Pentair PLC

Good morning and welcome to the PENTAIR third quarter 2022 results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Jim Lucas, Senior Vice President, Treasurer and Investor Relations. Please go ahead. Jim Lucas, Senior Vice President, Treasurer and Investor Relations. Please go ahead. Jim Lucas, Senior Vice President, Treasurer and Investor Relations.

Please go ahead. Jim Lucas, Senior Vice President, Treasurer and Investor Relations. Please go ahead. Jim Lucas, Senior Vice President, Treasurer and Investor Relations. Please go ahead. Jim Lucas, Senior Vice President, Treasurer and Investor Relations. Please go ahead. Jim Lucas, Senior Vice President, Treasurer and Investor Relations. Please go ahead. Jim Lucas, Senior Vice President, Treasurer and Investor Relations. Please go ahead. Jim Lucas, Senior Vice President, Treasurer and Investor Relations. Please go ahead. Jim Lucas, Senior Vice President, Treasurer and Investor Relations. 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 PINTAIR. 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 10-Q and Form 10-K and 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 Pentair'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 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. We are pleased to announce that our Q3 results were strong considering near-term challenges and were in line with our expectations. Sales growth of 9% and segment income growth of 15% included a partial quarter of our recently completed Manitowoc ice acquisition. ROS expanded 110 basis points, demonstrating that price and productivity offset inflation, and our adjusted EPS grew 11% to $0.99 in Q3. which included incremental debt from our acquisition and rising interest rates. We are very excited about the addition of ICE to our portfolio and the expansion of our commercial water solutions platform, and the team and the integration process is off to a fast start. I will give more detail in our updated full-year 2022 guidance later in the call. While we have modestly reduced our full-year expectations due primarily to increased FX headwinds and higher interest rates, The year is generally playing out the way we thought it would after our Q2 earnings call. We are seeing the previously communicated inventory correction in most of our residential channels, which we believe the industry is now addressing as supply chain challenges begin to abate. With our updated guidance, we now expect that we will have cleared nearly 200 million of channel inventory and pool by the end of the year. We are encouraged that underlying demand is still up year over year, as evidenced by dealer and distributor sell-through despite the rising interest rates within the U.S. residential industry. I will speak in a few slides about some preliminary thoughts on 2023, but the main takeaway is that we believe we are well-positioned to grow sales, segment income, margins, and adjusted EPS next year. Please turn to slide number five, labeled water. With everything going on and the market reacting to shorter-term challenges, I wanted to take a moment to remind you that we believe Pentair is well positioned to solve some of the world's toughest water challenges in a sustainable way. Today, over 70% of Pentair's solutions support water and energy efficiency through helping to reduce water usage, reuse, or recovery of water, or requiring less energy to operate or operate more efficiently. With a lot of the ongoing challenges, we believe that our solutions are needed to improve the lives of people and sustain our planet. Please turn to slide number six, labeled purpose. Our purpose is important to our employees, our customers, and is growing more important to you, our shareholders. We hold ourselves to very high standards, and our annual sustainability report has shown progress. We believe that further progress not only benefits the planet, but customers, employees, and shareholders as well. Please turn to slide number seven, labeled tenteritic land. Given how much focus has been on our residential businesses, particularly pool, we wanted to take a step back and remind people of the diversity of the Pentair portfolio. Our mission as a company is to help the world sustainably move, improve, and enjoy water, life's most essential resource. And we do this in residential, commercial, agricultural, and industrial applications. On a pro forma basis, with a full year of our Manitowoc ice acquisition, and inclusive of our current 2022 guidance. U.S. residential sales comprise roughly half of our revenue, and the other half comes from our other served industries. I will spend the next few slides talking about our three businesses and how they help comprise the overall PENTAIR results. We are on track to generate over $4 billion in sales this year, and we have a strong focus on profitability with our West and the High teams. 75 is an important number for Pentair. 75% of our products are replacement inside a large installed base that benefits from over 75,000 trade partners. We believe the large-served installed base and relationships with our trade channel partners drive resiliency of revenue and create a steady funnel for continued growth as new products and technologies are introduced. We have a long, successful track record of generating cash flows. and being disciplined with our capital allocation. In fact, we have increased our dividend for 46 consecutive years, and we are especially proud of our high-team RYC, demonstrating that we have been good stewards with your invested money. We believe we have a very solid foundation, and we know there's still more that we can do. Please turn to slide eight, labeled Aligning Organization for Accelerated Success. We announced last quarter that effective January 1st, 2023, we will be splitting our consumer solutions segment into two new segments, pool and water solutions. Our industrial flow technology segment will remain unchanged. We believe this new segment structure will help us accelerate our efforts to improve customer service, differentiate our products, and drive profitability for our shareholders. Please turn to slide number nine, labeled pool business. Pool is a leading in-ground equipment maker with the largest installed base in North America, primarily across the Sunbelt states. Pool is on track to generate $1.6 billion in sales this year, has returned on sales in the high 20s, and has generated a 10-year revenue caterer of approximately 10%. We are a preferred business partner to pool professionals and a trusted source for all things pool. Our pool business helps people sustainably enjoy water by using less energy and chemicals. One of the most attractive characteristics of the pool industry in North America is serving a large installed base of approximately 5.4 million pools. The average age of these pools is approaching 25 years. The industry has roughly 60% break and fix, 20% major remodeling, and 20% new pools. Over the last two years, there was undoubtedly an increase in demand for products such as heaters and cleaners, that were not as deeply penetrated on the cool path. People were moving to warmer climates and buying homes with a pool or wanting to build a pool. The emergence of Airbnb and Vrbo lets people rent homes with pools rather than staying in hotels. Our industry-leading variable speed pumps have faced supply chain disruptions that have kept us from shipping as many as the industry wants. But we are starting to catch up on these shipments as our supply chain improves. Only about half of all in-ground pools have some form of automation, and we believe this is another long-term opportunity for Pentair, the industry, and consumers. Pool dealers continue to be constrained by the lack of available labor. While dealers may have been busier with new pools the last two years, this has come at the expense of remodeling activity. We believe we have strong opportunities to continue to grow in key categories, particularly pumps. Our new IS3 pump was soft launched this year, as we were not able to get enough chips and drives to meet demand. The initial feedback is very positive, and we believe this is an opportunity to build on our leading technology position in pool pumps. We believe the long-term outlook for the pool industry remains very positive, and we are well positioned to enhance our position as a leader in North American pool equipment. Please turn to slide 10, labeled Water Solutions Business. Our water solutions business has undergone a transformation of its own with our acquisition of Manitowoc Ice. On a pro forma basis, water solutions are approaching $1.2 billion in sales, with return on sales of roughly 20%. The business is approximately two-thirds commercial and one-third residential. Similar to Poole, our water solutions business sees a large percentage of its sales go through distribution into trusted water treatment specialists. Our water solutions business improves water by providing great tasting, higher quality water and ice, while helping our customers use water more productively. We have discussed our commercial water solutions business quite a lot this year, given the acquisition of Mantua Ice. When put together with our Everpure filtration business and our KDI services business, we have created a leading platform to provide quality water and ice to our food service customers. Our residential water treatment business consists of components and systems. Our focus within residential water treatment is reestablishing the core of components while also investing in differentiated point-of-entry and point-of-use systems. We have a strong position with our core pro-trade specialists. We have brands such as Fleck and Rainsoft that have strong recognition in their respective channels. Commercial Water Solutions is already a high-margin business where the focus is on driving growth. Residential water treatment is focused more on complexity reduction and margin improvement while investing in core channels. We are excited about the opportunities for the soon-to-be water solution segment. Please turn to slide 11, labeled industrial and flow technology segment. Industrial flow technology does not always get the same attention from investors as our other two segments, but is important to our long-term strategy. As we help the world sustainably move, improve, and enjoy water, our flow business helps move water where you need it, when you need it, more efficiently. While our industrial solutions business might not be as water-focused as the rest of the portfolio, the business is focused on transforming waste into value. Our flow business is just north of 1 billion sales, with healthy margins that are improving. Professionals represent roughly 80% of sales per flow, and we have many highly recognized brands. Our deep relationships with channel partners are an important long-term growth driver. Flo is roughly two-thirds residential and one-third commercial. We also serve irrigation and infrastructure on a smaller scale, which helps bring balance to the business with a combination of short cycle products and engineered products that are longer cycle. Flo has seen solid margin improvements this year, and we believe this business has a long runway ahead. to drive margins even higher. Our industrial solutions business is roughly 500 million and is a technology leader in several niches, including beer membrane filtration and sustainable gas solutions. Industrial solutions is the one part of our portfolio that is not tied to professional trade channels, but this business provides filtration technology to help solve customers' environmental goals through smart and sustainable solutions. Similar to Flo, We believe there's a lot of opportunity for margin improvement within industrial solutions. Please turn to slide 12, labeled Transformation to Enhance Value Creation. We continue to believe that transformation will be a large value creation opportunity for Pentair. We are building capabilities and training businesses in new tools to use. We are furthest along on our sourcing initiatives. We have completed wave one that is focused on key categories like electronics, motors and drives, casting, and indirect. In fact, we had an early win in the quarter regarding our M&O spend, where we went from over 100 different suppliers down to one. This allows us to not only save money, but it also reduces complexity across our entire organization in this channel. As we institutionalize our wave one learning, we believe this will drive future waves as we look at additional categories. On pricing, we're establishing a foundation for pricing across our different go-to-market strategies. This includes looking at our dealer and distributor programs to better optimize them. We're gaining insight into profitability by customer and product category and using this data to better drive our forecast. Pricing remains a big opportunity, and this year has been about building capabilities, and next year should start to see benefits materialize. We've made a few small strides in footprint optimization this year. We believe this presents longer-term opportunities, but not until 2024 and beyond as we build out the funnel. From an organizational standpoint, there remains ample opportunities for complexity reduction across the entire portfolio and a realignment of these skills within our top priorities. Transformation has moved from funnel to execution, and we expect more material benefits to contribute to our longer-term margin expansion targets. We'll be providing more detail regarding specific expectations when we introduce our 2023 guidance. Please turn to slide 13, labeled Early Thoughts on 2023. While we are not yet ready to provide full guidance for 2023, we did want to share some early thoughts as we go through our internal planning process. We expect to grow revenue next year for a few reasons. First, we expect the inclusion of band flock ice will contribute significantly. Second, we expect carryover pricing from the actions we have already taken this year. And third, we believe the diversity of our portfolio will be demonstrated and create resiliency. The focus from investors feels solely on our pool business. But we have many other contributing businesses in our portfolio. In fact, pool has its own diversification with 60% break and fix that we expect will likely continue to grow. While the smaller exposure to new pool construction may decline double digits, and maybe there will also be softness in remodeling, we expect the 5.4 million in-ground pools in the break-and-fix portion of the industry will likely grow modestly. And this, along with carryover pricing, should help limit the anticipated declines from inventory correction early next year. The remainder of the Pentair portfolio has more exposure to some later cycle business, with industrial flow technologies that offers further diversification. We also expect to grow income next year. Again, we expect that Man's Lock Ice and pricing carryover will be contributors. We are also taking actions this year to better align our manufacturing costs and overhead with the lower volumes we are experiencing. We also expect productivity to return to more normalized levels as manufacturing inefficiencies abate with improved supply chain performance. Transformation is also expected performance next year. We also expect to see adjusted EPS growth with the accretion from AMSOC ice, overall business performance, and benefits from transformation. We expect free cash flow to return to more normalized levels and perhaps even a little better, as we expect better inventory performance as supply chain inefficiencies go away and backlogs are reduced. Overall, we believe we are positioned to grow in 2023 despite the challenges of a softening economy residential inventory, and stocking challenges, and FX headlooms. I would now like to turn the call over to Bob to discuss our performance and our financial results in more detail. Bob?