Pentair PLC

Good morning, and welcome to the Pentair Second Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode for the duration of the call. And should you need any 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. And to withdraw a question, please press star, then two. Please also note that this event is being recorded today. I would now like to turn the conference over to Shelly Hubbard, Vice President of Investor Relations. Please go ahead.

Thank you, Joe, and welcome to Pentair's second quarter 2023 earnings conference call. On the call with me are John Stouck, our President and Chief Executive Officer, and Bob Fishman, our Chief Financial Officer. On today's call, we will provide details on our second quarter's performance as outlined in this morning's press release. On the Pantera Investor Relations website, you can find our earnings release and slide deck, which is intended to supplement our prepared remarks during today's call and provide a reconciliation of differences between GAAP and non-GAAP financial measures that we will reference. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP. They are included as additional clarifying items to aid investors in further understanding the company's performance, in addition to the impact these items and events have on the financial results. Before we begin, let me remind you that during our presentation today, we will make forward-looking statements, which are predictions, projections, or other statements about future events. 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 Pinter. 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. Following our prepared remarks, we will open up the call for questions. Please note that we will limit your questions to two, after which we ask you to then re-enter the queue in order to allow everyone an opportunity to ask questions. Before I hand it over to John, I wanted to highlight slides four through seven in our earnings slide deck that include our strategic framework, Pentair at a glance, a Pentair overview, and our newest slide illustrating our ESG highlights and progress. These four slides provide a good snapshot of who Pentair is, especially for those new to our company. Our strategic framework states our purpose, mission, vision, and values that drive our performance as a smart, sustainable water solutions company. Pentair at a glance on slide 5 provides a great snapshot of our company, our performance, our installed base, and our 47-year track record of annual dividend increases, which places us in a small group of companies. The Pentair overview on slide 6 provides our historical sales and ROS performance on a consolidated level and by segment. Lastly, our ESG highlights and progress shown on slide 7 are a testament to the important work our teams do to integrate sustainability into our operations, product innovation, and long-term strategy. We are very proud of our achievements to date, especially considering the early stages of our program, which began just about three years ago. I will now turn the call over to John.

Thank you, Shelly, and good morning, everyone. Let's begin with our record Q2 results and the executive summary on slide eight. In Q2, we achieved record sales, segment income, return on sales, EPS, and free cash flow, following the separation of Invent from Pentair in 2018. Specifically in Q2, sales increased 2% to nearly $1.1 billion. Segment income increased 14% to $234 million. ROS expanded by 230 basis points to 21.6%, driven by margin expansion across all three segments. Adjusted EPS rose 1% to $1.03%. and free cash flow was $433 million. With another strong quarter financial results, we are raising our 2023 adjusted EPS range to $3.65 to $3.75, which increases the midpoint of our range to $3.70. We also continue to strengthen our balance sheet and reduced our net debt leverage ratio to 2.2 times EBITDA at quarter end, down from 2.6 times in Q1. We believe our record second quarter performance demonstrates the power of our global diversified water portfolio and strong execution across all three segments, IFT, water solutions, and pool. Our strategy to help the world sustainably move, improve, and enjoy water, life's most essential resource, is proving its resilience. For example, like last quarter, sales growth in our IFT and water solution segments more than offset the expected sales volume declines in pool year over year. Margin expanded across all three segments driven primarily by price, cost actions to right size our direct labor in pool, the elimination of 2022 manufacturing and supply chain inefficiencies, and continued progress on our transformation initiatives that are beginning to read out. Lastly, I want to thank our employees across the globe for their hard work, dedication, and contribution to delivering another strong quarter for customers and shareholders. Let's move on to slide nine, titled Q2 Segment Highlights. Within IFT, we achieved record sales driven by double-digit growth across our commercial and industrial businesses. Commercial and infrastructure flow delivered strong sales growth across all categories, primarily due to our strong backlog aftermarket and replacement sales in our pump portfolios, carryover pricing actions from 2022, and stabilization in the supply chain. Industrial Solutions also delivered strong sales growth, driven by global key account expansion, new business partnerships, and aftermarket and replacement sales in our components and membranes portfolios. Record margins in Q2 were primarily driven by price and transformation. In addition to implementing our transformation initiatives in IFT, we have also focused on capturing the right projects with improved offerings to drive margin expansion. In water solutions, our commercial offerings drove very strong sales growth and margin in Q2, which benefited in part from the continued recovery of food service and hospitality venues post the pandemic and a shift in consumer behavior from products to services. In fact, in 2023, The number of locations of the top 500 chain restaurants in the U.S. now exceeds the 2019 benchmark, according to the Technomic Top 500 Chain Restaurant 2023 Report. We also saw strength in commercial filtration sales in North America. Our Manitowoc ice acquisition continued to outperform our expectations, delivering strong sales and margins that were accretive to the water solution segment. Over the last few years, Manitowoc Ice has expanded its sales driven by a focus on its consumer with a targeted go-to-market strategy, effective management of macro supply chain challenges, and reliability in its supply chain to deliver product with better lead times. We are very pleased with the acquisition and how it complements our commercial water solutions businesses, enabling us to provide end-to-end water solutions for customers from filtration to ice to services. Lastly, we believe that the residential water treatment is nearing the bottom of the cycle. We believe our residential business is stabilizing and lead times have improved. Awareness of PFAS or forever chemicals that have been found in drinking water continues to rise. We are proud to say that we have products today for residential consumers that reduce PFAS to current certification levels. And we continue to drive new innovation and invest in R&D to be able to provide more products that are certified to produce PFAS, we believe we are positioned the company well to be a leader in this space. Within Poole, 2023 has been a softer and difficult year. As we expected, given the higher than historical demand in 2021 and 22, coupled with supply chain challenges that disrupted our lead times during those periods. Our lead times have returned to approximately five days on most of our products, However, the channel continues to work through higher inventory, creating a sell-in versus sell-through imbalance for Pentair in 2023. Despite these lower volumes, in Q2, we drove significant margin expansion from price, cost actions to right-size labor to lower volumes, eliminated 2022 sourcing and manufacturing inefficiencies, and delivered transformation savings. We continue to expect Q3 to reflect a bottom in Poole, volume for Pentair as we expect higher channel inventories to correct, allowing for sell-in to be more closely aligned with sell-through. We have noted in the past that our typical pool sales mix reflects 40% from new and remodeled pools and 60% from the aftermarket break and fix replacement sales. While the number of new pools this year is lower than the elevated number of new pools built during the pandemic, the installed base of U.S. pools has continued to grow. Despite the short-term reset in 2023, we believe pool remains an attractive market. Before I turn it over to Bob, let's turn to slide 10, titled CEO Summary. We delivered another quarter of quality earnings with ROS expansion across all three segments. Our IFT and water solution segments more than offset pool value declines, and our transformation initiatives are well underway. Our strong first half has resulted in another 2023 guidance increase. And we believe our pool business is well positioned for return to growth following the channel inventory correction, which we expect to be completed by Q3 quarter end. All in, we are building a strong foundation to drive long-term growth and profitability across our diverse water portfolio. We are introducing Q3 guidance and raising the full year adjusted EPS range to $3.65 to $3.75. The midpoint of $3.70 is up 5 cents from prior guidance due to strong Q2. We have also updated our segment sales expectations to reflect stronger sales in IFT and water solutions driven by a strong first half of 2023 and lower expected sales in our pool segment. We continue to closely monitor macroeconomic developments and remain mindful of an uncertain operating environment. We continue to implement risk mitigation strategies and we are accelerating transformation funnels as necessary while focusing on investing in the long-term growth of our company. We remain confident in our diversified water business model, long-term strategy, and our transformation initiatives, which we expect to continue to drive shareholder returns. We have a long, successful track record of generating strong cash flow and being disciplined with capital allocation. We have achieved 47 consecutive years of dividend increases and are targeting high-teens ROICs. We have a strong balance sheet and an enviable five-year track record in financials. I will now pass the call over to Bob, who will discuss our performance and financial results in more detail. Bob?