earnings Conference Call. At this time, all participants are in the listen-only mode. After the speaker's 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. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Jim Lucas. Thank you. Please go ahead.

Thanks, Stephanie, and welcome to PEMTER's fourth quarter 2021 earnings conference call. We're glad you could join us today. I'm Jim Lucas, Senior Vice President, Treasurer, FP&A, and Investor Relations. And with me today is John Stauk, our President and Chief Executive Officer, and Bob Fishman, our Chief Financial Officer. On today's call, we will provide details on our fourth quarter and full year performance as outlined in this morning's press release. Before we begin, let me remind you that during our presentation today, we will make forward-looking statements. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Pentair. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors in our most recent Form 10Q and Form 10K, as well as today's release. We will also reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found in the Investor Relations section of Penn State's website. We will be sure to reserve time for questions and answers after our prepared remarks. I would like to request that you please limit your questions to one and a follow-up in order to ensure that everyone has 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. We exit 2021 feeling very grateful for the tireless efforts of all of our employees who help Pentair deliver for our customers and create value for shareholders, despite significant inflation and global supply chain challenges. I am humbled and proud of how our employees remained agile and accountable throughout all of 2021. When we faced ongoing supply chain disruptions and inflation that was almost five times higher than during 2020, our 2021 results exceeded our expectations and create momentum heading into 2022. Sales grew over 20% while segment income and adjusted EPS increased over 30% each. Our return on sales expanded 100 basis points in the full year to over 18% despite significant inflation pressures. We had another strong year of free cash flow, generating over $550 million, which represented over 100% conversion to net income. We returned approximately half of our cash to shareholders through dividends and share repurchases, while also funding two strategic acquisitions. We announced a dividend increase at the end of last year, and the first quarter dividend in 2022 will mark Pentair's 46th consecutive year of increasing dividends. We are especially proud of this record as we are in a small and distinguished group of companies who can say that. Our balance sheet ended the year in excellent shape and is poised to be deployed to drive additional shareholder value. We are introducing Q1 and full year 2022 guidance today, which Bob will highlight in more detail later in the call. For 2022, we are looking for continued sales, income, and earnings growth, as well as further margin expansion. While Q1 faces a tough comparison to last year, due to the largest price versus cost impact and continued disruptions caused by COVID-19, our full-year outlook remains optimistic, and we believe our businesses are well-positioned to create further value for shareholders. Our residential businesses serve mainly the installed base. We estimate Pentair's overall exposure to new residential construction is roughly 10% to the entire company. Our pool business benefits from a large installed base, movement to more autonomous and more energy-efficient pools, and favorable population migration trends. Our water treatment business has built momentum on the residential side with smarter, connected solutions, while a more profitable commercial business has recovered nicely despite restaurant traffic still not back to 2019 levels. Finally, our industrial businesses exited 2021 with continued growth in orders and backlog, particularly in our food and beverage and sustainable gas businesses. Overall, we believe we are well positioned entering the new year, although we recognize that disruptions from COVID-19 are impacting the global supply chain as we start 2022. Please turn to slide five, labeled ESG Priorities are Integrated with Business Strategies. Since becoming a PurePlay sustainability-focused company about four years ago, we have been focused on integrating our ESG priorities with our business strategy. We believe this supports our efforts in cultivating a long-term value proposition for Pentair. It is the right thing to do, it is good business, and it is tied to what our employees, customers, and shareholders value. Sustainability is more than an initiative at Pentair. It is core to how we operate. At Pentair, we are united in our belief that our products and actions are making a difference. We are providing clean, safe water to millions of people while eliminating plastic bottles that are harming our environment. Our products help people use less chemicals and detergents in their lives through our water treatment solutions. We have many products that help reduce carbon-based electricity needs through variable speed pumps and LED lighting. And we are building a growing business for capturing CO2 gas for reuse. We believe our solutions help make the most of life's most essential resources. We are also focused on decreasing our carbon and water footprint with energy-efficient processes and bottle-free facilities. In 2021, we established formal goals to reduce Pentair's Scope 1 and 2 greenhouse gas emissions and water withdrawals. We are driving an inclusive and diverse workforce and leadership team. As a member of the CEO Action for Diversity and Inclusion Coalition, Leading our organization forward on diversity inclusion efforts is a priority, and I am proud of the work we are doing in this regard that contributes to us being an employer of choice. We are also working to build a more sustainable supply chain and have continued to make progress while we are navigating global supply chain disruptions. Finally, we believe we have always had strong governance practices, and we remain focused on ensuring that these are the best practices. We have strong diversity on our board of directors, and we also have strong board oversight of ESG. we recognize that our work will never be done but we believe we are focused on the right priorities and we will continue to engage with our stakeholders on focus areas where we can improve please turn to slide six labeled building a track record of consistent growth as we highlighted during our investor day last june we believe we are well on our way to establishing a track record of consistent growth we believe that we are in the right spaces for the future Global water awareness is increasing, and we serve large and stable end markets. In fact, our two largest businesses, Pool and Water Treatment, are serving sectors that, when combined, are nearly 40 billion in size and are growing faster than GDP. Growing the core is not just about top-line improvement, but continued income growth and margin expansion. We know we must focus on all elements of growth, and we believe we are better aligned on this focus today more than at any time in Pentair's history. Over the last few years, we have been investing in building our brand, our digital capabilities, and our innovation around smart and sustainable solutions. We have successfully rebranded Pelican, acquired in 2019, to pensioner water solutions in the water treatment space, and we believe we are delivering compelling and consistent messaging across all consumer touchpoints to generate awareness and provide consumer confidence in our solutions and expertise. We recently launched the new Home Water platform on Pentair.com to empower consumers to learn, shop, purchase, and gain service and support on our website. We have improved consumer engagement with multiple digital properties, such as web, app, social, and digital ads, to optimize customer journeys and deliver consistent, differentiated brand messaging across all platforms. We saw double-digit increases last year in new visitors to Pentair.com. In fact, this increased engagement has led to a substantial number of leads in our pool business. While we are leader in pool equipment today, we must continue to invest to maintain and improve our position with customers and consumers. A major part of our effort is around building an effortless pool ecosystem. We not only strive to have the most reliable products in the pool industry, but we are also focused on providing the best information about pool ownership, and we believe we offer the highest level of training and education of anyone through the professional channel. We are also increasing our services offerings in many of our businesses. The acquisition of KBI last year brought service capabilities to our commercial water treatment business and helped us create end-to-end solutions for our customers. We are also focused on expanding services within Poole and are developing a network to easily connect homeowners to the appropriate partner and service provider to take care of their needs in a proactive improvement situation. We are also developing more connected products that provide information about the performance of our equipment that will enable our channel partners to quickly react to the needs of the consumer. When we talk about strategic growth initiatives to accelerate the top line, this is about prioritizing, sequencing, and resourcing the critical few ideas that we can deliver to our customers while also driving shareholder value. This is primarily around investments in our leading pool and water treatment businesses. There are other opportunities, such as our sustainable gas business in industrial and flow technologies. We're focused in two areas today, biogas and carbon capture. Our technology helps capture and purify both CO2 and biomethane, in addition to capturing excess CO2 created in manufacturing processes that can be purified and reused. We are also driving transformation to both unlock value and to fund growth. In 2021, we launched and committed resources to drive transformation across Pentair. This is a multi-year initiative to transform how we do business and how we serve our customers. We are focused on four transformational areas, pricing, sourcing, operations, and organizational effectiveness. Last year was all about completing our planning and assessment phase, and we are moving to the implementation phase in 2022. Pricing, sourcing, and operations are big opportunities to drive our gross margin improvement, while we expect organizational effectiveness should help drive efficiencies across Pentair. We believe that transformation will be an important contributor to our goal of greater than 300 basis points of margin improvement by 2025, in addition to helping fund our strategic growth initiatives. Finally, we believe our balance sheet provides flexibility to our long-term value opportunity. Pentair has been a consistent cash flow generator, and we have built a successful track record of disciplined capital deployment. We ended 2021 with our balance sheet levered at only one times, which is below our targeted leverage. This balance sheet flexibility allows us to fund acquisitions in our key growth areas, such as KBI in water treatment and Pleatco in pool, which we completed during 2021. We believe that we are well positioned to continue delivering consistent growth, and we look forward to updating you on our journey. I would now like to turn the call over to Bob to discuss our performance and our financial results in more detail, after which I'll provide an update on our overall strategic position. Bob? Thank you, John. Please turn to slide 7, labeled Pentair Sales Performance. I will also be discussing slide 8 to help frame how we exited the year in context to our full-year performance. Fourth quarter sales grew 24%, with core sales increasing 19%. Consumer solutions core sales growth was 23%, and industrial and flow technologies delivered core sales growth of 13%. For the full year, sales grew 25%, with core sales growing 21%. Consumer solutions delivered 30% core sales growth, and industrial and flow technologies saw core sales growth 9%. We were encouraged to see price readout the strongest of the year in the fourth quarter. Nearly half of the price for the year came through in the fourth quarter. We have discussed all year the multiple price increases we implemented across all of our businesses and the fact that there has been a delay in some of the price reading out given the strong backlogs we have carried throughout the year. We believe the fourth quarter demonstrates our ability to have price read out and we expect that momentum carry over into the new year. For the fourth quarter, segment income grew 18%, while return on sales declined 80 basis points. The margin degradation reflects further acceleration in inflation, in addition to the lower margin contribution of last year's acquisitions. We would note that we experienced inflation in the fourth quarter that was double what occurred for all of 2020. Adjusted EPS grew 24% in the quarter. For the full year, segment income grew 33 percent, and return on sales expanded 100 basis points to 18.2 percent. Adjusted EPS increased 36 percent for the year to $3.40. Our tax rate ended the year at 15 percent, and our share count was 167.5 million. Please turn to slide nine, labeled Q4 2021 Consumer Solutions Performance. In addition to the fourth quarter performance for consumer solutions, I will also be referencing the full year performance on slide 10. Consumer solutions grew sales 31% in the fourth quarter with pool sales increasing 35% and water treatment up 23%. For the full year, consumer solutions grew 34% with pool up 40% for the year and water treatment increasing 24%. Growth was fairly consistent throughout the year and a testament to the hard work of the teams to meet record demand while facing significant supply chain disruptions throughout the year. The pool industry has received a great amount of attention the past couple of years with the acceleration of demand, where already positive industry dynamics have grown stronger. Pools have become enhancements to residential properties and are desirable features that new home buyers are searching for in their future homes. The population migration to warmer climates is another positive trend for the industry as homeowners are looking to add pools to existing homes or purchase new homes with pools in warm weather states. We believe the signs continue to be strong for pool growth to continue, not only in 2022, but well into the future. Channel inventories ended the year approaching levels more in line with historical levels. There are still some product lines and geographies, however, where channel inventory levels are not back to normalized levels. Our pool team did a great job meeting robust demand while managing supply chain disruptions and expanding capacity at the same time. We have also developed capabilities to enhance our ability to better procure products and improve a smoother delivery for our customers. We completed the Pleco acquisition during the quarter, and this adds to Poole's aftermarket capability. Poole made great progress in improving its customer service capabilities, and we believe this continues to be a differentiator for our leading Poole business, not only with industry dealers, but increasingly with consumers. We saw strong growth across all product categories. and we believe that Poole exited the year better positioned to face the ongoing supply challenges in order to continue meeting strong industry demand. Water treatment saw continued growth in residential and further improvement in commercial. Within residential, we saw growth across all channels and within our legacy tanks and valves businesses. While the teams were battling inflation and supply chain challenges throughout the year, we continue to invest in the future. With Roshan being integrated into Pentair at the beginning of 2021, we made great progress in commercializing the first product that is expected to be launched this year. We are excited about the innovation that Roshan brings to consumers around point of use countertop technology, and we look forward to updating you on the progress of the launch as the year progresses. The recovery in our commercial business continued, but industry traffic is still not back to 2019 levels. We continue to focus on the integration of KBI and the creation of an end-to-end solution for our customers has generated an increasing amount of interest. By offering both products and services, we believe our commercial business is better positioned to benefit from continued recovery in the industry, in addition to benefiting from new customers that are showing interest in our solutions. For the fourth quarter, consumer solutions grew income 10%, while Roth declined 410 basis points. The margin decline is due to three areas. First, both KBI and Pleco joined Pentair with lower margins than our segment average. KBI in particular is a services business with lower ROS, but strong recurring revenue and cash flow. Second, the margin pressure is in the form of higher inflation, which should not come as a surprise. In fact, Consumer Solutions experienced nearly half of its full year inflation in the fourth quarter alone. Finally, margins were under pressure due to ongoing supply chain disruptions that have continued to be a challenge. For 2021, consumer solutions grew segment income 32% while margins were down slightly for the year due to the fourth quarter inflationary pressures that we experienced. We believe that this will begin to move back in the right direction starting in the second quarter as price catches up with inflation and we begin to see some pressure taken off of many areas of our supply chain. Please turn to slide 11, labeled Q4 2021 Industrial and Flow Technologies Performance. In addition to the fourth quarter performance for industrial and flow technologies, I will also be referencing the full year performance on slide 12. IFT grew sales 14% in the fourth quarter, with residential flow up 14%, commercial flow increasing 4%, and industrial filtration growing 24%. For the full year, IFT grew sales 12%, with residential flow up 15%, commercial flow increasing 6%, and industrial filtration up 12%. Residential flow delivered double-digit sales growth all four quarters of 2021. We believe many of the population trends that have been driving demand for pool are also benefiting residential flow. Our broad portfolio of products are found in more rural and suburban areas. We exited the year with strong tailwinds, as many of our dealers are still facing low inventory levels. The growth in residential flow is all the more impressive given the strong focus on complexity reduction that saw the business exit many older or less profitable product lines. Commercial flow has been focused on complexity reduction and improving margins with good progress made throughout 2021. We have seen improvement in our water supply and disposal businesses, while infrastructure has slowed due in large part to us being more disciplined on bids. Industrial filtration has benefited from stabilization at some of the smaller product lines, while both food and beverage and sustainable gas continue to build backlogs and see their businesses rebound. We have seen accelerating interest in our Brew Assist IoT-enabled service for brewing, and we now have over 20 connected systems. Sustainable gas experienced strong double-digit growth in 2021 and exited the year with further increases in backlog. We have had good success in our biogas offerings with a number of wins during the year, and the funnel remains strong. We're also seeing more and more interest in our carbon capture technology. For the fourth quarter, IFT grew segment income 63% while Ross expanded 440 basis points. For the full year, IFT grew segment income 30% and Ross expanded 210 basis points to 15%. IFT was hit especially hard on the demand side when the onset of COVID-19 brought demand to a halt. The businesses focused on the elements within its control and the combination of growth and higher margin businesses, further complexity reduction, and overall productivity. These have all been contributors to the rebound in margins throughout 2021. IFT saw all three of its businesses exiting the year with strong backlog, and we would expect another year of growth and margin expansion for IFT. Please turn to slide 13, labeled balance sheet and cash flow. This slide is one we have been proud of all year, and it improved as we ended the year. For 2021, we generated $557 million of free cash flow. We ended the year with our balance sheet levered at only one time, and our return on invested capital exceeded 19%. We returned roughly half of our free cash flow to shareholders through dividends and share repurchases. We also funded two strategic acquisitions, KBI and PleatCo, to further the strategies of water treatment and pool. It is worth noting that PleatCo also contributed a little to IFT as it brought some clean air filtration technologies that fit nicely with one of our existing product lines in industrial filtration. We plan to remain disciplined with our capital, and we believe that we have more than enough flexibility to return capital to shareholders and fund growth, both organically and through acquisitions. Please turn to slide 14, labeled Q1 in full year 2022, and their outlook. Today, we are introducing Q1 in full year 2022 guidance. For the full year, we expect sales to grow 6% to 9%. segment income to grow 10 to 13%, and adjusted EPS of $3.70 to $3.80 were up 9 to 12%. Embedded in our guidance is a continued expectation for growth in all three of our verticals. Residential is roughly 60% of our sales, with 80% of that serving replacement, and only 20% exposed to new construction. While we would expect new construction overall to moderate following two stellar years of growth, we believe this will free up labor to serve strong demand in the replacement market that has been underserved due to the growth in new construction. Commercial represents roughly 20% of sales, primarily in our water treatment business. We are encouraged with the growth that commercial experienced in 2021, given that industry volumes are still not back to 2019 levels. industrial is the remaining 20 percent of sales and the strong exit to 2021 across ifp informs our expectations that industrial growth should continue in 2022. within our full year sales guidance we expect consumer solutions to grow mid to high single digits and ift to grow approximately mid single digits for the year On the income side for the full year, we do expect price to offset inflation, given that the many pricing efforts we undertook in 2021 are reading out, and we expect inflation headwinds to lessen in the back half of the year. We also expect that our transformation activities will move to the execution phase and benefit us in 2022 and beyond. as a result we expect further ross expansion in 2022 to approximately 19 percent while we expect to see continued top line growth in q1 due to the strong demand in many of our businesses we expect to continue to be challenged with higher inflation and supply chain challenges while we anticipate price reading out higher in the first quarter we do not expect it to fully offset inflation until the second quarter, which is putting pressure on our Q1 profitability. We do expect roughly 50% of EPS for the year to be in the first half in line with historical norms. Below the operating line, we expect corporate expense to be approximately $20 million in Q1 and roughly $80 million for the full year. We are forecasting that interest to be approximately $5 million in Q1 and between $16 to $18 million for the full year. We expect the tax rate to be roughly 16% and the share count to be $167 to $168 million for both Q1 and the full year. Finally, we expect free cash flow to approximate net income. I'd now like to turn the call over to Stephanie for Q&A, after which John will have a few closing remarks. Stephanie, please open the line for questions. Thank you.