Pentair PLC

I would now like to hand the call to Shelly Hubbard, Vice President, Investor Relations. Please go ahead.

Thank you, and welcome to Pentair's first quarter 2024 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 first 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 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-K and Form 10-U. Following our prepared remarks, we will open the call up for questions. Please note that we will limit your questions to two, after which we ask you to re-enter the queue in order to allow everyone an opportunity to ask questions. Note that we have now published our Pentair Investor Overview on our IR website, which includes the overview slides we previously included in our quarterly earnings presentations. Please visit our Pentair Investor Relations website and click on Events and Presentations to find this new overview. I will now turn the call over to John.

Thank you, Shelley, and good morning, everyone. First, I want to thank all of you who attended our 2024 Investor Day in New York last month. We appreciated your time and your insightful questions as we dove deeper into the business and provided our path to 24% ROS by full year 2026 with the potential for upside. Now let's begin with our strong Q1 results on slide four. The eighth consecutive quarter, we continued to drive margin expansion. In Q1, ROS expanded 90 basis points despite sales being down slightly against peak channel inventory challenges in our residential segments. We exceeded our first quarter guidance as our Pentair teams drove solid execution across all three segments. In the first quarter, segment income and adjusted EPS also increased year over year. Our transformation initiatives remained on track to deliver margin expansion as we highlighted at our recent investor day. Approximately 50% of our total revenue is adopted and implemented value-based pricing as part of our strategic pricing initiatives. We are well into wave two of our sourcing initiatives, which we expect to begin to drive benefits in the second half of this year. And we've continued to drive operational footprint optimization and plan to continue this going forward. And we have recently introduced 80-20 training to 50% of Pentair's revenue streams and have identified some quick wins and larger term opportunities. Lastly, we are encouraged by signs that we are returning to a more normal operating environment for the first time in nearly four years. Both our lead times and our backlog have been normalizing and our order rate trend has been in line with our expectations. As we expect to return to a more normal operating environment, we have seen a mix of trends across our residential, commercial, and industrial verticals within our three segments. For example, in flow, commercial and industrial verticals performed well in Q1, while higher interest rates continue to impact residential and agricultural verticals. Within water solutions, our commercial businesses servicing the food service and hospitality verticals performed as expected. We believe residential will improve as year-over-year challenges moderate. Lastly, in pool, a majority of our revenue is in the Sunbelt states with a focus on higher-end in-ground pools. In Q1, higher-end pools and the Sunbelt states remain resilient with the exception of California, where weather had a slight impact. From our recent dealer survey, remodeled pool projects appear to be increasing, and servicers we surveyed were optimistic about the aftermarket. Let's turn to slide six. Last week, we published our 2023 corporate responsibility report with an update on our progress. At our investor day last month, our leader of ESG and sustainability, Carla Robertson, provided a preview of our 2023 results on this slide. I'm very proud of the work Carla and our sustainability team are doing and the progress our teams throughout the company are making against our strategic targets. Before I turn it over to Bob, let's turn to slide seven. We delivered another quarter of quality earnings with better than expected results. Our investor day key themes remain on track. Our 80-20 training and workshops are underway with what we believe are promising early readouts. And we are reiterating our full year 2024 outlook while introducing strong Q2 guidance, with adjusted EPS midpoint up 13% as compared to the same period last year. All in, we continue to build a strong foundation to drive long-term growth and profitability across our diverse water portfolio. 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 eight. With sales over $1 billion, we delivered another strong quarter of quality earnings. Return on sales, or ROS, expanded 90 basis points, despite sales being down 1% versus last year's record Q1. Core sales were down 1% year over year, driven primarily by growth in water solutions which was more than offset by slight declines in flow and pool. Sales across all three segments increased sequentially from Q4. Pool sales in Q1 exceeded Q4 2023 sales, which in turn exceeded Q3 2023 sales as we had guided to last October. First quarter segment income increased 3% to $217 million, and return on sales expanded 90 basis points year over year to 21.4%. These results were driven by favorable mix, price more than offsetting inflation, as well as transformation. Ross improved sequentially from Q4 and approached the Q2 2023 record of 21.6%. We delivered adjusted EPS of 94 cents which exceeded our guidance and was up 3% year over year. As John previously mentioned, we are excited to be entering what we believe to be a more normal operating environment for the first time in nearly four years. Please turn to slide nine. Low sales declined 2% year over year. Commercial sales growth of 9% and industrial sales growth of 2% were more than offset by a decline in residential sales of 12%. Our residential sales are more closely tied to the overall housing and agriculture market. Segment income grew 19% and return on sales expanded 350 basis points to 20.1%, marking the first time Ross has reached or exceeded 20%. The strong margin expansion was a result of price and mix exceeding inflation and continued progress on our transformation initiatives. Please turn to slide 10. In Q1, water solution sales were up slightly to $273 million, driven by commercial sales up approximately 1% and residential sales down approximately 1%. Segment income grew 6% to $56 million, and return on sales expanded 110 basis points to 20.4%, driven primarily by favorable mix and transformation continuing to drive operational efficiencies. This is the eighth consecutive quarter of ROS expansion. Margins have nearly doubled from 10.8% in Q1 2022 to 20.4% in Q1 2024. Within our residential business in water solutions, we have continued to see improvement in our year over year sales rate for the last five quarters. Within our commercial business in water solutions, both filtration and ice drove sales growth, which was offset by lower services revenue due to project life cycles. Please turn to slide 11. In Q1, pool sales declined 1% to $359 million. However, Q1 sales improved nearly 7% sequentially from Q4 2023 as expected. Segment income was $111 million, down 5%, and return on sales decreased 110 basis points due to lower volume, an increase in costs as we prepared for the peak pool season in Q2, and investment in transformation. We expect pool margins to expand each quarter year on year for the remainder of 2024. Please turn to slide 12. At our investor day in March, we updated our three-year margin targets to reflect margin expansion through full year 2026, extending our plan by a year. With contributions from all four of our key transformation initiatives, pricing, sourcing, operations, and organization, we are targeting Roth to expand by 540 basis points to 24% as compared to full year 2022 and have the opportunity to do even better as we discussed during our investor day. In full year 2023, we achieved a Roth of 20.8% and expect to continue to drive margin expansion to approximately 22% by year end. Please turn to slide 13. This runway provides context of when we expect each wave to deliver margin expansion in our reported results. Note that we expect our transformation benefits to compound with each additional wave and the entire process to begin to repeat in 2027, creating a continuous cycle of ongoing savings. Please turn to slide 14. In Q1, we used $127 million in cash, which is consistent with the prior year quarter. Q1 is predominantly a cash use quarter and typically followed by strong cash generation in Q2, our seasonally highest quarter. Our net debt leverage ratio was 2.1 times, down from 2.6 times in Q1 a year ago. Our RRIC was 14%. We continue to target high-teens return on invested capital. We plan to remain disciplined with our capital and continue to focus on debt reduction amid the higher interest rate environment, along with share repurchases to offset dilution. With a net debt leverage ratio within our target range, we have additional flexibility to strategically allocate additional capital to areas with the highest shareholder returns. Moving to slide 15. For the full year, we are maintaining our adjusted EPS guidance range of $4.15 to $4.25, which is up roughly 12% at the midpoint. Also for the full year, we continue to expect sales to be up approximately 2% to 3%, with flow sales to be up approximately low single digits, water solution sales to be approximately flat, and pool sales to be approximately 7% for the full year. We also expect segment income to increase 8% to 11%. For the second quarter, we expect sales to be up approximately 1% to 2% compared to last year's record Q2. We expect strong growth in pool sales in Q2, somewhat offset by challenging compares in our water solution segment. We expect second quarter segment income to increase 10% to 12% with significant RAS expansion. We are also introducing strong adjusted EPS guidance for the second quarter of approximately $1.15 to $1.17, up roughly 13% at the midpoint. I would now like to turn the call over to the operator for Q&A, after which John will have a few closing remarks. Operator, please open the line for questions. Thank you.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then 2. We will now pause momentarily to assemble our roster. Today's first question comes from Mike Halloran with Baird. Please go ahead.

Good morning, everyone. Thanks for the question. So two questions here. First one, just how are you thinking about the end markets as you work through the rest of the year? I mean, the overall top line guidance really unchanged. So I guess the question is, are you seeing anything different today than you were thinking a few months back? And how are you thinking about the sequentials from here across your end markets?

So far, Mike, I'd say things are playing out exactly like we thought and hoped for, with the exception of maybe within our flow segment, the residential side and the ag side being a little weaker as we progress to the end of the year. Other than that, everything's generally in line with our previous expectations.

Thanks for that. And then on the flow margins, Awfully impressive and certainly seems a little different than I would have expected seasonally. So maybe some thoughts on how you think those margins sequentially work from here. In particular, anything in the first quarter that's not repeatable from a mixed perspective or anything else. And is this just an example of the right foundation to build off of with all the work you guys are doing internally?

It really is. On the flow side, we were extremely pleased with the ROS expansion in Q1. And again, we've said that they will be one of the main beneficiaries of the transformation program. So I expect the segment to continue to expand their ROS year on year because a lot of the play there is around strategic sourcing, the pricing excellence, the operational footprint, and basically the complexity reduction play.

Thank you. The next question comes from Brian Lee with Goldman Sachs. Please go ahead.

Hey, guys. Good morning. Kudos on the solid execution here. I guess, you know, maybe as a follow-up to Mike's question, I mean, I think, you know, the most eye-catching metric was definitely the ROS and FLOW. It looks like both price cost and transformation benefits are driving a lot of this. I know it's a little bit lumpy if we look historically, but what is kind of the right run rate to think of in this segment coming off this 20% result in Q1? How much more, I guess, price cost or transformation or anything else you want to outline as we think about year-on-year improvements in Roths, just particularly for flow?

Yeah, I mean, just to reiterate what Bob said, I think we've done a nice job refocusing the business and driving transformation. One thing that really kind of helps is if you think about flow, there is a business inside of flow. It's our sustainable gas business, which last year had, you know, several larger losing projects. And we've been able to, you know, right size that business and bring those project executions back up to, you know, it's called low single digit margins. but we are getting a very favorable year over year comparison against those performance last year. So we do think this is a good starting point. And as we move through the year, we're going to continue to manage the mix and drive the transformation programs and really pleased with the flow performance.

Okay, great. Helpful. And then second question, just when I look at pool again, I know quarter to quarter, this can, this can kind of fluctuate, but productivity, sort of reversed in Q1, 200 basis point headwind versus the tailwind you saw last quarter, which was about the same 200 basis points. Is this all investment? Can you kind of break down or quantify how much it was this quarter? It seems like it might have been a big spend quarter, and should we expect this drag for a few more quarters, or does Ross go right back up positive? year-on-year. I know you're saying growth is sequentially better throughout the year. How about, I guess, margins in ROS and POOL specifically as we think about the cadence? Thanks, guys.

Yeah, in my prepared remarks, I did mention that ROS and POOL will increase year-on-year for the balance of the year. So, comfortable that we'll see ROS expansion within the POOL business. I think, you know, Q1 was a little bit unusual in that the volume was declining but we have significant growth in Q2. And so some of the costs, the ramp up of costs to service the strong Q2, obviously put a damper on the margins in the first quarter. We also are continuing to invest to drive growth and transformation wasn't where we needed it to be within the pool business. But those investments will pay off and further Ross expansion down the road. Again, comfortable with the ROS expansion in pools the remainder of the year. And again, as we ramp to significant growth in Q2, that will become a big manufacturing leverage play as well.

Thank you. The next question comes from Damian Karras with UBS. Please go ahead.

Hi. Good morning, everyone. Morning. My first question is on the pool business. You had mentioned in your slide that remodel inquiries are up. Could you give us a sense for how much are we talking here? Is that kind of across the board, or was that also just like on the high-end side of the market? And is your expectation for remodels still kind of down low single digits for the year in your guidance?

Yes, to the second one. But we do feel there's some encouraging trends that will give us Feeling that our dealers will start to take more orders, which would extend those into 25 and 26. I think with all the new pools being built, there probably wasn't as much attention being spent to getting the remodel sequenced and completed. And I think we're encouraged that we're now seeing that part of the market get some demand from our customers. And again, this is primarily in the key Sunbelt states and more on aged pools.

Okay, that's encouraging to hear. And then could you just help us think about the water solutions and that 9% comp year over year? How are you thinking about the second quarter for the segment, kind of both in terms of top line and segment margin?

From a top line perspective, It's important to remind everyone what a large quarter Q2 was last year, especially within the ice business. So we do see, you know, a decline year on year within water solutions as they bump up against that tough compare. So think of the ice business and services having a bit of a headwind and then the filtration business continuing to grow nicely.

Thank you. The next question is from Andy Kaplowitz with Citigroup. Please go ahead.

Hey, guys. How are you? Good. How are you? Good. John and Bob, just maybe following up on water solutions. Look, is Mattel guys hanging in there a little bit more than you would have thought? Obviously, comps are tough, as you just talked about. I think your guidance for commercial water was up low single digits for this year. Is that still what it is? And then what happened in services and You know, would you expect that to sort of come back as the year goes up?

Yes, on ice. I think ice is going to play out right now the way we expected it to. And as a reminder, as Bob said, tough compare in Q2. But overall, I think it's going to come in line with our expectation. And, you know, still has resilience in the end industry. And we're feeling good about our filtration penetration combined with that BU to drive it. We are going to dial our services business into more profitable annuity-based services as we exited some of the larger programs that we were doing with some of the large fast food companies. And some of those were not very profitable, and we want to refocus the business into a simpler mix of service, more geared to the products that we install. And so we will see that be a little lumpy throughout the year as well.

helpful guys and then bob are you still thinking 75 million in productivity this year even with the you know slower starting pool and the 4 million in total in productivity for q1 yeah we again we were pleased with the transformation readout in in flow and and water solutions but it was was offset somewhat uh by the the negative uh productivity and pool as we ramp up for q2 still feeling very comfortable uh with the 75 million dollar number and think of that as being fairly linear over the next three quarters.

Thanks.

Thank you. The next question is from Steve Tusa with JP Morgan. Please go ahead.

Hey, guys. Good morning. Good morning, Steve. Hi, Steve. Just to follow up to that bridge question for the year, can you just update us on what you're thinking on price and then just the spread? on price cost and price and inflation for the year?

Yeah, I think we're still hopeful we can get price to offset cost. I mean, we did see a little incremental inflation start to enter Q1 into Q2. I think it's primarily around what we'd call freight and probably specifically copper. So we're monitoring that, Steve. If needed, we would go back out and see what we could recover from a price standpoint. And our goal is to, for the full year, try to offset price and cost.

Okay, and 2%-ish of price for the year, is that still kind of in there, or what you did three in the first quarter?

Yeah, we're still in that 2% for price, and think about 3% inflation on the cost base. Those two would roughly offset from a dollar perspective.

Thank you. The next question comes from Brian Blair with Oppenheimer. Please go ahead.

Thanks. Good morning, everyone.

So let's start. Morning. Quick follow-up on productivity and transformation read-through. You said step up, you know, somewhat ratable for the next three quarters to get to the $75 million. Given the moving parts of Q1 and, you know, divergence in segment contribution, how should we think about, you know, how that drop-through shakes out for the segments?

We expect pool to have a very significant contribution in Q2. given its rate of growth and the fact that we, as Bob mentioned, we had some incremental investments to get the product prepared to ship in Q2. And, you know, so think about that as labor being roughly flat from Q1 to Q2, but getting a lot more revenue in Q2. So that would be a huge contribution. Corporate's always a timing issue. Also, you know, Bob didn't mention that, but we have higher corporate expenses that run in Q1 typical in the industry. And so that usually comes down as it heads into Q2 as well. But I think the rate of contribution will be the same for the other segments, and then we get the step-up in the pool.

I appreciate the detail. And I understand that debt reduction is the priority near term with regard to capital deployment. Although with your second quarter cash flow, suspect by June-July timeframe, you'll be under two times leverage. Any color you can offer on your M&A pipeline, and whether we may see any deal flow the second half of this year, it's better to anticipate you get back to that growth lever more 2025 timeframe.

I agree with the comment that the cash flow is providing strong optionality for us. What was interesting is we started the year thinking there would be three rate cuts. We've now built into um our guidance of 100 million of interest expense no rate cuts so we think that's prudent we were able to keep the interest expense the same as our previous guide primarily because the free cash flow is happening earlier in the year so we look forward to a strong q2 and free cash flow uh to your point where we're right within our target range uh we think there continues to be a debt reduction play to help the eps uh we'll restart the share repurchases to offset dilution, and then there remains optionality in terms of what drives the highest shareholder value.

Thank you. The next question is from Julian Mitchell with Barclays. Please go ahead.

Hi, good morning. Maybe just wanted to put a finer point on that second quarter sales guide. So in total, it's up you know, one to two points year on year. Based on your comments, Bob, is it right to think about waters maybe down mid-single digits, you know, flow is flattish, and then you've got pool up 10% plus? Is that the right sort of framework for Q2 sales?

I would agree with those numbers, Julian.

That's very helpful. Thank you. And then just my... second question would really be around sort of you know the inventory situations I think your own inventories are you know flattish sequentially in March down a lot here on year maybe help us understand kind of how you're assessing inventories and the customer and channel partner level and how do you assess your own sort of inventory rate versus kind of history for where we are in the year

From our perspective, inventory from days on hand is still significantly higher. We go back to 2019 and see each of the segments has room for improvement. That being said, year on year, we were down roughly 10 days from an inventory on hand perspective. So we're moving in the right direction to bring down those inventories. The volume will certainly help in the second quarter. But we're not quite where we want it to be.

And then on the channel side, I think we're at normal levels. I think right now we're working with our channel partners and we're generally shipping through in the same quarter what's being bought. So I feel like all that's behind us here in the Q2.

Thank you. The next question comes from Jeff Hammond with KeyBank Capital Markets. Please go ahead.

Hey, good morning, guys. Hey, Jeff. Just on pool, I mean, John, you seem a little more confident in how things are shaping up, at least from the survey work. And I think you talked about, you know, kind of having these added costs to ramp. And so just wondering, you know, what it takes for you guys to kind of, you know, lift expectations there. And then just also any early read information. On the start of the pool season here, I know weather was pretty disruptive last year.

Yeah, Jeff, I appreciate the question. I mean, just as a reminder, I mean, pool markets and sell-through on a normal market basis would still be down mid-single digits. So we're benefiting from those year-over-year easier compares as we ramp up and no longer have those inventory headwinds. And I feel like we've got better insights into the sell-throughs. And the way that we now can work to get those shipments out in five days, we're more tying the shipments to the sell-throughs. So yes, it does feel better and feels like more normal, which is why we use the word normalized for a period of time. So I feel good about that. You know, interest rates are going to be pesky. And I think it's affecting the, you know, financing. It's affecting dealer financing in the sense of, you know, where are they getting their working capital loans from? it is going to continue to challenge the industry. And also, when interest rates are like this, we don't see movement from people selling their house and buying another house, which is what our business tends to like. You know, the water doesn't taste the same, and then you invest in a water filtration system. So, Jeff, we could use those lower interest rates at some point to send a signal that, you know, things are going to be brighter, and I think that that's what we're reflecting in our current hold of the full-year forecasts. And then we feel confident we have transformation and we have cost out initiatives to make up the gaps if we continue to see this be challenged as we head through the back half of the year.

Okay. And then just, you know, Home Depot is buying kind of a, you know, the number two player in pool. And I'm just wondering if you think, you know, that drives any change in behavior or, you know, kind of tougher customer to kind of deal with.

I think this year, short-term, no. You know, clearly, the deal's going to take a while to complete. I mean, I think all we can do right now is take Home Depot and SRS Heritage on their words. And what they're saying right now is they expect to run that independently and continue to service the Pro Channel. And for now, that's the way we would see it unfolding and, therefore, not a short-term impact that we anticipate.

Thank you. The next question is from Nathan Jones with Spiegel. Please go ahead.

Mr. Jones, your line is open. Oh, sorry, take off mute.

Good morning, everyone. Question on water solutions. You talked about some verticals there that are expected to improve as year-over-year challenges moderate. Is there an expectation that demand is actually improving sequentially here, or is that just a comment that you run into some easier comparisons as the year goes by and those comparisons just get easier in the second half of the year?

From an overall end market perspective, I would say it's more the latter, Nathan, in terms of we can't with you know, interest rates the way they are and people not buying new homes get too much ahead of ourselves on the residential side. So, you know, pleased to see that the decline year on year is improving for the last four or five quarters. But again, it's not as robust as we would like it to be.

Okay. And are you seeing any parts of those channels? I know we've talked a lot about the pool inventory channel. But any parts of the channel at Water Solutions that might still be, you know, reducing their own inventory? I mean, you guys have talked about reducing your inventory further. So, you know, potentially, is there any destocking still continuing in any channel, whether it's Water Solutions or, I guess, across the portfolio?

Not that we're aware of, Aidan. I mean, right now we would say that sell-throughs matching sell-in generally across the industry.

Thank you. The next question is from Dean Dre with RBC Capital Markets. Please go ahead.

Thank you. Good morning. Good morning. Good morning. Hey, can we circle back on the opening comments you talked about, that you're halfway through value-based pricing? We'd love to hear some of the early read on the traction and whether any disruptions, and then I guess it's a related question. The same thing on 80-20. Any success stories there? Any kind of product shakeouts, product lines that might be de-emphasized? Any color there would be helpful.

Thanks. We're doing a good job utilizing the pricing playbooks that we have. I'm really proud of the businesses utilizing those tools to affect outcomes strategically in their business. Again, this is just more strategic pricing and or thoughtful value-based pricing. That being said, I said this in investor day and I have now gone through a full session of training. I kicked myself for not having done 80-20 sooner because what we're learning from 80-20 is the complexity in the portfolio is all being treated equally. And what we need to do is think of our A parts or our top parts to our top customers getting differential treatment. And that's where we can be more innovative. That's where we can spend our energies for sourcing and pricing effectively. And then we get, like most companies, you get all the complexity that you introduced over time, either the secondary parts to those top customers or secondary parts to what you call the lower end customers that drive the complexity in the organization and drive too many resources where there's very little impact that you can have. I mean, Dean, I'll give you this. I mean, think about any regulatory change and thinking about how you treat that equally. It should really just be focused on your top parts to your top customers to your top regions, right? So we're going to get a lot of value from that, and I think it comes from the complexity reduction, but I think it's really more of a growth tool because it's going to allow us to double down and really focus our innovative efforts to the top products that we have and to the top end markets that we have with our best customers.

That's real helpful. I think we talked about it at the analyst day. It's less about cutting lines and it's more about optimizing growth. Is that right?

That is correct.

All right, good. And then just – I've asked about this before because the voice of the customer on the pool side is all this interest in automation, the extent to which you can automate testing and any sort of updates on the pool chemicals and so forth, the operation of the equipment. Where does automation stand in terms of the take rate of your customers?

I mean, it's still about where it used to be, Dean, and I think we think this year will be a higher level of penetration as people have time to think and our dealers have time to get caught up in and learn and then be more productive and how they help the end customers get what they need. I think we have to make it simpler and we have to take the complexity out of that portfolio as well. And then I think we also have to think about how do we bring the right value proposition for the overall pad? And I think those two things will help us really change and accelerate that penetration rate.

Thank you. The next question comes from Brett Lindsey with Mizuho. Please go ahead.

Hey, good morning, everybody.

Morning.

Hey, I want to go back to pools. So just some of the pre-ordering activity you've received. Is most of that shipped out in the fourth and first, or do you have some feather into the second quarter just trying to think about, you know, any revenue visibility there?

It's strongly in the second, to be honest. I mean, it balances out between Q4 and Q1, but most of this is about servicing the pool channel in the season, which would be Q2, and then adjusting within season, which would be Q3 for us.

Okay. And then just back to capital allocation, certainly deals are episodic, but I guess at what point, if deals aren't coming into view, do you lean a little bit heavier into repo? Is that... Is that an H2 event, or do you think you assess M&A for the course of 24, and we should think of incremental repurchase as more of a 25 event?

Well, we're going to have strong cash flow in Q2, we expect, as we normally seasonally do. And then, as Bob mentioned, I think our first step is we just got to reinstate buyback to offset dilution and get that back as part of the capital allocation strategy. And then we're always looking at potential bolt-on M&A and pleased that we're at least seeing some things now and if we can transact them or get them over the finish line that's yet to be determined and you know we got valuations we've got uh performance that has to be looked at but ultimately i think we're excited that we're at least looking at things again thank you the next question comes from andrew buscaglia with bnp tariba please go ahead hey good morning guys morning good morning

I just wanted to check on the flow side. You had mentioned Rezzy weaker than expected, down about 12%. Can you just remind us what's behind that, what's driving that, and then any concern that all your markets are different, but that that leads into other areas?

Two particular markets. It's water supply, water disposal. North America, which specifically is in-ground well pumps and what you'd say is pivot spray irrigation. That's it. I think it was just clear to us within the quarter that it's not worth running any promos or specials or thinking about dealer stockouts, that we really just have to understand that the market's going to be softer and work within that softer market to drive the transformation levers that we need.

Yeah. And then on the topic of areas of weakness in resi outside of flow, pool sounds strong, but I guess... Yeah, pool's got the over-year inventory tailwinds, which are helpful.

Again, still mid-single-digit down and from a market perspective. And then residential water treatment saw severe drops in their outlook last year, and so they're really more sequentially flat as they're moving throughout the year here, which, you know, if you said that's a sign of positive, they're not down substantially. But, you know, they're not seeing signs of improvement either as some of those higher-end systems require financing to move them.

Thank you. The next question is from Sari Boroditsky with Jefferies. Please go ahead.

Thanks for taking my question. So you made the comment that was positive on remodels and aftermarket pool. Could you just update us on how you're thinking about new pool construction for the year?

Right now we're thinking about exactly the same as in our original guide. You know, and it's down versus historical standards. But I think overall, you know, from an industry perspective, we're working within that context and no update at this time.

And then guidance implies, you know, you realize about 50% of your earnings second half, but I guess I would have expected to be slightly higher given the pool recovery and transformational benefits. So, you know, what's kind of the offset to that that's driving second half earnings to be similar to the first half?

Yeah, again, we're pleased that on our last earnings call, we talked about EPS being down um slightly in the first half and now we're at the point where it's roughly 50 50. so again the strength of the first half is is reading out and and we feel strong strongly that the momentum will continue in the second half that's in line with uh traditionally uh how the business is operated roughly 50 50. thank you the next question is from andrew krill with deutsche bank please go ahead

Hey, thanks. Good morning, everyone. Just wanted to do a quick follow-up on that EPS kind of seasonality question. I think it makes sense on the 50-50 split. Just wondering for 3Q versus 4Q, I think historically those are somewhat similar. Should we be expecting that, or is there any reason maybe it's a little more 4Q heavy as more of the transformation benefits flow through?

You know, I think I would – Just say the normal cadence of our business would be generally the same or if not more skewed a little bit more to Q3 versus Q4. Most of our dealer trade businesses, which is 75% of what we do, don't see a very strong close to the year. Most people don't want them inside their homes during the holidays. And then we don't have that normal industrial cycle where there's a push to ship everything by the end of the year. The things that will skew that is depending on what the pool season is for the subsequent year, and then that sometimes leads to stronger earlier shipments in Q4, and we have no idea what that's going to look like at this stage.

Okay, great. Very helpful. And then quick follow-up, just on backlog, and I know you're more of a book and ship business, but just with lots of costs to that, kind of a more normalized cycle, patterns, et cetera, just Is it reasonable to expect like the small backlogs the segments have now you think are lower kind of exiting this year and that, you know, should be the more normal run rate into 2025? Thanks.

We would agree with that, that, you know, the majority is the shorter cycle and that backlogs would be lower at the end of this year as the more normal operating conditions continue.

Thank you. The next question comes from Scott Graham with Seaport Research. Please go ahead.

Hey, good morning. Thanks for taking the question. I have two of them. The first one's on strategic pricing, maybe a little bit more finer to the point. You know, with the pricing guide that you gave on the call here earlier suggests a little bit of a bleed off in pricing for the rest of the year, notwithstanding if you increase prices, of course. What does strategic pricing do to the pricing number? In other words, Let's say that bleeds off to 2% for the balance of the year. Does that sustain 2% into next year, the pricing initiatives?

Yeah, strategic pricing would do two things. First of all, it helps you have confidence that the price you set is the right value that you should expect. Meaning you, you looked at the features and you priced accordingly. The second thing it allows you to do is hold firmer on your rebate structures. So that's usually where the net pricing benefit comes on. So there's list pricing, which is usually higher, and then what did you net or what did you realize? I don't know if we have next year's dialed in yet, but we usually drive it to be, as Bob said, price offsetting cost. And when we take a look at material inflation and cost, we're going to try to drive enough pricing actions to at least be neutral along those two elements. Okay.

Okay. Thank you. My follow-up is around margin guide. I know, you know, 22%. The first quarter was a really strong margin quarter, and you had really no benefit from volume. You had a little bit of benefit from mix, but it wasn't necessarily in pool, right? So the rest of the year, you have building strategic savings, you know, the transformation. You have building mix in pool, which is – could be material with volumes. I'm just sort of wondering if, you know, 22% seems like you should be able to get there fairly easily. Are you thinking higher than that potentially?

I would start by saying the midpoint of our guide does suggest that we're slightly higher than the 22%. And overall, for the reasons you mentioned, there's potential upside on that ROS expansion. Um, like the idea that that price is going to offset inflation transformation, then drive that Ross expansion. Um, and, and then, you know, mix can play in it plus or minus, we got, we saw some favorable mix in Q1, but you know, having a slightly lower ice business, that's a profitable business as an example. So, um, you know, price offsetting, inflation factoring in mix, um, and then transformation. potentially reading out better could drive an improved ROS expansion story.

Thank you. The next question comes from Joe Giordano with Cohen. Please go ahead.

Hey, good morning, guys. Good morning. I think most questions have largely been asked already, but just kind of curious, like, bigger picture, you know, EPA comes out with regulations on PFAS. This is something that you guys were thinking about doing. potentially like an in-home product. I'm just curious how those kind of strategies, how you weigh those against kind of the 80-20 and the simplicity and wanting to focus on things that you know have a real market and how does that dynamic play out in your thought process for things like that?

That's a great question. I think 80-20 helps optimize the current revenue streams you have, but it also needs to apply to your focus on what you think you can do to make a larger impact in the future. And You know, I think we're getting better at choosing fewer, more impactful innovation projects. And I'm still behind what we're doing with the whole home system that we're working on. And I do believe that there's a strong progress around that. The more awareness we get in water and homes and the more people are concerned about what they're consuming and drinking, I think that's better for us. The reason I don't get all, you know, pounding the table on the movements on the regulatory side is we just don't see people running out right now to buy the current products that we have that actually create or solve the problems today. So there has to be something else that occurs to get the consumer focused. And, you know, as you look at the longer term, I think we're very energetic. I think the shorter term, we're less optimistic that we're going to see a shorter term impact.

Fair enough. Thanks, guys.

Thank you.

Thank you. Today's final question is a follow-up from Steve Tusa with JP Morgan. Please go ahead.

Hey, guys. Sorry, just one last quick one on the 2Q. Do we just assume that basically that entire, call it, I don't know, $25 to $30 million, that that's effectively from, you know, the transformation for the 2Q?

Yeah, in terms of reading out, we've captured four of the 75, and then our view is that the remaining 70 is fairly linear over the next three quarters.

Right, so that basically accounts for all the year-over-year profit improvement, like roughly for the second quarter.

Yeah, with pools, incremental volume growth being offset a little bit by the year-over-year impacts in water solutions, but you're not far off.

Yep, all right, cool. Thanks, guys.

Thank you. Thank you.

Thank you. This concludes today's question and answer session. I would now like to turn the conference back over to John Stelck for closing remarks.

Thank you for joining us. In closing, I wanted to reiterate our key themes. First, solid execution across our balanced water portfolio drove significant margin expansion for the eighth consecutive quarter. Second, we are reiterating our full year 2024 guidance, which reflects confidence in our strategy while continuing to monitor uncertainty across the macroeconomic and geopolitical landscape. We are mitigating risk where we can and being more agile as we expect to achieve new performance records in 2024 and drive long-term shareholder value. Third, we are pleased with our progress on our transformation initiatives, which we expect to continue to drive strong margin expansion. And finally, we expect to continue to deliver value creation beyond the 2024 fiscal year. Thank you, everyone, and have a great day.

Thank you for your participation. You may now disconnect your lines. Thank you for your participation. You may now disconnect your lines.