Pentair PLC

One follow-up. Please note, this event is being recorded. I would now like to turn the call to Shelly Hubbard, Vice President of Investor Relations. Please go ahead.

Thank you, Anthony, and welcome to Pentair's third 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 third quarter 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 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 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. A quick reminder before I hand the call over to John. Similar to last quarter, we have included slides four through seven in our earnings slide deck, which provide a brief overview of Pentair. Please see these slides titled Strategic Framework, Pentair at a Glance, Pentair Overview, and Making Better Essential for more information. In reference to slide seven, Making Better Essential, we are proud to share two recent recognitions that Pentair has received for its work in social responsibility and ESG. We have been recognized as a constituent of the FTSE for Good Index Series, and we have been named one of America's Greenest Companies 2024 by Newsweek. This recognition from Newsweek evaluated Pentair's environmental performance in relation to our industry, assessing our progress against key environmental factors, including greenhouse gas emissions, water usage, waste profile, and commitment to disclosing sustainability data. Pentair's achievement supports our purpose to create a better world for people and the planet through smart, sustainable water solutions. We look forward to continuing to reduce the environmental impact of our operations and further integrate sustainability into our product innovation as guided by our social responsibility strategic targets. Please refer to our published 2022 Corporate Responsibility Report for more information on our sustainability strategy. I will now turn the call over to John.

Thank you, Shelly, and good morning, everyone. Let's begin with the executive summary on slide eight. We are very pleased with our third quarter results, which surpassed the guidance that we provided on our last earnings call. Q3 marked the sixth consecutive quarter of sales over $1 billion and the sixth consecutive quarter of adjusted margin expansion. Segment income increased 3% and ROS expanded by 140 basis points. Adjusted EPS was 94 cents versus our previous guidance of 84 cents to 89 cents. And year-to-date free cash flow was 453 million, up 115% over the prior year. As we look to the full year, We are updating our 2023 adjusted EPS guidance range to $3.70 to $3.75, which reflects the high end of our previous guidance. I want to celebrate these strong results with all our employees. Your resilience and dedication to serving our customers and delivering value for our shareholders during a year of global macroeconomic uncertainty is making a difference. Thank you for your leadership. Let's move to slide nine, titled Strategic Focus. Through our mission to help the world sustainably move, improve, and enjoy water, we are enabling the right investments to both deliver the core and build our future to drive long-term value for shareholders. In Deliver the Core, we have driven profitability and productivity across all three segments, industrial flow technologies, water solutions, and pool in 2023. We have also been making better essential through our products and solutions for people on the planet with a focus on sustainability, and we have been investing in our people to develop talent and build a higher performing culture. Another strategic focus of ours is to build our future to accelerate performance. In 2023, we have further invested in transformation, innovation, and M&A. In fact, we have seen great results across all three of these areas, with our transformation having begun to read out and new innovation launched this year with exciting new products coming in all three segments. And our Manitowoc ice acquisition is exceeding expectations. Regarding innovation, in 2023, our businesses have launched 25 new products. Examples include a new high-efficiency ice maker for convenience stores and fast casual restaurants designed in advance to meet the future EPA regulation for refrigerants, expansion of our Energy Star award-winning and smart IntelliFlow 3 pump series, the advancement of our beer membrane filtration solutions to operate continuously with higher levels of smart automation. In addition to these new product launches, our innovation teams continue to make great progress advancing our strategy to build our future as they focus on our longer-term growth themes centered on the pool of the future, reimagining residential commercial water treatment, and industrial waste-to-value solutions. Over the last three years, we have launched over 100 new products. Let's turn to slide 10, titled Transformation Update. We embarked on this transformation journey nearly two years ago with the intent to transform our business for the Pentair of the future. Our company has evolved substantially with the separation of Invent and then evolving to a leading diversified water company. Through our four key transformation themes, including pricing, sourcing, operational excellence, and organizational effectiveness, we are streamlining our processes and building additional capabilities which add more tools in our toolbox to drive growth and productivity. In Q3, transformation gained momentum and drove a substantial increase in productivity sequentially from Q2. After implementing Wave 1 in both pricing and sourcing, we expected transformation to begin to scale in the second half of this year, and we are pleased to note that our transformation initiatives remained on track. Let's turn to slide 11, titled CEO Summary. We delivered another strong quarter with significant ROS expansion. Our Manitowoc ice acquisition continued to exceed expectations. Our IFT and water solution segments more than offset pools' volume decline, and our transformation initiatives drove margin expansion. Our performance through Q3 resulted in another positive update to 2023 adjusted EPS guidance. All in, We are building a strong foundation to drive long-term growth and profitability across our diverse water portfolio. We have updated the full-year adjusted EPS guidance to a range of $3.70 to $3.75 from the previous range of $3.65 to $3.75. We are mindful of the uncertainty across the global macroeconomic and geopolitical landscape, and we continue to closely monitor macroeconomic developments and implement risk mitigation strategies when and where necessary. We have continued to accelerate transformation funnels 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 allocations. We achieved 47 consecutive years of dividend increases and are targeting high-teens ROIC. We have a strong balance sheet and an enviable five-year financial track record. I will now pass the call over to Bob, who will discuss our performance and financial results in more detail.

Bob? Thank you, John, and good morning, everyone. Let's start on slide 12, titled Q3 2023 Pentair Performance. We delivered another strong quarter of significant margin expansion, despite sales being down 4% year over year. The diversification of our portfolio and our transformation initiatives continued to more than offset Poole's lower volume impact on margins. Poor sales for Q3 were down 7% year over year, driven by our residential businesses. Our commercial and industrial businesses performed well in the quarter. While Q3 sales declined primarily due to the volume headwind and pool, the negative volume impact on Pentair and pool improved sequentially from Q2. Third quarter segment income increased 3% to $212 million and return on sales expanded 140 basis points year over year to 21%. This improvement was driven primarily by productivity from transformation accretive margins from the Manitowoc ice acquisition, and some price versus cost benefit. We delivered adjusted EPS of $0.94. Net interest expense was nearly $29 million, and our adjusted tax rate was 15% during the quarter with a share count of $166.6 million. Please turn to slide 13. labeled Q3 2023 Industrial and Flow Technologies Performance. Industrial and flow technology sales increased 3% year over year, driven by commercial sales growth of 8% and industrial sales growth of 12%, which more than offset a decline in residential sales of 7%. Segment income grew 18% and return on sales expanded 250 basis points to 19.4%, marking the fifth consecutive quarter of equal to or greater than 200 basis points of improvement. The strong margin expansion was a result of continued progress on our transformation initiatives. IFT's continued success was partly driven by a revised go-to-market strategy and industry leadership that has been underway over the last two years. For example, within our industrial businesses, our strong reputation and industry expertise is driving above industry growth. We've been moving away from primarily project-led business to standardized solutions, focused on ease of doing business with distributors, and our key accounts have begun to reinvest in sustainable product lines following the pandemic. Within our commercial businesses in IFT, we are focused on driving business beyond warehouses and office space to data centers and institutions such as universities, airports, hospitals, and government buildings. We also believe there are large opportunities in municipal infrastructure as driven by the Infrastructure Investment and Jobs Act legislation in the US with a focus on investments in clean water, flood control, and broadband. Interestingly, one of our customers is the leader in directional drilling equipment for fiber optic cables. We continue to believe the aftermarket is a good opportunity for future growth because of our significant product install base. Lastly, we believe we are in a strong position to benefit from the Build America, Buy America Act as our compliance is expected to give us a strategic advantage. Within our residential businesses and IFT, we have seen a return to normalization. Recall that these products are typically not a discretionary spend. When a sump pump or a well pump breaks, it's critical to get it fixed. Please turn to slide 14 labeled Q3 2023 Water Solutions Performance. In Q3, water solution sales increased 9% to $299 million, driven by our Manitowoc ice acquisition and price. Segment income grew 40% to $69 million, and return on sales expanded 510 basis points to 23%, driven primarily by our creative Manitowoc ice acquisition and productivity from our transformation initiatives. Margins have expanded over the last seven quarters from 10.8% in Q1 of 2022 to 23% in Q3 of 2023. Within our residential business and water solutions, we noted last quarter that we are seeing North America stabilize. This was evident in Q3 as residential sales declined improved sequentially from Q2. Within our commercial business and water solutions, filtration sales in North America remained strong and Manitowoc ice continued to exceed our expectations. Please turn to slide 15, labeled Q3 2023 pool performance. In Q3, pool sales declined 21% to $309 million. The volume decline of 28 points was primarily due to continued channel inventory corrections in the quarter and reflects a strong Q3 2022 comparison. Sequentially, the negative impact of volume significantly improved from Q2. The pricing benefit of seven points helped partially offset the volume decline. Despite lower pool sales in Q3, return on sales expanded 130 basis points due to price offsetting inflation, prior actions to right size direct labor to align with lower volumes, and improved productivity driven by our transformation initiatives. Please turn to slide 16 labeled transformation initiatives. Similar to last quarter, we believe this slide provides a good illustration of our transformation initiatives and our ultimate goal of driving margin expansion. For reference, our transformation initiatives focus on four key themes, pricing excellence, strategic sourcing, operations excellence, and organizational effectiveness. As we've mentioned in past quarters, we expect strategic pricing actions to benefit the top line of all three of our segments. We expect our other three transformation initiatives to help improve our overall cost structure. As a result, We are targeting ROS of approximately 23% by the end of fiscal 2025, expanding margins over 400 basis points as compared to fiscal 2022. Please turn to slide 17 labeled Transformation Runway. As you look at each of the four key themes, you can see that the work within these transformation initiatives is in various different stages. For example, in 2023, we have begun to see early readouts from wave one within pricing, sourcing, and operations. We are beginning wave two within each of these three themes and expect margin benefits to read out in 2024. You can see how each new wave is expected to compound on the others to drive expected margin expansion year over year through 2025 and beyond. In pricing excellence, the strategic pricing playbook has been developed, which is just beginning to roll out across segments and categories. For example, in Q3, we began to implement strategic pricing actions across select products within our pool segment. Within these price actions, while these price actions are reflected in our recent annual price increase, Please note that these strategic actions differ from annual price increases. Typically, on an annual basis, we evaluate overall inflation, both material and cost, to determine the appropriate price increase across our products. With regards to strategic price actions, we are evaluating all products through a value-based model and identifying which ones have opportunities for adjustments. Recall that in the past, we primarily evaluated pricing through a cost-plus approach. In sourcing excellence, the implementation of Wave 1 is underway with savings currently reading out. As a reminder, Wave 1 included materials such as electronics, motors, maintenance, repair, and operation spend, packaging, and logistics. Additionally, we successfully kicked off Wave 2 this summer with over 800 suppliers attending our supplier show. For reference, Wave 2 materials include metals, molding, resins, ocean freight, and purchased finished goods. We expect Wave 2 to begin to read out beginning in 2024. Incremental to our strategic sourcing waves, we have seen benefit from our rapid renegotiation process that is a part of our transformed sourcing excellence work. In operational excellence, we have completed the consolidation of three facilities while continuing our execution on lean transformation plans across our sites. In organizational effectiveness, we are in the earliest stages with wave one and expect margins benefits to be realized beginning in 2024. Due to the staggered nature of these transformation initiatives, we expect wave three to begin to read out post 2025 in operations excellence and organizational effectiveness. Overall, we are excited about the savings we have begun to realize from the early waves and remain confident that our teams can execute on pricing actions and savings we have identified, particularly in sourcing. Please turn to slide 18, labeled balance sheet and cash flow. In Q3, we generated $143 million in free cash flow, up nearly 100% year over year, reflecting another strong quarter. Year to date, our free cash flow was $453 million, up nearly 115% year over year. Our net debt leverage ratio was 2.1 times, down from 2.6 times in Q1 and 2.2 times in Q2. Our maturity stack is very manageable. Total debt is now less than $2 billion and the average rate is approximately 5.3%. Our ROIC was 14.1%, exceeding our cost of capital and includes debt from the Manitowoc ice acquisition. We continue to target high teens ROIC in the long term. We plan to remain disciplined with our capital and continue to focus on debt reduction amid the higher interest rate environment. Moving to slide 19, titled Q4 and Full Year 2023 Pentair Outlook. For the full year, we are updating our adjusted EPS guidance to approximately $3.70 to $3.75. from our previous range of $3.65 to $3.75. Also for the full year, we expect sales to be roughly down 1%, segment income to increase 10 to 11%, with corporate expense of approximately $85 to $90 million, net interest expense of roughly $123 to $125 million, an adjusted tax rate of approximately 15%, and a share count of $166 million. For the fourth quarter, we expect sales to be down approximately 3% to 4%. This is mainly attributable to expected lower pool volume year over year and the return of seasonality in our business now that lead times have normalized. We expect fourth quarter segment income to increase 3% to 8% with corporate expense of roughly $23 million net interest expense of roughly 28 to 30 million dollars an adjusted tax rate of approximately 15 percent and a share count of 166 million we are also introducing adjusted eps guidance for the fourth quarter of approximately 82 cents to 87 cents moving to slide 20 title full year 2023 guidance at midpoint we continue to expect total 10th air sales in fiscal 2023 to be approximately $4.1 billion or down about 1%. We continue to expect IFT sales to be up mid single digits and water solution sales to be up high teens. For pool sales, we have made a slight adjustment to down high teens from previous guidance of down mid teens at the high end of the range. Segment income is expected to increase approximately 10% to 11%, with ROS expansion of over 200 basis points to 20.9%. Moving to slide 21, titled Q3 Progress Summary. We are very pleased with our Q3 and year-to-date performance. As John mentioned earlier, our third quarter marked the sixth consecutive quarter of sales over $1 billion and the sixth consecutive quarter of adjusted margin expansion. We have executed well in a dynamic environment and delivered on our commitments. Specifically, our diversified water portfolio and transformation initiatives have driven significant margin expansion despite pools volume decline. Our Manitowoc ice acquisition has exceeded our expectations. We have instilled performance accountability across the organization which is being measured through key metrics. We have a very strong balance sheet and free cash flow generation, and we have a disciplined capital allocation strategy that aligns to our high-teens ROIC target. I'd now like to turn the call over to the operator for Q&A, after which John will have a few closing remarks. Anthony, please open the line for questions. Thank you.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. We ask that you ask one question, sorry, one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Our first question will come from Brett Lindsey with Mizuho. You may now go ahead.

Hey, good morning, all. Morning. Hey, first question is just on pricing and pools. So it sounds like you have two different actions here, so one being the normal course of business, and then on top of that some surgical. If you could just square that comment. And then anything you can share in terms of the magnitude of the actions that you're contemplating there?

No, I think, you know, just to clarify, as we go into – Next year, we were only counting on a price increase, which would be a more normalized price increase and modest compared to prior years, but slightly higher than what we would have said would have normally occurred, which is us covering the inflationary aspects. Not aware of anything incremental than that. And those price increases are already been announced to the market.

Yeah, our comment was that not only did we use an approach that looked at inflation, but for certain product lines, looked at adjustments based on a value-based model, but that is all included in the pricing that went out to be effective Jan 1.

I understood. Thanks for that. And then just wanted to circle back to the comments around the market extensions within IFT commercial. Great to see some opportunity outside those traditional verticals. Is there any way to quantify the total addressable market size that will increase here given this new reach, this new focus?

No, but, I mean, you know, it opens up what we would say would be at least a billion dollars plus for our particular opportunities. You know, and I think that's a conservative estimate, Brett.

Okay, great. Best of luck. Thanks. Thank you.

Our next question will come from Andy Kaplowitz with Citigroup. You may now go ahead.

Good morning, everyone. Morning. Morning. John, can you update us, give us more color on what you're seeing in the pool market? It looks like you're suggesting with your Q4 guide, slightly bigger inventory correction than the 150 you were guiding to. Maybe you could give us some more color on that. And then how do you think that sets up pool for 2024, especially given a higher interest rate environment?

Yeah, so I think, you know, first of all, we're pleased that we were able to predict, you know, the way that Q3 was going to unfold and it played out generally as we expected. I think we focused on sell-through data and then also focused on the metrics of our channel partners. And I think that data is providing clarity of what's going on. You know, I think the inventory is generally behind us. I don't think that's what Q4 represents. I think Q4 represents what we would say is You know, reflecting the higher interest rates and the impact it could have on the sell-through aspects within the market. And it's helping to position ourselves for the best possible 2024 that we can have. So it's a modest participation in early buy. It's making sure that we're not continuing to build inventory ahead of next year. And it's setting ourselves up for a really good 2024.

So for john and then you know you beat your forecast for Q3 sales overall it down 4% I think you're expecting down seven. You didn't change anything other than pool, which we just talked about, but my question is whether you're seeing anything in it, or what are solutions that stopped you from raising your forecast at all. I would imagine you want to be conservative as you talked about, but any more color there on your current economic conditions how they're affecting the other segments.

No, I mean, I think Water Solutions has benefited from significant performance at Manitowoc Ice, and we're really pleased with how that acquisition came in and has performed. Just a reminder, though, we're going to start comparing against really good delivered quarters in the prior years, and so that year-over-year performance is going to moderate. I think the market outlook for that business continues to be strong, but it's going to be hard to continue to put up those types of numbers on a consistent basis.

And then in IFT, anything you're seeing in terms of channel D stock or anything like that?

No, but I think it's only fair to suggest that higher elevated interest for longer makes sure that productivity-based projects and or expansion investments are going to be up against higher hurdle rates. And we're reflecting that in our particular revenue forecast as we go forward.

Appreciate the call, John.

Thank you.

Our next question will come from Brian Lee with Goldman Sachs. You may now go ahead.

Hey, guys. Good morning. Thanks for taking the questions. I know there's a lot of questions around pool. I'll just throw another one in there. And a lot of moving parts and the macro is still uncertain. But is there sort of a framework you guys can use provide us, you know, to think about for pool? Because if all goes right, it sounds like, you know, by the time we get to end of 23 here, you know, channel to stocking is fully complete. You've got, you know, normal seasonality returning, price is still kind of elevated in the mid single digits. So I guess, you know, first off, do you see that holding in 24 on the price side? And then just from a volume framework perspective, assuming all those things do play out as you expect, channel destocking, seasonality, like what is a framework we should be thinking about in terms of, you know, the pool volume outlook here, you know, as we think about the next kind of 12 to 18 months?

Yeah, first, I think we're feeling really good about the ability in 2023 to have continued to raise our guidance through the diverse by portfolio offsetting, you know, we're really consistent performer in pool. I mean, pool has generated a lot of income and growth for us over the years. And, you know, I think it was a little bit worse this year than we anticipated coming into the year, primarily because that inventory, um, was larger and the overall market wasn't as strong as we had hoped it would be. But as we head into 2024, we're looking at the framework as being that we do pick up the tailwind from not having that inventory correction. And then as we get closer to the end of the year, we'll predict what the markets are going to be. I think it's fair to say that we're not thinking that overall pool builds expand from here. And we don't think overall remodeling expands, but I do think we're going to see a little bit of recovery in that aftermarket, which I think was accelerated into the prior years and now would be normalized. And a lot of those are non-discretionary purchases, and we think we get back to a potential overall growth plus the benefit of the tailwinds of inventory.

Okay, fair enough. Makes sense. And then maybe just with interest rates backing up here and the macro, I think a lot of focus around kind of what it meant for your pool business all year long. Are you seeing anything beyond the resi sector in your kind of end market exposures that are having any you know, impacts or constraints on spending when it comes to that sort of, you know, cost of capital environment and just, you know, financing conditions getting a little bit tougher here. Anything you can speak to at, you know, kind of a high level? Thanks.

Yeah, I mean, I think you're calling and I think we're seeing it everywhere, to be honest with you, in little bits. I mean, as a reminder, you know, 75% of our end customers are small dealers and professional trade channel people and their borrowing of capital is higher and harder to get access to capital. I think that slows down some of the projects they were working on. You know, we're not exposed to commercial buildings more than, you know, 100 million or a couple hundred million, but I think you're going to see financing be tougher on the building side. And so an elevated higher interest rates for long just, I think, produces a sluggish environment is the way we're looking at it, which is why we're really putting that accelerator on the transformation initiatives we have. You know, pricing selectively, making sure that we understand market back and and how to position our products and services effectively in the industries, and then making sure that we're managing the cost structure well within the company.

All right. I appreciate it, guys. Thank you.

Thank you.

Our next question will come from Brian Blair with Oppenheimer. You may now go ahead.

Thank you. Good morning, everyone. Good morning. I was hoping to drill down a little bit more on... commercial water solutions trends. It sounds like underlying market activity remains pretty solid. Just curious if your team is seeing anything shift on a sequential basis. I know a lot of questions have been asked already in terms of macro backdrop, higher for longer rate environment, etc. Specific to that platform, are you seeing anything as we get into Q4 or the outlook for 2024 that concerns your your team in terms of the strength that you've been leveraging recently?

There's no doubt that Commercial Water Solutions has had an excellent 2023. Going to market with the end-to-end solution of water quality, ice, and services has been very compelling. Manitowoc has had an excellent year. And we've done well in North America filtration. So overall, we continue to see the market within the restaurants, primarily the quick service restaurant space, staying solid for us. The challenge for us is bumping up against tough compares next year. But overall, the markets that we serve are doing well.

Just to give you some indication of point to point, I mean, despite the fact that we're going to see significant shipments in Manitowoc this year and, you know, feel really good about their progress. The overall CAGR from 2019 to the end of 2023 is about 8%-ish or slightly a little bit higher than that, which is slightly normal than or higher than the mid single digits that we had forecast the business to have. So just a reminder that the markets, as Bob mentioned, are recovering globally and they continue to participate in that recovery.

I appreciate the color. That's very helpful. You mentioned the N10 solution, and there's no doubt that the value proposition combining EverPure, KBI, Man Ice, that's resonating with your customer base. Can you speak to direct cross-selling traction within the platform? What's been realized to date for your legacy platform? businesses, not just the lift demand.

Yeah, I mean, I would quantify that value as a couple points of incremental growth as the overall commercial water solutions business from those synergies. I mean, lots of excitement and putting Everpure in the trade shows next to the Manitowoc Ice and vice versa and helping our customers, which are a distributor and an installer, realize the benefits of of promoting both. And I think when you have a good filtered solution on an ice machine, you're extending the life of the ice machine. And then it also leads to the service capabilities we have and the fact that we can offer some of those services. More importantly, just understand what the service provider is up against so that we can redesign for service and also work with our partners to help them get in and out of those end markets faster. So, I mean, there's a lot of energy and excitement, and we couldn't be more pleased with the synergies and the go-to-market strategies of these three businesses put together.

Well, it makes sense. Thanks for the call.

Thank you.

Our next question will come from Mike Halloran with Beard. You may now go ahead.

Hey, good morning, everyone. So two quick ones here. First, on the destock impact last quarter, you talked about about $150 million impact on destock this year. Is that still the number we should be thinking about, or has that changed at all?

No, I think, you know, there's nothing that's changed in that number. It played out, as we said, as expected.

Thanks for that. And then on the balance sheet side of things, you're two times levered now. on a net basis, Bob talked to debt pay down still the priority. Maybe you could just talk to, given the changes in the interest rates, how your financing terms are, has there been any shift in what kind of leverage levels you're looking at going forward, or maybe better put, what kind of leverage levels would you want to see before you became more aggressive using your balance sheet, whether it's for buybacks, M&A, whatever it is?

know mike i promised myself i wouldn't give a target today i i think i think what right now i i think we all have to be mindful of access to capital and managing with our capital um you know framework and i i think paying down the debt right now is a good use of it obviously we're always looking at strategic complementary businesses to our um you know current business units the market's not robust though at the moment and know even when you're seeing assets availability you've got to question how those interest rates environments affect their business so you're not seeing transactions happen so i think just paying down the debt right now and giving ourselves the maximum flexibility is where bob and i are focused for the remainder this year and into next year yeah i would just add to that that you know obviously staying investment grade you know hugely important to us um

As the variable rates have crept up, we did undertake the interest rate swap in the collar. So that turned out to be a smart move where when you include the collar, effectively 65% of our debt is fixed. That brings us to kind of a weighted average rate of 5.3% in the quarter, maybe 5.5% going forward. Overall, we've done some good things to manage within this environment, and paying down the debt has certainly helped from an overall perspective.

Thanks for that. All very reasonable. Appreciate it.

Thank you, Mike.

Our next question will come from Julian Mitchell with Barclays. You may now go ahead.

Hi, good morning. Maybe just wanted to... follow up on the sort of profit bridge a little bit from slide 12. So the sort of price net inflation number was close to zero. You know, it seemed inflation picked up a bit as a headwind year on year versus the prior quarter. So maybe help us understand kind of the inflation moving part in Q4 into early next year? And should we expect that price net of inflation number to be sort of close to zero, you know, like it was in Q3?

So I think the way it's good observation, I would remind you that, you know, inflation, as we show in our bridges, is a year over year. So it doesn't necessarily reflect sequentially this year. It could be that we saw some elevated inflation on some of the buys that we had last year. So We think that we are overall moderating to price versus cost being neutral or slightly more close to neutral, and then obviously focusing on the productivity contribution that's coming from our transformation initiatives. That's the model going forward. If you recall, we were benefiting quite substantially early in the year and last year on price versus cost, and now that's shifting to more of a transformation benefit as we go forward. Bob, I don't know if you want to add anything.

Yeah, I would just add to that that You know, while inflation did the change in inflation and increase in Q3 versus Q2, the nice thing was that, you know, price was able to cover that. We do expect inflation to moderate significantly in the fourth quarter and certainly where price exceeds inflation. At the beginning of the year, we talked about inflation being around 4.5% of sales. And we're really tracking right towards that. So the team has done a nice job of understanding inflation and factoring in the impact of that. So overall pleased with what we're seeing, and that'll moderate in the fourth quarter.

That's helpful. And as you said, hopefully that productivity piece becomes larger as a driver. It was substantial already in Q3. Maybe just sort of refresh where we are on the sort of wave two from transformation savings and how substantive that productivity number should be as a segment income driver next year when you kind of roll together sort of incremental savings from transformation next year.

Yeah, and that is a very important part of our margin expansion story. As we talk about price equaling inflation, it's important that productivity then drives that Roth expansion. So we were pleased to see the $29 million readout in the third quarter up significantly from the single digit in Q2 and expect to have a significant transformation benefit in the fourth quarter. We're really within wave one in terms of reading out in 2023. We've built some healthy funnels around each of the four pillars of transformation. And so that'll start to read out to an even greater extent next year. So overall pleased with the momentum going into 2024. Got it.

And your sort of second half run rate for those savings, We should expect that to be steady through at least the first half of next year, I suppose, and then maybe the comps get a bit tougher on productivity.

Well, and then that's when the wave two kicks in, Julian. But you're right. The material took a long time to realize because of all the engineering work and the resupply efforts that we had to do with the supply community. So we're starting to benefit from those in Q4. That run rate will go into next year, and then wave two starts to take over in the second half of next year from a sourcing standpoint. To give you some color, about a third of our businesses engaged in the pricing exercises in 2023. We'll be close to two-thirds of the way through that in 2024. So that's kind of how the waves that Bob mentioned start to unfold, and we start to benefit from the performance inside the businesses.

That's great. Thank you.

Thank you.

Our next question will come from Sari Borodotsky with Jefferies. You may now go ahead.

Hi, thanks for taking my question. Just building on the Transformation Initiative comments, we discussed seeing the benefit from Wave 2 in the second half of next year. Can you just quantify how you should think about that as contributing to margin performance?

Well, we're very focused on ROS expansion. So if you think about us finishing around 21% this year, we've talked about improving the ROS to 23% by 2025. And we've said that's being done in a linear way versus it being all back-end loaded. So, we expect Ross to, you know, improve next year as we head towards that 23 percent.

I appreciate the color. Then, just kind of going back to pools and a lot of questions today, but when you talked about some of the early bioprograms having participation there, maybe as you think about for Q delivery versus 1Q, is there any way to think about how you thought about those delivery patterns and what that could mean for 1Q sales?

Yeah, I mean, I think, you know, what we'd like to see unfold is we believe Q4 can be higher from a shipment perspective for Pentair than Q3, and then we would expect Q1 to be better than Q4. And then, you know, we would be in the normalized pattern then of Q2 next year finally being a normal seasonal pattern, which would be the strongest pool quarter of the year. And as a reminder, Q3 is modestly less than that. And then, again, Q4 starts the preload for the 2025 season. So we feel like we've worked through this, and now we've got a clear line of sight to more normal seasonality in the business and, you know, really keeping our eye on sell-through going forward so that we don't get in this inventory situation with our channel again.

I appreciate the call. Thank you.

question will come from Jeff Hammond with KeyBank Capital Markets. You may now go ahead.

Hey, good morning, guys. Good morning. Hi, Jeff. Hey, just on IFT, can you just talk about like the order trends you're seeing? I don't know if it was really a comp issue, but it seemed like there was a step down in the growth rate. And, you know, I'm just wondering, you know, what the orders are telling you about kind of the go forward there.

Yeah, I mean, just again, we're looking at year over year comps, Jeff, and You know, our, our infrastructure businesses had a really solid 2022. And so some of these growth rates reflect against the prior quarter of 2023. Um, you know, I think the orders continue to be strong, um, from a mid single digit indicator as we go forward, but the year of year comparisons are going to be tougher. And as Bob mentioned, we are really focused on non-project related wins. Um, we're focusing on service. We're focusing on aftermarket. We're focusing on recurring revenue streams with our key distributors and market providers. Jeff.

Okay, great. And then just back on this Manitowoc ice, you know, tough comp issue, can you just talk about, you know, I think you called out, you know, a lot of the success and the synergies, but just what's been going on with backlog drawdown and order rates there to kind of think about, you We're also kind of picking up in the channel that commercial food equipment and some of their markets are maybe starting to see more normal growth as well.

Yeah, I would say backlogs have returned to more normalized levels. Just as a reminder, Manitowoc grew roughly 30% in the second quarter, will have grown or did grow 20% in the third quarter. And for the full year, Manitowoc will be up roughly 20%. So they've had a very strong year. To John's point, when you look at the CAGR from 2019, that's sitting at roughly 8%. So we do expect a more normalized year next year as we bump up against 2023's 20% growth. But overall, the business remains very healthy. The end-to-end approach in terms of going to market is resonating well. So Very confident in the Manitowoc business.

And, Jeff, your data points are right. This isn't a sustainable growth level for our ice business. I mean, when you're mid to high single digits, we would hope that that is the more linear growth rate that we get to. And, you know, obviously we're going to satisfy the demand and make sure that, you know, it's a Manitowoc ice machine that someone's putting into their restaurant, so it gives us the ongoing service and relationship with that customer. But this is not normal, as we've said all year.

Okay. Appreciate it, guys.

Thank you.

Our next question will come from Andrew Krill with Deutsche Bank. You may now go ahead.

Hey, thanks. Good morning, everyone. I want to go back to the pool pre-buy. I think you might have said you were expecting a modest pre-buy this year. So just any more insight you can give on that and maybe try to quantify how tracking versus more normal years And just to clarify, are you assuming that as part of the 2023 guide or would that be incremental to the pool sales guidance? Thanks.

No, it's all included in our current view of what our business will do in Q4. And just to just remind everybody, what we try to do is level load factories to make sure that we're not taking down our shipments in any one quarter beyond the level of our employment groupings. We're obviously encouraging the channel to buy ahead of next year's pool season through discounts that we offer and term extensions. We're now at a level that we think is prudent for us. That's where the modest early buy is. As you know, the channel would take more if they're incentivized more to take it. If they don't, then those become standard buy orders in the next year. That's always what the forecast is reflecting, and we have to do it in our economic best interest. Our channel partners do it in their best economic interest. And right now, we feel our guide is the best reflection of what we'd say a more normal seasonality and a more normal early buy, which would set us up nicely for a 2024 growth year. Got it.

Thank you. And just for the 4Q guidance, the implied margins for the total company mark a pretty meaningful step down sequentially. I think historically you've been more flattish from 3Q to 4Q. I know this isn't necessarily a normal year, but just this seems a little perhaps conservative, especially with the cost action starting to come through. So maybe if you could unpack that and if like, you know, any segments in particular, you know, I think the margins are weaker than normal for 4Q. Thanks.

We implicit in our guide is significant Ross expansion versus last year's Q4. When you look sequentially, it does come down, but a lot of that does reflect some of the seasonality that that is returning back to more normalized levels. So overall, pleased with the Ross expansion in Q4 versus last year's Q4 and it'll be the momentum we need exiting the air.

Thank you. Thank you.

Our next question will come from Joe Giordano with Cohen. You may now go ahead.

Hey, guys. Good morning. Good morning, Joe. I want to start on margins and keep it there for a sec. I mean, not always splitting hairs a little bit, but pool margins went below 30. I think we were kind of talking about 30 being like a new floor. And you're close enough where that's still like a valid statement, but just from here and, you know, into the fourth quarter into next year, that 30% kind of feel good still as, as probably kind of a, a bottom level.

Let's say yes. On the second part of your question. And I think, you know, delivering the margins we did despite the Europe year decline in volume is what I'm most proud of the team having accomplished. And yeah, I mean, I do think we're splitting hairs. I think they're, directionally in a really good spot as a business model. And obviously getting growth from here is going to leverage up nicely.

Okay. And then similarly on water solutions, I think you were talking about like the commentary coming out of last quarter was that the margins were going to step down pretty decently sequentially in the third quarter because of the deliveries that Manitowoc did in 2Q. And the opposite happened, right? It went up sequentially. So how should we think about margins there? I know Manitowoc is still delivering at a high level, but How should we think about sequential margins there and the sustainability of this, like, 22%, 23% level there?

Yeah, I would remind you that Water Solutions has a residential components and systems businesses, and they also have the commercial water solutions. When we mix towards commercial, we're going to have a lot higher margin profile. And what we're really doing is being very selective on the products that we're offering on the residential side, and we're trying to mix up that business. A lot of the decline in the revenue was on the residential side, and that actually helped the overall mix of the business to the positive.

Okay, that makes sense. And if I could just sneak in one last one on just volume. So, I mean, your pool volumes this quarter came in better than what we were thinking about when we spoke three months ago. Your commentary from your largest distributor calls for like fourth quarter, their inventory levels in dollars are going to go up from the third quarter. So, like, that kind of implies growth for you guys. You know, if they do normal seasonality, it implies growth in pool of, like, high single digits. If they do less, maybe it's more modest growth. But how would you kind of think about where growth could look like for pool into fourth quarter?

Well, I think we're a piece of their puzzle, so we'll start there. And I think we are indicating that we do think sequentially our revenue numbers do go up from Q3. And then it's really a discussion of how much more And I really think that we do our best to predict that business with reasonable accuracy, and getting it exactly to the dollar is improbable. And so I would say we got really close in Q3, and I think we feel really good about our Q4 revenue estimate at this moment.

Thanks, guys.

Thank you.

Our next question will come from Scott Graham with Seaport Research. You may now go ahead.

Good morning, John, Bob, Shelley. How are you? Morning. How are you?

Hi, Scott.

Good. Thank you. So the productivity jump was obviously meaningful. How much of that 2.8% maybe was some help from a better supply chain, sort of external?

Well, I think a lot's coming from that, Scott. I mean, I think we're, you know, we're working more seamlessly with our supply chain today. Obviously we've caught up on most of the, um, demand to them and aligned with our channels. And so we are benefiting substantially from a lot of more seamless deliveries across the entire supply chain today.

I'm back onto pool, sorry, but, uh, you know, historically these numbers kind of shook out as 40, 30, 30 new remodel, and then, uh, you know, sort of the maintenance, the aftermarket. As we look at a weak 2023, what are those numbers kind of in the year at? Is that an estimate you can make?

Yeah, I think they're generally in that ballpark. And we could argue weak. I think the overall builds in 2023 are going to definitely be at pre-pandemic levels, but generally in line with what we had seen prior to the pandemic. So I think we're in the more normalized area. Scott, I think the learning is across the channel is there's high end pools and there's low to mid market pools and the interest rates are definitely impacting the more low to mids and the highs are continuing to be built. So, you know, I think that we'll all probably start to refine the numbers to try to break it out by the demographics that it's serving. But I think generally the model is still working.

Okay. Thank you, John. Last one. You indicated you were assuming kind of flattish, remodeling flattish, and then aftermarket up. Were you referring to the fourth quarter or a period of time longer than that?

We're talking about if we think about heading into the 2024 pool season, that's generally what our current expectations would likely suggest.

Okay. So your mid-single-digit-plus long-term thinking on pool, it's not going to be that next year based on that?

We'll give that in January, Scott. I remind you that there's an inventory correction next year, which creates some benefits, and then there's the overall general market conditions that we were addressing. But when we get to giving our Q4 earnings, we'll update and share with our 2024 guide.

All right. Thank you. Had to try.

Yeah, you tried. Thank you.

Our next question will come from Dean Dre with RBC Capital. You may now go ahead.

Good morning. This is Jeff Reeve on for Dean. Maybe my first question, you talked about your innovation, the 25 new products this quarter, 100 for the year or the last 12 months. Is there an internal metric you target? Are you targeting a new product vitality? And what is the typical margin differential on new products?

Yeah, I mean, we do. We have all those vitalities. Obviously, they're by product line by product line. We'll be create new valuable products at the market or that our customers want, we tend to see margin lift from those new products. You know, not, not usually its initial stage. It usually takes probably a year or two for that to recognize, but that is the model we work to.

Okay. So nothing to quantify. Um, and then maybe on IFT, you kind of mentioned the build America by America, uh, provision and infrastructure spending. Are there any products that you offer where you're on or virtually a hundred percent America made where your competitors aren't? And is that a meaningful piece of the business?

Yeah. You know, we, we add to there, the born in America, you know, we're, you know, a lot of our historic brands, you know, 120, 130 years old are, have originated in the United States. They've been specified here for long periods of time and they're manufactured here. And so, our employees are really proud of those brands, our customers are really proud of those brands, and they tend to give us, you know, the ability to have at least a fair opportunity to win those jobs when we go to market.

Got it. Thanks.

Thank you.

Our next question will come from Nathan Jones with Stiefel. You may now go ahead.

Good morning, everyone. Good morning. Hi, Nathan. Hello. A couple of questions on water solutions. I think the first one is probably on Manitowoc Ice. I think you guys have shipped out a backlog this year. You had maybe a couple of large projects that might not repeat next year. You talked about mid-single-digit plus. But should we be thinking of that long-term single-digit plus as being off a lower number than what you've done in 2023, or do you think you can actually grow from the number that you're putting up in 2023 as we go into 2024?

That's a nice try, Nathan. We're not going to go there yet. Right now, we're trying to satisfy our customer demand for the rest of the year, and then we'll do an assessment of where we think we are, and we'll be prepared to share that insight with you as we head into 2024.

Okay, fair enough. In water solutions, I think you've also had some inventory destocking in some other business, residential water treatment businesses. Can you talk about the impact that, you know, comping against that as we go into next year might have without looking at the fundamental outlook of 2024?

Yeah, as a reminder, what we did in 2022 is we exited a fair amount of lower margin direct to consumer business and we've been up against those comparisons this year in water solutions those comparisons as we had in next year go away and so obviously this is all included in water solutions this year and next year we get a little bit less contribution from acquisitions and we have a little bit less headwind from the business exits that we we took on this year all right thanks for taking the questions thank you

Our final question will come from Andrew Obin with Bank of America. You may now go ahead.

Hey, you have Sabrina Abrams on for Andrew Obin. Just wanted to ask, I know there's been a couple questions about Manitowoc, but are you guys still committed to the $370 million full-year guidance?

That would be an easy commit.

um yeah we we had talked at the beginning of the year of of that 370 but the business has done significantly better than that and will grow roughly 20 this this year got it um and then just gonna ask another one about pool and maybe if you could get some color on the pricing number um because i know you're returning to the regular discounts in 4q Any color on what we should think about the pricing in 4Q23, given that the past couple of years you were not having normal pre-buy?

Yeah, I don't know how to answer the question. I mean, I think as a reminder, we put our price increases in for the season over the next year. We do that in Q3. And so the discounts usually take you to more flattish pricing year over year. So the pre-buys are term extensions, but they don't include a price increase necessarily because there's a discount to what the price increase would be so it's not like we're discounting product to sell it we're just not having to we're just not getting the full raise prices in that early buy got it thanks okay thank you okay so thank you for joining the call today in closing I want to reiterate some key themes on slide 22 First, solid execution within our diversified portfolio and transformation initiatives continue to drive significant margin expansion in Q3. Second, we updated our 2023 guidance due to strong performance year-to-date and confidence in our strategy. Third, our transformation initiatives have gained momentum in 2023 with benefits expected for the remainder of 2023 and beyond. And finally, we expect to continue to deliver long-term value creation. Thank you, everyone, and have a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.