Shelly Hubbard:

Thank you, and welcome to Pentair's second quarter 2024 earnings conference call. On the call with me are John Stauch, our President and Chief Executive Officer, and Bob Fishman, our Chief Financial Officer. On today's call, we will provide details on our second quarter performance as outlined in this morning's press release. On the Pentair 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 the call up for questions. Please limit your questions to two and reenter the queue if needed to allow everyone an opportunity to ask questions. As a reminder, you can reference our Pentair investor overview and investor day presentations on our IR website. Please visit our Pentair Investor relations website and click on events and presentations to find these materials. I will now turn the call over to John.

Robert Fishman:

Thank you, John, and good morning everyone. Let's start on slide eight. We delivered another strong quarter of quality earnings. Sales rose 2% to $1.1 billion, while adjusted operating income increased 16% to $271 million. ROS expanded 310 basis points to 24.7%, driven by sales growth and transformation. All three metrics achieved new records post the separation of nVent from Pentair in 2018. Core sales were up 2% year-over-year, driven by 18% growth in Pool, which was somewhat offset by a 3% decline in Flow and a 7% decline in Water Solutions. Both Flow and Water Solutions reported record sales in the prior year period due to supply chain improvement and our ability to ship a large portion of backlog orders. Sales across all three segments increased sequentially from Q1 as expected, our second quarter sales have typically been our highest sales quarter of the year. We are very pleased to see Pool return to growth for the first time in eight quarters. All three segments drove significant margin expansion in the second quarter. Lastly, we delivered record adjusted EPS of $1.22 post the nVent split, which exceeded the high end of our guidance by $0.05 and was up 18% year-over-year. Please turn to slide nine. Flow sales declined 4% year-over-year compared to a record quarter last year. Residential sales declined 10% as compared to the prior year quarter, but reflected an improvement sequentially from Q1. Commercial sales rose 2% compared to a record prior year. Industrial sales were flat in Q2, reflecting our decision to discontinue certain projects that no longer met our profitability criteria. Segment income grew 13% and return on sales expanded 310 basis points to 21.3%, marking the first time ROS has reached or exceeded 21%. The strong margin expansion was a result of continued progress on our transformation initiatives. Please turn to slide 10. In Q2 Water Solutions sales declined 8% to $311 million, driven by declines in both commercial and residential. We expected our commercial business to be down in light of a record prior year comparison driven by Manitowoc Ice's ability to work through a significant portion of backlog orders. We were pleased with filtration sales strength in Q2. Segment income declined 3% to $73 million and return on sales expanded 130 basis points to 23.5%, driven primarily by transformation which continued to drive operational efficiencies as well as mix. This was the ninth consecutive quarter of ROS expansion. Margins have expanded nearly 900 basis points over the last two years. Please turn to slide 11. In Q2, Pool sales increased 17% to $392 million. Segment income was $134 million, up 27% and return on sales increased 270 basis points to 34.1%, driven by sales growth and transformation. Please turn to slide 12. At our investor day in March, we shared our updated three-year margin targets. We expect 2026 ROS to expand to 24% over 540 basis points as compared to 2022, driven by contributions from all four of our key transformation initiatives, pricing, sourcing, operations and organization. And we have the opportunity to do even better as we discussed at our March investor day. In 2023, we achieved ROS of 20.8% and expect to continue to drive margin expansion to approximately 23% by year end 2024, an increase of nearly 100 basis points from our previous guidance. Please turn to slide 13. As we mentioned in our March Investor Day, we expect 80/20 to enable and accelerate our transformation initiatives. It's another tool in our toolkit to help our businesses enhance the customer experience and reduce complexity. The 80/20 analysis uses a quadrant based strategy to assess customers and products. Simplistically, the first quadrant reflects a combination of customers and products, which drive a majority of revenue and profit. Conversely, the fourth quadrant reflects customers and products that represent roughly 4% of revenue but includes 15% to 25% of total cost to serve. We expect to focus on customer segmentation over product segmentation to enable us to implement customer strategies based on each quadrant. As a result, we can take specific actions tailored to each quadrant to drive higher and more profitable growth over time. To date, we have assessed about 50% of our total revenue using 80/20 and are currently evaluating this analysis and developing action plans. 80/20 is about treating our customers fairly but differently depending on the circumstances. The objectiveness of the data frees the organization to make the right decisions. We expect to see the largest benefit from 80/20 in operations. However, we also believe G&A and new product introductions will be impacted by the fourth quadrant due to the effort required to serve. We expect this to benefit our organizational excellence efforts as well. We believe the 80/20 analysis is a great complement to our transformation program. We expect to see a noticeable contribution in 2025 as these plans are rolled out. I'm excited about the process and the findings, and I expect it to lead to larger transformation opportunities. Please turn to slide 14. In Q2 we achieved record free cash flow of $522 million. We deployed capital to lower our long-term debt, restart share repurchases and pay our quarterly dividend. During the quarter, we repurchased approximately 600,000 shares for a total of $50 million. We have an additional $550 million available on our share repurchase program. Our net debt leverage ratio was 1.6 times down, significantly from 2.2 times in the prior year period. Our ROIC was nearly 15%. Long term, 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 and share repurchases. As I mentioned last quarter, with the 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 increasing our adjusted EPS guidance to approximately $4.25, which is up roughly 13% year-over-year and is at the high end of our previous guidance range. Also, for the full year, we expect sales to be approximately flat to down 1%, driven by a continued sluggish economy. The second half of 2024 reflects the anticipated reality of a continued higher interest rate environment and its impact on the global economic landscape. For Pentair, this means we are lowering the back half revenue expectations by about $120 million at the midpoint of our guidance. About $30 million of this is in Pool, which reflects the expectation of primarily slower Pool builds and remodels. About $30 million is in Water Solutions and is in lower margin commercial services and global water treatment end markets and about $60 million in Flow is primarily related to residential delayed industrial projects and being more focused around standardized offerings and recurring revenue to drive higher profitability. We now expect Flow and Water Solution sales to be down approximately low single digits and Pool sales to be up approximately mid-single digits for the full year. Within Flow, we expect residential to be down approximately high single digits, commercial to be up approximately mid-single digits and industrial to be roughly flat as we continue to be selective around certain projects. Within Water Solutions, we expect residential to be down approximately low to mid-single digits and commercial to be down approximately low-single digits, primarily due to services. We're also updating expected adjusted operating income to approximately increase 10% to 11%. We are pleased to be able to increase our adjusted EPS guidance despite the lower revenue, we are increasing expected transformation savings to approximately $100 million for 2024 as compared to $75 million in our previous guidance, driven by higher productivity. We expect to improve our mix of higher margin businesses and continue our focus on pricing initiatives to offset inflation. Due to a continued sluggish economy we expect sales to be down approximately 2% to 3% for the third quarter, but adjusted operating income to increase 10% to 12%. We are also introducing strong adjusted EPS guidance for the third quarter of approximately $1.06 to $1.08, up roughly 14% at the midpoint. Before I turn the call over to the operator for questions, I want to say how pleased we are with our second quarter record performance. Our teams have been working diligently and effectively to mitigate uncontrolled risk like continued global economic pressures, while working to deliver strong financial results and executing our major initiative transformation, which now includes 80/20. We are very proud of the hard work and dedication of our entire Pentair team. 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.

Andrew Kaplowitz:

Good morning, everyone. Nice quarter. John or Bob, can you give us more color regarding what you're seeing in Pool and your assumptions for break and fix and remodeling? I think you mentioned a strong aftermarket, weaker remodeling, we obviously know what you're thinking for new Pools, but could you talk about your selling assumptions to the channel? How concerned are you? Or where you're baking in for inventories in the channel at this point for '24?

John Stauch:

Andy, I would just add that as a reminder. We had a really easy compare in Q2 versus a, a really low number last year. And so the growth rate in Q2 is more reflective of last year's performance than it is of anything that is outside the performance of this year.

John Stauch:

Yes. So first of all, 80-20 was not in our 2026 Investor Day longer-term targets. Very little of it is included in our 2024 update guidance. We completed the training sessions and the fact-based analysis on roughly half of our revenue streams. And we'll have the other half done in roughly the next 90 days. So we're very encouraged with what we're learning and finding and it does give us confidence that we can continue to improve margins as we go forward.

Operator:

Our next question comes from Bryan Blair from Oppenheimer. Please go ahead with your question.

Robert Fishman:

Yes. From our perspective, in terms of the guide we gave for Q3 and then the implicit guide for Q4, we'll see significant ROS expansion in both quarters. We do think that the main beneficiaries in the back half will be the Pool business and Flow followed by Water Solutions.

John Stauch:

Yes. I mean most of the decline that we're seeing in Water Solutions is coming from not participating in low-value service contracts within our KBI services arm, and we're adjusting our revenue down to reflect that. That would be roughly a $20 million adjustment for the year. The rest of it is filtration grew double digit in Q2 and they're having a really strong year. And the Manitowoc Ice business continues to perform to expectations. And as a reminder, we were just under $450 million of revenue last year. We'll be just in the low 420s this year. So we're managing through a really decent execution despite having those record backlogs last year that we ended up shipping. So I feel really good about Water Solutions business. We are tweaking our global residential water treatment business, reflecting some of the lower revenue streams and non-U.S. related businesses. And that's a small adjustment here, but I think it's reflected that we don't think that those will improve in the back half of the year.

Operator:

Our next question comes from Steve Tusa from JPMorgan. Please go ahead with your question.

John Stauch:

That is correct, Steve. And I don't think we should expect that we're going to outperform that between now and the rest of the year. I think we're -- there's pockets of being able to recover some of the incremental inflationary areas, but we don't feel that inflation is significant enough to go out with another round of pricing. So we're generally doing the best we can and that the original list prices. And I think so far, so good.

Robert Fishman:

No. We do not see that happening. At the halfway point, we have -- of the year, we have two points of price reading out, and I expect something similar in the back half.

Robert Fishman:

$100 million now in my prepared remarks, and you can think about that as roughly split between -- evenly between Q3 and Q4.

Brian Lee:

Hey, guys, thanks for taking the questions. Good morning. I guess maybe a follow-up on the last one. You raised the kind of transformation benefits from the $75 million to $100 million. I know you don't have much, if any, of the 80-20 in '24, but can you give us some sense, any sense of sort of how it would compare just your initial read on 80-20 impact into '25 when you kind of compare and contrast to what you've been able to do with the transformation initiatives this year going from $75 million to $100 million?

Robert Fishman:

Yes. From my perspective, it brings tremendous focus to the things that really matter allows us to be seek perfection in QUADRA one with our best customers and best products and really to reduce complexity and simplify the business in quad 4.

Robert Fishman:

I would say in the revenue reduction, there's nothing significant relating to 80-20. There happens to be lower profit revenue streams as we're more selective within Flow as commercial services comes down, those would be helping the overall mix. But nothing yet directly related to 80-20.

Jeffrey Hammond:

Hey, good morning, everyone. Just on Water Solutions, a couple of questions. One, the commercial filtration, you called out is strong. Is that just attachment synergies from or is it something more broad than that? And then just speak to commercial foodservice. In general, we're seeing kind of a weaker consumer or mixed results out of Starbucks, et cetera, what you're seeing in general there?

John Stauch:

And I think this is John. Jeff, to answer your question, I mean, we do a lot of quick serve. And even though the traffic may be a little more challenged from time to time, it's relatively a stable industry. when it comes to the replacement side and the step-through for our related products.

John Stauch:

Yes. I'd say, first of all, I mean, we're disappointed in the new Pool build for the year. I mean, we're almost near historical lows and pretty close to where we were in the '08-'09 financial crisis, Jeff. So I mean we're looking for the movement in interest rates to really start to spur the remodeling side and hopefully begin to get people to move homes and think about Pools as part of that attachment. Overall, on the way the segmentation works, we do really on the high end and high end is still strong. That's generally a cash buyer, and they're utilizing retirement income to -- or retirement of funds to buy the dream home in the Sunbelt states. It's really the mid-market and some of the remodeling that we believe has slowed. And so as we mentioned in our remarks, our dealer pulse would suggest that it's a little less optimistic here as we enter the second half of the year than we saw in the first half of the year, which is why we adjusted our guide downward by a couple of points.

Deane Dray:

Thank you. Good morning everyone. It's -- you mentioned in the prepared remarks that Flow was seeing some of the government stimulus coming through. Can you provide any color there?

Deane Dray:

Got it. And what kind of contribution are you expecting for the second half in that stimulus?

Operator:

Our next question comes from Saree Boroditsky from Jefferies. Please go ahead with your question.

John Stauch:

Yes. Sell-in and the sell-through about flat in the quarter for us. And the rest of what happened in Q2 was the year-over-year comparison really wouldn't happen, which was last year, there was a sizable at 5% inventory correction in this year generally sell-in matched sell-out.

John Stauch:

So as a reminder, the prebuy starts in Q3 and Q4 of the previous year, and we take those orders ahead of the price increases for the next Pool year. Right now, we have what we'd say is a modestly down to normalized environment as we look forward in 2025, reflecting that we think that we won't really see benefits from lower interest rates across the residential businesses probably second half of 2025.

Andrew Buscaglia:

Hey, good morning, guys. Just wanted to -- you're talking more about those 80-20 costs or transformation costs accelerating where like, specifically within each segment, in Pool in particular, are you finding this beneficial to one segment versus any other? And then if you could just talk more about details, maybe specifically for Pool in that regard?

Andrew Buscaglia:

Yes. Yes, very helpful. Okay. Yes, that's interesting. And then the -- your cash Flow was really strong this quarter and seemingly a little more profitability as we exit year. What are you thinking about in terms of capital allocation at this point? Has there anything changed there? Any thoughts on a buyback and/or M&A?

Operator:

Our next question comes from Nathan Jones from Stifel. Please go ahead with your question.

John Stauch:

Yes, I appreciate the question. No, it's harder actually. And I think it's the right way to do it and the only way to really do 80-20 is because ultimately, your customers are determining what parts you're selling and why you're selling those parts. Nathan, we talked about, this usually self create your own complexity. I mean we did design and introduce all these parts. So we have to take accountability for that. But really, as Bob said, we're going to treat our customers fairly and basically differentiate how we serve them. And so not all our customers are buying quantities and not all our customers are buying the same levels of transportation and expectations. So it is harder. It takes longer because we have to have honest and fair and transparent pricing across the customer base. And then we have to work the rebates and the volume discounts accordingly, which takes time to work its way through. And that's what we're doing, and we're going to do it, obviously, legally and compliantly, but we're making sure that we notify everybody that at the end of the day, we can't give everybody the same on delivery. We can't give them the same volume purchases because it gets really complex to someone who's not buying the right quantities.

John Stauch:

I'll answer your question quickly. That is a possibility, Nathan. I don't know that yet, obviously. I mean we framed it, and I shared with you that in the near term of walking away from Quad 4 could be 4% to 5% total revenue. What we don't know yet is usually in any short-term period, there would be a little bit of a pullback, but you would get the cost out and therefore, the margin lift. What we would hope that this leads to though is a faster core growth rate because we're able to give the products and customer experiences to our top customers and grow greater than our historical growth rate. Bob and I don't know what that math looks like yet to go across the portfolio. I do think it increases our confidence level of what ROS could be. And certainly, we feel like this will be additive -- at the same time, you're probably not wrong on the fact that some of our dollar growth that we might have forecasted in 2026 could be lower.

Operator:

Our next question comes from Julian Mitchell from Barclays. Please go ahead with your question.

Robert Fishman:

Yes. I would say I'll take the second one first. I mean at the turn year-to-date, we're slightly below price versus inflation. Prices read out around $40 million, inflation at $47 million. So inflation continues to be running a little higher than what we thought. I would say in the back half, our goal is to catch up and end the year, roughly speaking, price equaling inflation. On the run rate going into next year for transformation, too early to kind of give a calendarized view of that, but transformation will be significant next year in 2025 and certainly help us accelerate our ROS expansion goals.

Damian Karas:

Hey, good morning, everyone. Congrats on the transformation progress.

Damian Karas:

So first, just a follow-up to some of your earlier comments on Pool, the business being up year-over-year for the first time in a few years, but underlying markets still kind of down for the rest of the year, which would kind of suggest like an extended 3-year down cycle more or less, I'm just curious, given channels being kind of more or less normalized now, what do you think a market recovery looks like for Pool presumably in 2025?

Damian Karas:

Okay. I appreciate your thoughts. And then you've called out the launch of your first commercial PFAS product as well as expansion of the existing PFAS product line. I know you haven't necessarily put a number around the PFAS opportunity. But maybe if you could just speak to that, would you say that's firmly in your mid-single-digit sales target over the medium term? Or is there maybe some upside there?

Operator:

Our next question comes from Andrew Krill from Duetsche Bank. Please go ahead with your question.

Robert Fishman:

For Q3 and that down 2% to 3% guide, we expect Pool to be up slightly and for Flow and Water Solutions to be down slightly.

Robert Fishman:

Yes. We do expect to have similar ROS expansion story for Pool in the back half of the year. So again, they're executing very well. They'll get some slight growth in the back half, and so we should be able to see, again, impressive ROS expansion story.

Scott Graham:

Yes. Hey, good morning. Two questions, most of mine have been answered. On the price cost to catch up to sort of get the parity for the year. Do you have to increase prices anywhere to get there? Is that one two the math for the second half does that work to increase -- to get to par?

Scott Graham:

At price plus 2%, I think you're saying yes?

Scott Graham:

Thank you. And the second question, it's an easy one. You used the wording we restarted share repurchases. I don't know what that means, more events that you just did some this quarter for the first time in a while. Is the second quarter share repurchase number, is that maybe a good number to use from here that maybe go higher?

Operator:

Our next session comes from Joe Giordano from Cowen. Please go ahead with your question.

John Stauch:

Yes. I just want to make sure, I mean, early buy is done and it's just really more a the factory. Otherwise, we'd have all of our revenue in Q2 and Q3 and very little in Q3 and Q4 -- Q1 and Q4. So we make that decision as we head into the year based upon what level of revenue we're comfortable with to still maintain a decent profit level and also make sure that we can keep a consistent employment level. So that's how we make that decision. It's too early to make that call right now. And as the season approaches, that's the discussions we have with the Pool team.

John Stauch:

Yes. The answer is yes. That is an add-on to what we currently have.

Stephen Tusa:

Hey, guys. Sorry. Just wanted to like touch on this whole inflation and pricing. It looked like the kind of the stack comp pricing in Pool went down sequentially. And I think as a follow-up to the other question, just wondering, could you just maybe delve into what was so inflationary for you guys? I mean like trying to disaggregate a sourcing benefit versus cost increases that would just be more basic in nature? Just wanted to maybe, I guess, just delve into what you're seeing by category and that inflation number? Like what's really driving that?

Stephen Tusa:

Okay, that's super helpful. Thanks a lot.

Operator:

And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. I'd like to turn the conference call back over to John Stauch, President and Chief Executive Officer for closing remarks.

Operator:

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.

Shelly Hubbard:

Thank you, and welcome to Pentair's first quarter 2024 earnings conference call. On the call with me are John Stauch, 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 Pentair 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-K and Form 10-Q. 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 reenter 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.

Bob Fishman:

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 decline 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. ROS improved sequentially from Q4 and approached the Q2 2023 record of 21.6%. We delivered adjusted EPS of $0.94, 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. Flow 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 ROS 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 eleven. 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 ROS 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 ROS 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 ROIC 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 the 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 Solutions segment. We expect second quarter segment income to increase 10% to 12% with significant ROS expansion. We are also introducing strong adjusted EPS guidance for the second quarter of approximately a $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.

Michael Halloran:

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 topline guidance is 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?

Michael Halloran:

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 mix perspective or anything else? And is this just an example of the right foundation to build ROS with all the work you guys are doing internally?

Operator:

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

John Stauch:

Thank you

John Stauch:

Yes. I mean just to reiterate what Bob said, I think we've done a nice job of 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 several larger losing projects, and we've been able to right-size that business and bring those project executions back up to, let's call it, 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.

Bob Fishman:

Yes. 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 Q1 was a little bit unusual and that the volume was declining, but we have significant growth in Q2. And so some of the costs, the ramp-up of cost 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 ROS expansion down the road. So again, comfortable with the ROS expansion in Pool, 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.

Damian Karas:

Hi. Good morning everyone.

Damian Karas:

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?

Damian Karas:

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?

Operator:

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

John Stauch:

Good. How are you?

John Stauch:

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 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.

Bob Fishman:

Yes. Again, we were pleased with the transformation readout in Flow and Water Solutions, but it was offset somewhat by the negative productivity and Pool as we ramp up for Q2, still feeling very comfortable with the $75 million number and think of that as being fairly linear over the next three quarters.

Operator:

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

John Stauch:

Good morning Steve.

Steve Tusa:

Just a 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?

Steve Tusa:

Okay. And 2%-ish price for the year. Is that still kind of in there or -- what you did 3% in the first quarter?

Operator:

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

John Stauch:

Good morning.

John Stauch:

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 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 is always a timing issue. Also, 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 Pool.

Bob Fishman:

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 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 in free cash flow. To your point, we're right within our target range. We think there continues to be a debt reduction play to help the EPS. We'll restart the share repurchases to offset dilution and then there remains optionality in terms of what drives the highest shareholder value.

Julian Mitchell:

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

Julian Mitchell:

That's very helpful. Thank you. And then just my second question would really be around sort of the inventory situation. I think your own inventories are flattish sequentially in March, down a lot year-on-year. Maybe help us understand kind of how you're assessing inventories on 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?

John Stauch:

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 with being bought. So I feel like all that's behind us here in the Q2.

Jeffrey Hammond:

Hey, good morning guys.

John Stauch:

Hi, Jeff.

John Stauch:

Yes, Jeff, I appreciate the question. I mean just -- as a reminder, I mean, Pool markets are -- and sell-through on a normal market basis 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 then I feel like we've got better insights and into the sell-throughs and the way that we now can work to get those shipments out in five days, where we're tying the shipments to the sell-through. So, yes, it does feel better and it feels like more normal, which is why we use the word normalized for a period of time. So I feel good about that. Interest rates are going to be pesky. And I think it's affecting the financing. It's affecting dealer financing and the sense of where they're 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 are what our business tends to like, 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 things are going to be brighter. And I think that, that's what we're reflecting in the -- in our current hold of the full year forecast. 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.

John Stauch:

I think this year, short-term, no. Clearly, the deal is 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.

Nathan Jones:

Sorry. I take off mute. Good morning, everyone.

Nathan Jones:

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? 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?

Nathan Jones:

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

Operator:

Thank you. The next question is from Deane Dray with RBC Capital Markets. Please go ahead.

John Stauch:

Good morning.

Deane Dray:

Can we circle back on the opening comments, you talked about that you're halfway through value-based pricing. Would 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. Just any success stories there? And any kind of product shakeouts, product lines that might be deemphasized? Any color there would be helpful. Thanks.

Deane Dray:

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?

Deane Dray:

All right. Good. And then just I've asked about this before because I just kind of 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, operation in the equipment? Just where does automation stand in terms of the take rate of your customers?

Operator:

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

John Stauch:

Good morning.

John Stauch:

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 will be Q2 and then adjusting within season, which would be Q3 for us.

John Stauch:

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 kind of 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 we got valuations, we've got performance that has to be looked at. But ultimately, I think we're excited that we're at least looking at things again.

Andrew Buscaglia:

Hi. Good morning, guys.

Bob Fishman:

Good morning.

John Stauch:

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 stock outs that we really just have to understand that the market is going to be softer and work within that softer market to drive the transformation levers that we need.

John Stauch:

Yeah, Pool has got the -- yeah, Pool has got the year-over-year inventory tailwinds, which are helpful, again, still mid-single-digits down and from a market perspective. And then residential water treatment saw severely -- severe jobs in their outlook last year. And so they're really more sequentially flat as they're moving throughout the year here, which if you said that's a sign of positive, they're not down substantially. But they're not seeing signs of improvement either as some of those higher-end systems require financing to move them.

Saree Boroditsky:

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

Saree Boroditsky:

And then guidance implies you realized 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 what's kind of the offset to that, that's driving second half earnings to be similar to the first half?

Operator:

Thank you. The next question is from Andrew Krill with Deutsche Bank. Please go ahead.

John Stauch:

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 or 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.

John Stauch:

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

Scott Graham:

Hey, good morning. Thanks for taking the questions. I have two of them. The first one is on strategic pricing, maybe a little bit more finer to the point, with the pricing guide that you've given -- 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 is strategic pricing due 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?

Scott Graham:

Okay. Thank you. My follow-up is around margin guide. I know 22%. It's just -- the first quarter was really strong margin quarter and you had no -- 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, the transformation, you have a building mix in Pool, which is could be material with volumes. I'm just sort of wondering if 22% -- just seems like you should be able to get there fairly easily. Are you thinking higher than that potentially?

Operator:

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

John Stauch:

Good morning.

Joseph Giordano:

I think most questions have largely been asked already. But just kind of curious like bigger picture, EPA comes out with regulations on PFAS. This is something that you guys were thinking about doing like potentially like an in-home product. I'm just curious how those kind of strategies, kind of 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 thinking about that?

Joseph Giordano:

Fair enough. Thanks guys.

Operator:

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

Bob Fishman:

Yes. In terms of reading out, we've captured $4 million of the $75 million. And then -- our view is that the remaining $70 million is fairly linear over the next three quarters.

John Stauch:

Yes. 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.

John Stauch:

Thank you.

Operator:

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

Operator:

The conference has now concluded. Thank you for your participation. You may now disconnect your lines.

Shelly Hubbard:

Thank you, Drew, and welcome to Pentair's fourth quarter 2023 earnings conference call. On the call with me are John Stauch, our President and Chief Executive Officer, and Bob Fishman, our Chief Financial Officer. On today's call, we will provide details on our fourth quarter and full year performance as outlined in this morning's press release. On the Pentair 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 up 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. Similar to previous quarters in 2023, we have included Slides 4 through 7 in our earnings slide deck, which provide a brief overview of Pentair as well as our investment thesis. I will now turn the call over to John.

Bob Fishman:

Thank you, John, and good morning, everyone. Let's start on Slide 11, titled Q4 2023 Pentair Performance. I will also be discussing our Full Year Performance on Slide 12. We delivered another strong quarter of earnings and significant margin expansion, despite sales being down 2% year-over-year. Volume continued to improve sequentially, with substantial progress in Q4 as compared to Q2 and Q3, driven primarily by improvement in Pool volume. Sales for Q4 were down 2%, which was slightly better than we guided. Core sales across all three segments were down slightly, as compared to last year's record Q4, when our lead times began to improve from a recovering global supply chain, enabling us to ship more backlog orders. As we move into 2024, we expect to see a more normalized operating environment. Fourth quarter segment income increased 8% to $198 million, and return on sales expanded 190 basis points year-over-year to 20.1%. This improvement was driven primarily by our Transformation initiatives. Adjusted EPS of $0.87 was up 6% versus the prior year. For the full year, sales were flat at $4.1 billion, with core sales down 5%, driven by growth in Flow and Water Solutions, which were offset by lower Pool volumes. Segment income grew 11% and return on sales expanded 220 basis points to a record 20.8%. All three segments significantly expanded margins and set new records. Adjusted EPS increased to a record $3.75. Turning to Slide 13, labeled Flow at a Glance, you can see the impressive five-year financial performance. Sales rose over 4% compounded annually and margin expanded 300 basis points since 2019. In 2023, Flow continued to reach new records in sales and ROS. We have also provided a sales view by region, channel and solution reflecting 2023 sales and the diversified nature of the business. We have eight iconic brands, some over 100 years old, and we rank first in quality, technical support and customer service. Please turn to Slide 14, labeled Q4 2023 Flow Performance. In addition to the fourth quarter performance for Flow, I will also be referencing the full year performance on Slide 15. Note that we have recently renamed our Industrial & Flow Technologies segment to Flow. In Q4, Flow grew sales 1% in the quarter to $379 million, a record fourth quarter. Industrial solutions was up 9% and commercial was up 2% with residential down 7%. Segment income was flat and return on sales decreased 20 basis points to 17.2% due to a return to more normal seasonality following a record Q4 2022 and an unfavorable mix from our residential business. For the year, Flow sales increased 5% to $1.58 billion primarily due to double digit growth in commercial and industrial solutions. Residential was down 4% showing improvement sequentially from Q3. Full year segment income grew 17% and return on sales increased 170 basis points to 17.8%, a record margin for Flow driven by Transformation and price more than offsetting inflation. Turning to Slide 16, titled Water Solutions at a Glance, you can see the strong five year financial record with a compounded annual sales growth rate of 17% and over 400 basis points margin expansion since 2019. Our iconic brands include Everpure and Manitowoc Ice. Our residential Water Solutions products have helped reduce the need for 7 billion single use water bottles in 2023. Please turn to Slide 17, labeled Q4 2023 Water Solutions Performance. In addition to the fourth quarter performance for Water Solutions, I will also be referencing the full year performance on Slide 18. In Q4, Water Solution sales decreased 5% to $270 million following a record Q4 2022. Commercial sales were down 4% primarily due to the timing of projects within our services business, partially offset by growth in Manitowoc Ice and filtration. In residential, Q4 sales were down 6% but reflect significant improvements sequentially from Q3 of this year in which residential sales were down 14%. Segment income grew 15% to $52 million and return on sales expanded 320 basis points to 19.1%, a new Q4 record driven primarily by productivity from our Transformation initiatives and Manitowoc Ice. For the year, Water Solution sales grew 19%. Segment income grew 66% and return on sales increased 590 basis points to 21%, a new full year record. Commercial sales increased 54% driven by the acquisition of Manitowoc Ice and growth in filtration. Manitowoc Ice had a record sales year with growth of 23% versus the prior year. Please turn to slide S9 titled Pool at a Glance. Looking at the five-year financial performance, Pool was able to grow the top-line significantly and increase margins to a record 31% or up 320 basis points since 2019. Our Pool business benefits from a very large installed base with roughly 80% of sales coming from remodel and break and fix. Please turn to Slide 20 labeled Q4 2023 Pool Performance. In addition to the fourth quarter performance for Pool, I'll also be referencing the full year performance on Slide 21. In Q4, Pool sales declined 2% to $336 million driven by a six-point drop in volume which was partially offset by four points of price. Note that volume improved significantly compared to the 28-point decline in Pool volume in Q3. For the year, Pool sales were down 18%, segment income decreased 10%, and return on sales increased 270 basis points to 31% driven by price and our Transformation initiatives. Please turn to Slide 22 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. We have been targeting ROS of approximately 23% by the end of fiscal 2025, expanding margins over 400 basis points as compared to fiscal 2022. In 2023, we delivered ROS of 20.8% as Transformation began to read out in Q3 and Q4, and we expect to deliver roughly 22% by the end of full year ’24, which we believe puts us on track with our Transformation initiatives. Please turn to Slide 23 labeled Transformation Runway. We have kept this slide as a reference to illustrate the staggered nature of each of the four initiatives and the various stages of each. We are pleased to note that we believe we are executing well on these initiatives going into 2024. Please turn to Slide 24 labeled Balance Sheet and Cash Flow. In Q4, we generated $97 million in free cash flow, up nearly 100% year-over-year, reflecting another strong quarter. For the year, our free cash flow was $550 million, up nearly 94% year-over-year. Our net debt leverage ratio was 2.0 times, down from 2.6 times in Q1. Our total debt was less than $2 billion, and the average interest rate was approximately 5.2%. Our ROIC was 14.3%, which includes the full impact from the Manitowoc Ice acquisition. With the focus on being good stewards of capital, we continue to target high teens ROIC. We plan to remain disciplined with our capital and continue to focus on debt reduction amid the higher interest rate environment with the potential for share buybacks. Moving to Slide 15 titled Q1 and Full Year 2024 Pentair Outlook. For the full year, we are introducing our adjusted EPS guidance of approximately $4.15 to $4.25, which represents a year-over-year range of up 11% to up 13%. We expect total Pentair sales in fiscal 2024 to be approximately $4.2 billion or up about 2% to 3%. We expect Flow sales to be up low-single digits reflecting low to mid-single digit growth in our commercial and industrial businesses offset slightly by a low-single digit decline in residential. Water Solution sales are expected to be essentially flat, comping record 2023 performance driven by our commercial water business. Commercial sales in full year 2024 are expected to be up low-single digits and residential to be down low to mid-single digits. Pool sales are expected to increase approximately 7% in full year 2024 which aligns the historical compound annual growth rates of mid-single digits pre-pandemic. We expect Pool sales to increase driven primarily by inventory headwinds in 2023 that we do not expect to repeat in 2024 and some benefit of price. We expect this growth to be slightly offset by the uncertainty that still exists regarding the macroeconomic environment, higher interest rates, the potential impact of financing for new and remodeled pools and potential repair deferrals in the aftermarket. We believe Pool remains a highly attractive market for us and we look to deliver strong growth in 2024 while being mindful of macroeconomic dynamics. We expect segment income to increase approximately 10% with ROS expansion of roughly 150 basis points. Also for the full year we expect corporate expense of approximately $95 million, net interest expense of roughly $100 million, an adjusted tax rate of approximately 16.5% which is inclusive of changes in the global tax standards for a total impact to Pentair of about $0.07 per share and a share count of approximately 166 million to 167 million. Lastly, we expect to deliver approximately $1 billion in EBITDA in full year 2024, a milestone we are very proud of. For the first quarter, we expect sales to be down approximately 2% to 3%. As a reminder, many of our businesses were working down large backlogs in Q1 last year as supply chains improved and we were able to ship more backlog orders, in 2024 we expect more normalized seasonality in our businesses. We expect first quarter segment income to be flat to down 3% primarily due to lower sales with corporate expense of approximately $25 million, net interest expense of roughly $29 million, an adjusted tax rate of approximately 16.5% and a share count of approximately 167 million. We expect Q1 to drive ROS expansion both sequentially and year-on-year. We are also introducing adjusted EPS guidance for the first quarter of approximately $0.88 to $0.91. For the first time since 2020, we believe we are seeing a return to a more normalized operating environment globally. Thus we expect to see seasonality resume to historical norms across all three of our segments in 2024 with Transformation driving margin expansion. In the first half of 2024 we expect adjusted EPS to be slightly less than 50% of our full year adjusted EPS guide. Q1 is expected to be the lowest quarter for sales, segment income, ROS and adjusted EPS as compared to the remaining three quarters in full year ’24. We have continued to accelerate transformation funnels and remain focused on investing in the long-term growth of our company. Turning to Slide 16 titled 2023 Reflection, our business continued to execute well and delivered what we said we would do. We drove margins as a result of our balanced water portfolio and Transformation initiatives. Manitowoc Ice posted a record year exceeding expectations. We drove performance accountability across the organization, ended the year with an even stronger balance sheet and free cash flow and maintained a disciplined capital allocation strategy. We believe we are well positioned going into full year ’24. I would now like to turn the call over to the operator for Q&A, after which John will have a few closing remarks. Drew, please open the line for questions. Thank you.

Unidentified Analyst:

Hi, thanks for taking the questions. This is Grace on for Brian. First question on margin, kudos on the margin executions. Just a quick question on the margin expansion trajectory here, so if I do a math correct here, your full year guide implies 140 basis point expansion while your 1Q guide implies 20 basis points at the midpoint. So how should we think about the margin expansion trajectory moving the year and which segment should we see the most margin expansion? Thanks.

Bob Fishman:

Yeah, I would agree with your numbers. So ROS expansion will continue in the first quarter as we drive approximately 150 basis points of ROS expansion for the full year and as you'd expect, with Q2 being our largest quarter, the ROS expansion will be significant in Q2 and will also play out well as we close out the year in Q3 and Q4.

John Stauch:

That's two questions with a lot of subparts. But let me see if I can summarize it. I mean, first of all, we have given two numbers on the inventory piece. We've given $150 million and $120 million. I just want to remind everybody it's about a $150 million for Pentair from the end of Q1 to the end of Q4 2023. On a year-over-year basis, it's actually closer to $120 million, which is, you know, then if you think about exactly what you're saying, you take our reported sales, add the $120 million, you'll get to the conclusion that price and volume is down. And I think that reflects several factors. One is that we expect new Pool builds to decline only modestly but then we are not so sure what's going to happen with remodeled pools. And we're also expecting some level of discretionary purchases in the aftermarket in the first half for sure, as people are maybe a little more cautionary, depending on where the interest rates are. Net-net, it's still a fundamentally good growth rate for us as we set up the year. And we're expecting really good conversion of ROS on that contribution.

Julian Mitchell:

Hi. Good morning. Just wanted to circle back to the sort of profit bridge numbers and maybe looking at Slide 12, to try and understand what's embedded for 2024. Any help you could give us around the sort of that inflation bucket, what you're dialing in, it was that sort of $190 million number in ’23. And when we look at productivity, very good exit rates in terms of, $30 million or so tailwind in Q4. How are we thinking about that number for full year ’24 as well, please? So, yeah, inflation and productivity, any finer points on the guide assumption?

Julian Mitchell:

That's extremely helpful. Thank you. And maybe just a quick follow up on the top-line outlook. So you start out Q1 down a couple of points, the full year is up a couple of points, how are you thinking about the sort of rate of improvement in that year-on-year sales line through the year? Is it just each quarter year-on-year gets slightly better? And is that true across all three segments kind of moving in a synchronized wave from down slightly to up slightly? Any clarity on that, please?

Operator:

The next question comes from Nathan Jones with Stifel. Please go ahead.

John Stauch:

Good morning.

Bob Fishman:

Yeah, we're pleased with what we're seeing in terms of Transformation reading out. It was $29 million in both Q3 and Q4 of 2023. And as I just mentioned, we're looking at roughly a net $75 million number in 2024. When we look at the funnel, we would expect those type of Transformation numbers to continue over the next couple of years. We think the funnel supports the various waves, whether it's pricing, sourcing, the operations or the org excellence. So we think it's going to create runway for us over the next couple of years, for sure.

John Stauch:

Yeah, let me just give some color and I'll let Bob close out. I think we enter 2024, especially in the Q1 phase with much more normalized backlog levels. We still grew nicely in Q4 Manitowoc and we expect to grow again in Q1. So I think we're at normal levels. Just as a reminder, this business was only taking 60 days to 75 days of orders. So the backlog was more relative to what the nearer term dynamics were, Nathan, not some level of large backlog that wouldn't be used in the future. So obviously we had a great 2023. This business contributed nicely to overall Water Solutions and overall Pentair and we couldn't be more pleased where we are. And 2024 is more about getting the filtration synergies lined up along with the Manitowoc Ice acquisition. They're the same business unit and when we gave the numbers of what we expected this business to achieve in the longer term of 2025, it was inclusive of those revenue synergies on both the services side and the filtration side. So very pleased where we are and very excited about the contribution we'll see in 2024 and beyond.

Operator:

The next question comes from Mike Halloran with Baird. Please go ahead.

John Stauch:

Good morning.

John Stauch:

Yeah, there is easier comps but it's also the most global of the businesses inside that portfolio, Mike, so we're balancing off Europe, China and North America and while the comps are easier in North America, we do expect some return to growth. We're not yet seeing the interest rate environment propel new housing starts and/or a lot more movements which is usually key indicators to drive that business. But we're at levels now where we're definitely growing off of these compares in North America but we're anticipating a little bit more choppier outcomes in China and Europe in that business. So net-net probably slightly down but getting closer to flat.

John Stauch:

That's correct. On Pool --

John Stauch:

You expect a net price benefit and a contribution in line with the way that Bob shared it across the total Pentair portfolio and the offsets to that would be the volume which would be the market challenges.

John Stauch:

Thank you. Appreciate it.

Scott Graham:

Hey, and good morning. Thank you for taking my question. Just on two quickly -- the fourth quarter price cost on the order side. I was just kind of wondering what happened there. But it looks like there was some slippage. And did that reverse, maybe in the first quarter or second quarter of this year?

Operator:

The next question comes from Jeff Hammond with KeyBank Capital Markets, Inc. Please go ahead.

John Stauch:

Good morning.

Jeff Hammond :

So just on the early buy, I think there was some question on, kind of how you're going to spread it for 1Q and just wondering, if you have more to go in 1Q? And then just I'm kind of the, maybe just speak to break fix kind of how you're thinking about that market within the guide?

John Stauch:

Yeah, and on the break fix, Jeff, I will concede that we probably have what I'd call a more cautious outlook, I would not call it conservatism, I call it more realistic. And we just don't know how the interest rate environment is going to affect the consumer being more thoughtful on what's discretionary, not discretionary on the pad. Clearly, we expect products like pumps and filters to be replaced as needed to keep the pool running. But some of your heaters, especially on the high end and/or some of your lighting could see some consumer discretion push those off a quarter or two. That's just our outlook. I don't say that that's right. I think it's better to take that slant and maybe err to the fact that if that doesn't happen, we're going to see, a higher level of growth versus taking a more optimistic view and then having to reset the guide again to the lower end in Pool. So I would be very clear, I don't know. It's just what we have in our particular view.

Brett Linzey:

Hey, good morning all.

Bob Fishman:

Morning.

Bob Fishman:

Yeah, based into the assumptions that we gave, the $100 million of interest expense and the share count, we have assumed share buyback resumes to offset dilution. So typically, Q1 is a negative free cash flow quarter, but we would also start a share buyback later in the year, is what's based into our assumptions currently.

Brett Linzey:

Got it. And then just want to circle back on the $75 million of Transformation that's planned this year. Curious how that feathers across the individual segments as we model ’24? And is this primarily from the Wave 1 measures and actions taken last year, or are you doing more on the operational side in 2024?

John Stauch:

You know, Brett, we've got to leave some information for Analyst Day to make sure everybody attends, comes and listens to us. And we'll go in a lot more detail as to how we see all of those Waves working and connected to what the segment expectations will be as well.

Andrew Krill:

Hey, thanks. Good morning, everyone. I just want to go back to pricing. I know you said about two points net for the company, but just wondering, do any of the three segments benefit more or less relative to that 2%? And are these pricing increases basically already put through or does it require more pricing on kind of mid-year or at some point in the year? Thanks.

Operator:

The next question comes from Joe Giordano with TD Cowen. Please go ahead.

John Stauch:

Good morning.

John Stauch:

Yeah, let me simplify it. I mean, right now we're seeing great traction, especially with Manitowoc and also then the filtrations of Everpure, through distributors into key accounts and also working our way through synergies there. I just want to mention that our services business had a very large project that it worked in 2022, which was for a large customer, the install of frozen carbonated beverages. And we ran up against the year-over-year headwind in that business in Q4. But if you actually look at the filtration and the Manitowoc, contributing nicely and it's just offset slightly by the headwind of the services business.

Andy Kaplowitz :

Hey, good morning, everyone.

Andy Kaplowitz:

John, could you give us a little more color into your industrial CapEx, I suppose businesses within Flow? I think you have the segment up single digits for ’24, industrial businesses look good in Q4. So what are you seeing in Flow and then how are you thinking about your commercial businesses there as well?

Operator:

The next question comes from Deane Dray with RBC Capital Markets. Please go ahead.

John Stauch:

Good morning Deane.

John Stauch:

Yeah, I know. I appreciate the question, Deane. And I will spend a little bit of time on this at the Analyst Day in March. But just to share with you how I'm thinking, the relabeling of Flow was actually more of a branding exercise. You know, we want to have a web presence where we can tell our story and flow represents 9.99% of everything we do and the former Industrial & Flow Technologies, well, we just didn't think worked as a naming nomenclature. So that's all it was. It's also shorter, which makes producing reports easier. And that's a big deal, right? But ultimately, Deane, the way I think of the company is we're a $1.5 billion in separations and membrane technologies. We're about a $1.5 billion of pumps across the enterprise. And then even some of our specialty applications like heating and cooling of ice, a rise in $800 million, which leaves you a couple $100 million of lighting and $100 million of other. So when you think of the portfolio, we're not geared to residential other than that's where our dealer base is. And that's where our strength and our presence has been generally accepted around our brands. But as a reminder, we do a couple of hundred million dollars industrial wastewater today. That's in the Flow side and we'll continue to build out that capability and technology to continually take advantage of water reuse projects around the world. So, it’s -- we are -- we believe this business naturally fits and we're going to demonstrate that we use those membranes that are used for industrial wastewater applications. We're bringing those back into the residential applications and we think it's going to give us a differentiated technology advantage as we do so. So really excited about the cross-pollination of technology and really excited about how the segments are working together, while also maximizing what we think is the revenue opportunities within their individual swim lanes.

Steve Tusa :

Hey, guys, good morning.

Bob Fishman:

Hi, Steve.

John Stauch:

Good. How about you?

John Stauch:

It's not a lot. Just, you know if you thought about $10 million to $20 million of reinvestment into the areas of sales and marketing, innovation, digitization, capturing data upstream and bringing that data to help our dealers be successful. And then really just automating the experience between our dealers and our distributors and us, are the two biggest opportunities we have. And then we got some excitement around three or four of these innovation projects that we'll talk about further, Steve, at the Analyst Day. And I want to continue to invest in them because I think they could be game changers in the long haul. So I'm really pleased with the level of transpiration we're realizing and, you know, these are good businesses that we want to add a little bit of investment back into.

John Stauch:

But you [answered] it for me, Steve. Now it's in the transcript, so thank you.

John Stauch:

Yeah, you know, I hate ever using the word conservatism. I think we definitely have a funnel that would suggest we could realize more. And certainly, at the upper end of the range, we would be realizing more. So I think right now, as we sit here and we don't see any definitive movement in interest rates for the rest of the year, we haven't planned on any in this forecast. You know, we think we're well balanced in the way we're positioning this.

John Stauch:

Well, thank you for joining the call today. In closing, I want to reiterate some key themes on Slide 27. First, our balanced water portfolio and Transformation initiatives continue to drive significant margin expansion in 2023. Second, we initiated 2024 guidance with expected growth in sales and profitability, reflecting confidence in our strategy and execution across the company. Third, our Transformation initiatives have gained momentum in 2023, with expectations to drive further margin expansion in 2024. And finally, we believe our focused growth strategy and solid execution are building a solid foundation for long-term growth, profitability, and shareholder value. Drew, that does conclude the call.

Shelly Hubbard:

Thank you, Anthony, and welcome to Pentair's third quarter 2023 earnings conference call. On the call with me are John Stauch, 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 Pentair 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 4 through 7 in our earnings slide deck, which provide a brief overview of Pentair. Please see the slide titled Strategic Framework, Pentair at a Glance, Pentair Overview and Making Better Essential for more information. In reference to Slide 7, Making Better Essential, we are proud to share two recent recognitions that Pentair has received for its work in social responsibility and ESG. We've been recognized as a constituent of the FTSE4Good 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.

Bob Fishman:

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 Pool's lower volume impact on margins. Core 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 in 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 & Flow Technologies Performance. Industrial & Flow Technologies 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 datacenters 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 in 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 Solutions 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 accretive 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 in Water Solutions, we noted last quarter that we are seeing North America stabilize. This was evident in Q3 as residential sales declines improved sequentially from Q2. Within our commercial business in 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 7 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 rightsize 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 1 within pricing, sourcing and operations. We are beginning Wave 2 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 materiality costs 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 operations 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, moldings, resins, ocean freight and purchase 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 earlier stages with Wave 1 and expect margins benefits to be realized beginning in 2024. Due to the staggered nature of these transformation initiatives, we expect Wave 3 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 million to $90 million, net interest expense of roughly $123 million to $125 million and 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 million to $30 million, and adjusted tax rate of approximately 15%, and a share count of 166 million. We are also introducing adjusted EPS guidance for the fourth quarter of approximately $0.82 to $0.87. Moving to Slide 20, titled Full Year 2023 Guidance at Midpoint. We continue to expect total Pentair 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 Solutions 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 Pool's 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.

Brett Linzey:

Hey, good morning all.

Brett Linzey:

Hey, first question just on pricing in Pool. So it sounds like you're going to 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?

Bob Fishman:

Yeah, our comment towards 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.

John Stauch:

No, but I mean it opens up what we would say would be at least $1 billion plus for our particular opportunities. And I think that's a conservative estimate, Brett.

John Stauch:

Thank you.

Andy Kaplowitz:

Hey, good morning everyone.

Bob Fishman:

Morning.

John Stauch:

Yeah, so I think, first of all, we're pleased that we were able to predict 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. 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 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.

John Stauch:

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.

John Stauch:

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.

John Stauch:

Thank you.

Brian Lee:

Hey guys, good morning. Thanks for taking my questions. I know there's a lot of questions around Pool. I'll just throw another one in there. And lot of moving parts and the macro is still uncertain, but is there sort of a framework you guys can provide us to think about for Pool? Because if all goes right, it sounds like by the time we get to end of '23 here, channel destocking is fully complete, you've got normal seasonality returning, price is still kind of elevated in the mid-single digits, so I guess, 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 you play out as you expect channel destocking seasonality? Like, what is the framework we should be thinking about in terms of the Pool volume outlook here as we think about the next kind of 12 to 18 months?

Brian Lee:

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 impacts or constraints on spending when it comes to that sort of cost of capital environment and just financing condition is getting a little bit tougher here? Anything you can speak to at kind of a high level? Thanks.

Brian Lee:

All right. Appreciate it guys. Thank you.

Operator:

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

John Stauch:

Morning.

Bob Fishman:

There's no doubt that commercial water solutions has had a excellent 2023, going to market with 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 being solid for us. The challenge for us is bumping up against a tough compares next year. But overall, the markets that we serve are doing well.

Bryan Blair:

I appreciate the color. That's very helpful. You mentioned the end-to-end 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 businesses, not just the lift to Man Ice?

Bryan Blair:

All makes sense. Thanks for the color.

Operator:

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

John Stauch:

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

John Stauch:

Mike, I promised myself I wouldn't give a target today. I think right now, I think we all have to be mindful of access to capital and managing with our capital framework and 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 current business units. The market is not robust though at the moment. And 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 of this year and into next year.

Mike Halloran:

Thanks for that. All very reasonable. I appreciate it.

Operator:

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

John Stauch:

No, I think the way -- it's a good observation. I would remind you that the inflation as we showed in our bridge is as 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 earlier 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.

Julian Mitchell:

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 2 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.

Julian Mitchell:

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

Julian Mitchell:

That's great. Thank you.

Operator:

Our next question will come from Saree Boroditsky with Jefferies. You may now go ahead.

Bob Fishman:

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 the ROS to improve next year as we head towards that 23%.

John Stauch:

Yeah. I mean I think 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 we would be in the normalized pattern, end of Q2 next year finally being a normal seasonal pattern, which should be the strongest full quarter of the year. And as a reminder, Q3 is modestly less than that. And then again Q4 starts the pre-load for the 2025 season. So we feel like we worked through this and now we've got a clear line-of-sight to more normal seasonality in the business and really keeping our eye on sell-through going-forward so that we don't get into this inventory situation with our channel again.

Operator:

Our next question will come from Jeff Hammond with KeyBanc Capital Markets. You may now go ahead.

John Stauch:

Good morning.

Jeff Hammond:

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 I'm just wondering what the orders are telling you about kind of the go-forward there.

Jeff Hammond:

Okay, great. And then just back on this Manitowoc Ice tough comp issue, can you just talk about -- I think you called out 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 this tough comp dynamic? We're also kind of picking up in the channel that commercial food equipment and some other markets are maybe starting to see more normal growth as well.

John Stauch:

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 have hoped that, that is a more linear growth rate that we get to and obviously, we're going to satisfy the demand and make sure that it's a Manitowoc Ice machine that someone is 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.

John Stauch:

Thank you.

Andrew Krill:

Hey, thanks, good morning, everyone. Want to go back to the Pool pre-buy. I think you might have said you're expecting like a modest pre-buy this year. So just any more insight you can give on that and maybe try to like quantify how it's 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.

Andrew Krill:

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

Andrew Krill:

Thank you.

Operator:

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

John Stauch:

Morning, Joe.

John Stauch:

I'd say yes on the second part of your question and I think delivering the margin that we did despite the year-over-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.

John Stauch:

Yeah. I would remind you that Water Solutions has a residential component 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 try to mix up that business. And so 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.

John Stauch:

Well, I think we're a piece of their puzzle. So we'll start there.

John Stauch:

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.

John Stauch:

Thank you.

Scott Graham:

Good morning, John, Bob, Shelly. How are you?

Shelly Hubbard:

Morning.

Scott Graham:

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?

Scott Graham:

Okay. Back on to Pool, sorry, but historically, these numbers kind of shook out as 40, 30, 30 new remodel and then sort of the maintenance of the aftermarket. As we look at a weak 2023, kind of, what does that -- where do those numbers kind of end the year at? Is that an estimate you can make?

Scott Graham:

Okay, thank you, John. Last one, you indicated builds, you are assuming kind of flattish. We're modeling flattish and then aftermarket up. Were you referring to the fourth quarter or a period of time longer than that?

Scott Graham:

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

Scott Graham:

All right, thank you. Had to try.

Operator:

Our next question will come from Deane Dray with RBC Capital. You may now go ahead.

John Stauch:

Yeah. I mean we do. We have all those. Vitality is obviously the right product line by product line. When we create new valuable products at the market or that our customers want, we tend to see margin lift from those new products, not usually at its initial stage, it usually takes probably a year or two for that to recognize. But that is the model we work to.

John Stauch:

Yeah, we have today with the Born in America where a lot of our historic brands 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 the ability to have at least a fair opportunity to win those jobs when we go to market.

John Stauch:

Thank you.

Nathan Jones:

Good morning, everyone.

Bob Fishman:

Hi, Nathan.

John Stauch:

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.

John Stauch:

Yeah, as a reminder, we -- 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 head into next year, go away. And so obviously, this is all included in Water Solutions this year and in 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 took on this year.

John Stauch:

Thank you.

Sabrina Abrams:

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

Bob Fishman:

Now, we had talked at the beginning of the year of that $370 million but the business has done significantly better than that and will grow roughly 20% this year.

John Stauch:

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 is a discount to what the price increase would be. So it's not like we're discounting partly to sell it, we're just not having to -- we're just not getting the full raised prices in that early buy.

John Stauch:

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 continued 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.

Shelly Hubbard:

Thank you, Joe, and welcome to Pentair's Second Quarter 2023 Earnings Conference Call. On the call with me are John Stauch, our President and Chief Executive Officer; and Bob Fishman, our Chief Financial Officer. On today's call, we will provide details on our second quarter's performance as outlined in this morning's press release. On the Pentair 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 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. [Operator Instructions] Before I hand it over to John, I wanted to highlight Slides 4 through 7 in our earnings slide deck that include our strategic framework, Pentair at a Glance, a Pentair overview and our newest slide illustrating our ESG highlights and progress. These 4 slides provide a good snapshot of who Pentair is, especially for those new to our company. Our strategic framework states our purpose, mission, vision and values that drive our performance as a smart, sustainable water solutions company. Pentair at a Glance on Slide 5 provides a great snapshot of our company, our performance, our installed base and our 47-year track record of annual dividend increases, which places us in a small group of companies. The Pentair overview on Slide 6 provides our historical sales and ROS performance on a consolidated level and by segment. Lastly, our ESG highlights and progress shown on Slide 7 are a testament to the important work our teams do to integrate sustainability into our operations, product innovation and long-term strategy. We are very proud of our achievements to date, especially considering the early stages of program, which began just about 3 years ago. I will now turn the call over to John.

Robert Fishman:

Thank you, John, and good morning, everyone. Let's start on Slide 11, titled Q2 2023 Pentair Performance. We delivered record second quarter sales of nearly $1.1 billion, up 2% year-over-year. This is compared to a previous sales record in last year's Q2 of $1.06 billion post the separation of nVent from Pentair in 2018. Our IFT and Water Solutions segment continued another quarter of strong sales performance, which more than offset lower Pool volumes. Sales growth in Q2 included strong price contribution and the Manitowoc Ice acquisition, which closed in July of 2022. The volume decline in Q2 was primarily related to our pool and other residential businesses which was partially offset by strength within Commercial and Industrial. Please note that where I referenced record results, I'm referring to Pentair's performance post the separation of nVent from Pentair in 2018. Core sales improved 9% in both IFT and Water Solutions with Pool declining 28%, compared to the prior year periods, pool sales increased 19% in Q2 2022 and 49% in Q2 2021. Second quarter segment income increased 14% to a record $234 million and return on sales expanded 230 basis points year-over-year to a record 21.6%, this improvement was driven by price more than offsetting inflation, accretive segment margins from our Manitowoc Ice acquisition, the elimination of 2022 manufacturing and supply chain inefficiencies and productivity benefits from our transformation initiatives. We delivered record adjusted EPS of $1.03. Net interest expense was $33 million, and our adjusted tax rate was 15% during the quarter with a share count of 166.1 million. Please turn to Slide 12 labeled Q2 2023 Industrial & Flow Technologies Performance. Industrial & Flow Technology sales increased 9% and year-over-year, driven by commercial sales growth of 28% and industrial sales growth of 13%, which more than offset a decline in residential sales of 4%. Segment income grew 27% and return on sales expanded 250 basis points to 18.2%, marking the fourth consecutive quarter of equal to or greater than 200 basis points of improvement. The strong margin expansion was a result of price offsetting inflation and continued progress on our transformation initiatives. Please turn to Slide 13, labeled Q2 2023 Water Solutions performance. In Q2, Water Solutions sales increased 51% to $336 million driven by our Manitowoc Ice acquisition, volume and price. Manitowoc Ice has continued to exceed our expectations. Q2 sales were approximately $135 million, up roughly 30% compared to the prior year period. Segment income grew 130% to $75 million and return on sales expanded 760 basis points to 22.2%, driven primarily by our Manitowoc Ice acquisition as well as efficiencies from our transformation initiatives. Within our residential business, we are seeing North America stabilized. We have also been evaluating our SKU mix and reducing complexity. Please turn to Slide 14, labeled Q2 2023 Pool performance. In Q2, Pool sales declined 28% to $334 million. The volume decline of 36 points was primarily due to channel inventory corrections in Q2. This year, a strong Q2 2022 comparison and cooler and wetter than usual U.S. weather. The pricing benefit of 8 points helped partially offset the volume decline. Despite lower Pool sales in Q2 2023, return on sales expanded 190 basis points due to price significantly offsetting inflation, rightsizing direct labor to align with lower volumes, the elimination of 2022 manufacturing and supply chain inefficiencies and benefits from our transformation initiatives. Please turn to Slide 15, labeled Pentair Pool sell-in versus estimated industry sell-through. This slide provides an illustration of our Pool sale sell-in and the estimated comparison to industry channel sell-through since 2019. Here, you can see the imbalance of sell-in and sell-through beginning in 2020 and continuing to expand in 2021 and 2022 due to record inflation and supply chain disruption. In 2023, we have returned to normal lead times and sell-through is returning to normalized levels. We expect sell-in and sell-through to rebalance by 2024, following approximately $150 million of channel inventory correction in 2023. We expect this 2023 inventory correction to become a tailwind in 2024. Please turn to Slide 16, labeled transformation initiatives. Our transformation initiatives focus on 4 key themes

Julian Mitchell:

My first question, I suppose, was really around -- when we're looking at a couple of the guidance increases in the non-pool divisions, just wanted to try and understand the cadence of sales a little bit better through the back half. If I look at the Water business, for example, it looks like the guide implies a pretty heavy sequential declines in Q3 and 4. I just wanted to make sure I understood that right. And then also within IFT the guides implying year-on-year growth evaporate in the back half. Is that just a function of comps or something changing in the end market sell-through?

Julian Mitchell:

Understood. And then just my quick follow-up on the Pool segment. On that point on inventories. So, it's obviously the sort of the weather impact early in the second quarter, which have been very well flagged for months now. Is your point that maybe delayed the requisite inventory depletion early on. But what's happened, say, so far in Q3, that's why you feel confident that the inventory depletion is on track to be finished by the end of September. Maybe just any color on how your conversations with channel partners and what you see on the sell-through, how has that evolved in the last 2 to 3 months?

Operator:

Our next question here will come from Andy Kaplowitz with Citigroup.

Robert Fishman:

I would say we're very pleased with Wave 1 across the board, particularly pleased within sourcing. As a reminder, Wave 1 consisted mainly of motors and drives, casting, electronics, logistics, packaging and then Wave 2, you can think of that as being metals, resins, purchase finished goods and a component of indirect spend. We've seen a lot of benefit within the transportation area within Wave 1 and 2024 is setting up for benefits in the other components of the Wave 1 spend. One of the areas that we've done a really nice job is capturing deflation, particularly across resins, plastics, motors, metals and castings where our team went in and did an expedited response to what they saw in the global marketplace. We're able to strengthen relationship with suppliers and actually take advantage of pricing that was coming down in the number of different commodity groups. I would say within kind of the ocean space, the expedited air on the air consumption, that's down over 50% from where it was last year. And ocean rates are down some 65%. The final thing I would say is that we've done a really nice job of rightsizing to the volumes that we expected from a direct labor perspective, and that's all about having headlights into the business and taking the corrective action. And then finally, there were a lot of inefficiencies in 2022. Spot buys, expedites, partial truckloads, partial completion of products where we'd have to push a 90% complete product off the line and wait for a part to come in. We had overtime attrition. We've done a really nice job of addressing those inefficiencies as part of the transformation as well. So across the Board, we're very pleased and I'm very thankful to the team that works on this every day.

John Stauch:

Yes. So I think as we head into 2024, we're certainly pleased with the way prices held up in 2023 in relationship to what Bob said. And I think that's indicative of the way that ROS expansion has unfolded. I think we're going in a more normalized pricing environment now, Andy. And I think that -- that means that we have to rely on those price increases and work hard on the productivity aspects to drive the margin. And I think we're going to see normal and then I think it depends on how these industries fare as to what would be the expected hold rate or the realization rate of those price increases in 2024, and it's way too early to tell.

Bryan Blair :

I wanted to ask about transformation, obviously driving pretty strong results already, and you've noted that you're early stage and the respective waves of those initiatives. As we look to your 2025 gross target to level set, what are you baking in for core growth between now and then? And then what level of reinvestment is contemplated? The reason I ask is that just the simple math, if we assume any core growth in kind of moderate realization of the sourcing opportunity that you've identified that seems to drive ROS above the targeted range and then the other levers imply pretty solid offset.

Bryan Blair :

Understood. That all makes sense. Appreciate the color. I know your attention focused on debt reduction since the Manitowoc Ice closed. But your balance sheet starting in pretty solid shape. You're generating really robust cash flow given your financial position and clearly successful integration of Man Ice, just wondering if your team will get back to bolt-on or tuck-in M&A over the near term?

Operator:

Our next question here will come from Mike Halloran with Baird.

John Stauch:

Yes. I think if you look back at the 8 years prior to 2019, 7, 8 years, like this has historically been a 5% to 6% steady grower with some years that might be slightly higher, slightly lower based upon how the restaurant and hospitality market unfolds. Clearly, if you take '19 as a starting point to where we expect '23 to finish, think about being high single-digits. What we want to remind people is there's a significant catch-up to the significant downturn that hospitality industry has faced and that's a big part of the start-up and the demand. As I referenced in my note, we're now back slightly above the 2019 restaurant numbers. So I think we're going to see more of the historical trend pattern as we look forward in this business going forward. Our ability this year to grow faster was the share capture that was really based upon -- having gone through the supply chain work that we're doing elsewhere in Pentair, ironically and completely coincidentally, Manitowoc is using the same outsource partner that we're using on the rest of Pentair and started that sourcing initiative 3 to 4 years earlier than us. And so they were able to put the supply chain into place that allow them to be prepared and ready to partner to get these increased demands, and that's been a big benefit to the Manitowoc business. It's also very encouraging for us on what the rest of Pentair can realize as well.

John Stauch:

Yes, special call out to our commercial and infrastructure team on just getting to margins in ROS is that, quite frankly, Mike, I didn't think were possible, right? And I think they're doing it while they're growing, which is extremely encouraging. That being said, I think as we go forward, it's going to be about how we continue to win projects and jobs that have aftermarket and service [Indiscernible] to them, how we can grow at mid-single digits, while maybe more likely maintaining these margins. Because as you know, when you get these tailwinds in the industry, it's easy to be selective -- it's harder to be selective when the jobs get tougher to find. And I think that's the discipline we're putting into the group. But it's really encouraging to see the progress they made. I think they still see opportunities to expand the ROS. But again, this is an area we want to invest in. And as you know, one of the things that has always talked about is blue water, right? So we're really strong on the fire pump side, and we've been able to find synergies by bringing the clean water side to some of the projects we've worked on, and we've been able to do that at the appropriate margins. So it's really encouraging to see that growth and the margins at the same time.

Brian Lee:

A lot of mine have been covered, but I had a couple of maybe modeling specific ones. I guess on the record ROS, when I look at the full year guide, I know this might be a little bit timing related or -- and maybe a little bit of nitpicking, but it seems like the implied ROS is down here in 4Q. Can you kind of walk us through some of the puts and takes just exiting the year? As you think about driving more expansion into '24 as your comments suggested?

Brian Lee:

Okay. Understood. Yes, we'll go back and take a closer look at the model. And then maybe just on Pool. It sounds like you're pretty confident around trends bottoming here, inventory sell-through, sell-in normalization. So I know it's probably too early to tell, but any initial thoughts around what all of that points to the rest of this year kind of goes according to plan and pool. Are we thinking about a reasonable base case back to like mid-single digit volume, maybe low single-digit type pricing tailwinds in '24? Just sort of what's the setup as you think about what the normalization and how quickly it plays out, gets you to in terms of a reasonable base case to get back to normal growth trends in '24, potentially?

Operator:

Our next question here will come from Andrew Krill with Deutsche Bank.

Robert Fishman:

Yes. We -- sequentially, we will be roughly in line, I would say, to maybe slightly down because we just won't drive that amount of volume and necessarily get the leverage that we saw from an Ice perspective. But overall, when we look at the different pieces, the filtration as well as the residential piece within Water Solutions, we continue to see transformation playing a big role. So I would say year-on-year, significant ROS expansion in Q3 for Water Solutions, a little bit of pressure as you go from Q2 to Q3 just because -- to John's earlier point, seasonality that's start to return to more normalized levels.

John Stauch:

Yes. I hate to bring the weather word into the focus. And as I said earlier, I don't think it played as much into our Q2 Pool softness as the inventory correction did. Weather usually intends to work its way out eventually throughout the period. So I would say right now, we're seeing heat trends that have some positives in certain areas to driving demand. And at the same time, when it gets this hot, you don't necessarily need heaters. So I don't -- I would not bring weather into our forecast at all. I think everything we know today from our weather forecasting has been included in our guide, and we don't expect weather to be a big part of our discussion going forward.

Steve Tusa:

Not too bad. I'm not going to ask you about the assumptions that underlie your weather forecast. Yes. So just on the kind of phases of this transformation, you mentioned logistics? I mean obviously, the logistics prices in general are down, how do you like disaggregate what you guys are doing versus just like the normal deflationary cycles that are happening in these types of materials?

John Stauch:

But Steve, just to add on that, I agree with everything Bob said, and we're happy, but it is a benefit of the deflationary, the work we do to negotiate. But also, we have reduced our carriers by almost 2/3. And we did do a series of route optimizations and choose partners that are best to serve the routes and the lines that we need, and that was a big part of the work that's generating the savings.

Robert Fishman:

We did not.

Robert Fishman:

What we've said up until now is we'll go from what will be roughly a 21% ROS this year to 23% by 2025. And our view is that roughly linear as we get to that 23%. So -- and transformation plays a big piece of that margin expansion.

John Stauch:

Larger than that increase because we're also putting back investment, Steve. So I think the next wave that we'll start to realize is the significant Wave 1 benefits of the purchasing savings and the direct material that we're doing. And you could assume that, as Bob said in prior comments that, that's a double-digit savings against about 1/3 of the material buy.

John Stauch:

Price bar and productivity bar, correct.

John Stauch:

Well, price is the transformation work we're doing on the strategic price initiatives, right? So it's a piece of the price contribution and then the productivity of the transformation is a piece of the productivity contribution.

David Tarantino :

This is David Tarantino on for Jeff. Maybe just to attack the margins a bit different. Margin's been pretty impressive the last couple of quarters. Could you parse out what the price cost tailwinds just kind of from carryover and normal pricing actions and what was kind of the early benefits from the transformation program?

David Tarantino :

Great. And then maybe just a cleanup one on Pool, maybe outside of the destock, how would you describe the sell-through in the channel versus expectations? It seems like trends were maybe a bit softer and then on that kind of -- maybe could you level set us on what you would expect the magnitude of the prebuy, like what's implied in the guide, given we've had an unusual recent couple of years?

Operator:

Our next question here comes from Damian Karas with UBS.

John Stauch:

Your breaking up just a little bit.

John Stauch:

If you wouldn't mind repeating the question, please?

John Stauch:

Do we have another question?

Nathan Jones:

I will ask one on IFT. Volume has been pretty flat overall for the last couple of quarters. But you've talked about being more selective on projects. I'm wondering if you could talk a little bit about how much the growth is where you want to grow versus maybe how much the declines are where you're not looking to grow?

Nathan Jones:

Okay. Maybe then just one more on the Water Solutions business. I think you -- there's basically inventory destocking going on there as well that you had expected to probably end in 2Q. Is that the case in where kind of a bit more back to sell-in matching sell-through in that business?

Operator:

Our next question here will come from Joe Giordano with Cowen.

John Stauch:

We continue to believe on the Flow side, and remember, IFT is an industrial solutions business as well as Flow. I mean Flow has traditionally, we would think it is a low single-digit to mid-single-digit contributor and we're moderating back to those growth rates as we get to the second half, which we believe is normal. And then what we've got to do is make sure the mix of the business is start to contribute more to the margin expansion side. And we've gotten a lot of productivity and a lot of strategic projects out of C&I. But as a reminder, R&I tends to be the higher margin side of that business. And so we would expect that contribution get more normalized as we go forward.

John Stauch:

That's correct. Yes.

John Stauch:

It's a good basis to build off of. As we grow from here, we begin to get volume leverage on the on the overhead structure of the business. The only thing that would be an add-back is rebasing commissions that would be relative to selling the product throughout the channel. But when you think all that, growth is a really good thing and this is a really good level to model off of. With that, I'd like to provide some closing comments. Thank you to everybody for joining us today. And I wanted to reiterate our earnings call key themes

Shelly Hubbard:

Thank you, MJ, and welcome to Pentair's first quarter 2023 earnings conference call. On the call with me are John Stauch, 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's performance as outlined in this morning's press release. On the Pentair 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, Form 10-K and today's release. Following our prepared remarks, we will open up the call for questions. Please limit your questions to one plus a follow up then reenter the queue in order to allow everyone an opportunity to ask questions. Before I hand it over to John, I wanted to highlight Slides 4 through 6 in our earnings slide deck that illustrate our strategic framework, Pentair at a glance and a Pentair overview. We believe this information is helpful to understanding who Pentair is, especially for those new to Pentair. Our strategic framework states our purpose, mission, vision and values that drive our performance as a smart sustainable water solutions company. Pentair at a glance on Slide 5 provides a great snapshot of our company, our performance, our installed base and our 40-year track record – 47-year track record of annual dividend increases, which places us in a small group of companies. Lastly, the Pentair overview on Slide 6 provides our historical sales and ROS performance on a consolidated level and by segment. This information was first disclosed last quarter in the supplemental data section and is now illustrated on one slide. As you can see, over the last three years, we have grown sales by a compound annual growth rate of nearly 12% and ROS has expanded by 110 basis points on a consolidated basis. I will now turn the call over to John.

Bob Fishman:

Thank you, John, and good morning, everyone. Let's start on Slide 13, titled Q1 2023 Pentair Performance. We delivered better-than-expected first quarter sales growth of 3% driven by pricing benefits across all three segments and the contribution of our Manitowoc Ice acquisition, which were partially offset by volume declines in our residential businesses. Our higher-than-expected sales in the quarter were driven by better performance in IFT and Water Solutions, offset by slightly lower-than-expected sales in our Pool segment, primarily due to unusual weather in the West. Core sales declined 3% mainly driven by a 16% decrease in Pool after Pool grew 23% in last year's Q1 and 48% in Q1 of 2021, partially offset by core growth of 11% in IFT and 2% in Water Solutions. First quarter segment income increased 23%, and return on sales expanded 330 basis points year-over-year to 20.5%, driven by price more than offsetting inflation, productivity benefits from our transformation initiatives and accretive margins from our Manitowoc Ice acquisition. As John mentioned, both segment income and ROS in Q1 hit record levels post separation of nVent. We delivered better-than-expected adjusted EPS of $0.91, up 7% versus the prior year. Net interest and other expense was $33 million, and our adjusted tax rate was 15% during the quarter with a share count of 165.8 million. Our better-than-expected segment income and adjusted EPS were driven by higher sales, price offsetting inflation and better contribution from our transformation initiatives. Please turn to Slide 14, labeled Q1 2023 Industrial & Flow Technologies Performance. IFT sales increased 9% in the quarter, which included two points of FX headwinds. Core sales increased 11%, segment income grew 25% and return on sales expanded 200 basis points to 16.6%, marking the third consecutive quarter of equal to or greater than 200 basis points of improvement. The strong margin expansion was a result of price offsetting inflation and continued progress on our transformation initiatives. Sales growth in IFT was driven across all businesses, led by commercial flow and industrial solutions, along with growth in residential flow. Please turn to Slide 15, labeled Q1 2023 Water Solutions Performance. In Q1, Water Solutions sales increased 32% driven by our Manitowoc Ice acquisition and price. Core sales grew 2%. The three points of volume decline was primarily due to the continued inventory correction across many product lines in our residential channels. Segment income grew 136%, and return on sales expanded 850 basis points to 19.3%, driven by our ICE acquisition as well as efficiencies from our transformation initiatives. Please turn to Slide 16, labeled Q1 2023 Pool Performance. In Q1, Pool sales declined 16%, which was slightly below our expectations. The volume decline of 27 points was primarily due to unusual weather in the Western U.S. in the first quarter of this year, inventory corrections in this year's Q1 and a strong prior year comparison. The pricing benefit of 11 points helped partially offset the volume decline and was due to carryover from the prior year. Despite lower sales year-over-year, return on sales expanded 520 basis points to 31.9% due to price significantly offsetting inflation, rightsizing to lower volumes and benefits from our transformation initiatives. Please turn to Slide 17, labeled Transformation Expectations. We continue to make progress on our transformation with realized successes in Q1 regarding pricing and sourcing, which drove margin expansion. As we shared with you last quarter, we expect to drive ROS expansion of over 400 basis points by year-end 2025 as compared to 2022. As I mentioned last quarter, in pricing, we completed wave one, which established a new strategic pricing playbook. This creates a foundation for pricing across our different go-to-market strategies and includes looking at our dealer and distributor programs to better optimize them. We continue to gain insight into profitability by customer and product category and use this data to better drive our forecast. We believe pricing remains a big opportunity. We are building capabilities and starting to see benefits materialize. We expect future waves to include the implementation of a pricing playbook across all of our product categories. We are furthest along in our strategic sourcing initiatives. As I've mentioned previously, material costs represent roughly 40% of our revenue. We have completed wave one negotiations that focused on key categories like electronics, motors and drives, castings, packaging, logistics and MRO. Wave one included roughly 35% of material spend and identified over 12% in saving opportunities. We have unlocked value through supplier-dedicated resources, supply base reduction, inventory solutions, enhanced supplier executive-level relationships and rebate programs. In Q1, over 120 Pentair cross-functional team members attended workshops to begin the wave one implementation process. Wave two was launched in Q1 and covers another 35% of material spend for commodity groups, such as metals, plastics and molding, purchased finished goods, transportation, and indirect spend such as IT, fleet management and office supplies. We expect this will create a funnel of savings for 2023 and 2024. In operations excellence, we are focused on reducing complexity and driving lean processes across all our operations. We believe this presents longer-term opportunities but not until 2024 and beyond as we build out the funnel. Lastly, in organizational effectiveness we are focusing on sales and functional excellence to simplify our organization. From an organizational standpoint, we believe ample opportunities remain for complexity reduction across the entire portfolio and a realignment of needed skills within our top priorities. We continue to move transformation from funnel to execution, and we expect more material benefits to contribute to our longer-term margin expansion targets. We continue to believe that our transformation initiatives will be a large value-creation opportunity for Pentair. Please turn to Slide 18, labeled balance sheet and cash flow. This slide reflects the closing of the Manitowoc acquisition at the end of July of last year. We ended the quarter with pro forma leverage at 2.6 times. Our ROIC was at 15.2%, and as a reminder this includes debt from the Manitowoc Ice acquisition with only approximately 3/4 of Manitowoc EBITDA contribution. We recently entered into interest rate swap and collar agreements in order to hedge our variable rate debt. We now expect the mix of variable to fixed debt to be closer to 50/50 by the end of Q2. We have no significant long-term debt maturing for the next few years, and almost the majority of our debt is in term loans going out three to five years. We used $123 million of free cash flow in Q1, which reflects typical seasonality and was roughly $25 million better than the prior year. As a reminder, the second quarter is typically our highest free cash flow quarter of the year, and we expect full year free cash flow to be in line with our historical performance of 100% of net income. 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 Q2 and full year 2023 Pentair outlook. For the full year we are updating adjusted EPS guidance to approximately $3.60 to $3.70, raising the midpoint. Also for the full year we expect sales to be roughly down 2% to flat. We expect segment income to increase 7% to 10% with corporate expense of approximately $80 million, net interest expense of roughly $125 million, and adjusted tax rate of approximately 15% and a share count of 165 million to 166 million. For the second quarter, we expect sales to be approximately down 1% to flat versus last year's Q2 as the contribution of Manitowoc Ice and our commercial and industrial businesses are expected to help offset expected volume declines from our residential businesses. We are introducing adjusted EPS guidance of approximately $0.94 to $0.96, which represents a year-over-year decrease of approximately 6% to 8%, primarily due to lower pool volumes. We expect an improvement in the second quarter versus the $0.91 of adjusted EPS in Q1. We expect segment income to increase 5% to 7% with corporate expense coming in around $21 million, net interest expense of roughly $34 million, and adjusted tax rate of approximately 15% and a share count of 165 million to 166 million. Moving to Slide 20, titled full year 2023 guidance at midpoint. At the midpoint, we expect total Pentair sales to be down approximately 1%. While the sales midpoint has not changed, our sales mix and assumptions have. We now expect IFT to perform better than we expected 90 days ago and Pool sales to decline from our original expectations due to increased economic uncertainty and lower new pool construction. We now expect IFT sales to be up low-single digits, Water Solutions to be unchanged with sales up mid-teens and Pool sales to be down approximately in the mid-teen range as compared to down low-double digits previously. As we have discussed in prior quarters, our Pool sales consist of 20% from new pools, 20% from remodels and 60% from the aftermarket. Within our current Pool guidance, we now expect new pools and remodels to be down approximately 25% versus previous assumptions of down approximately 20% and inventory in aftermarket to be down roughly 20% compared to previous assumptions of down 15% with approximately two-thirds of the decline relating to inventory corrections. We expect price carryover of roughly mid-single digits. We do expect Pool to return to more normalized demand in 2024 after absorbing significant headwinds in the current year. Segment income is now expected to increase approximately 9% as compared to 8% previously with ROS expansion of nearly 200 basis points to 20.5% as compared to 20.2% last quarter. We are encouraged by the diversity of our portfolio, the integration of Manitowoc Ice and the continued momentum of our transformation initiatives, which are expected to drive significant margin expansion. Before I turn the call over for Q&A, I wanted to highlight why we believe that Pentair is a compelling investment opportunity. Please turn to Slide 21. There are six distinguishing characteristics that we believe sets Pentair apart. We are an industry leader with a diversified brand portfolio and a focus on driving innovation across all three segments. We have a transformation strategy that is expected to drive operational efficiencies and margin expansion. We have an ESG focus on people, the planet and governance to provide smart, sustainable water solutions. And we just recently published our 2022 corporate responsibility report, highlighting progress towards our strategic targets. We have favorable secular trends driving end-market growth. We have a strong balance sheet and cash flow, which we expect to drive additional value creation. And we are a dividend aristocrat with 47 consecutive years of increasing dividends. I would now like to turn the call over to the operator for Q&A, after which, John will have a few closing remarks. MJ, please open the line for questions. Thank you.

Mike Halloran:

Hi. Good morning everyone. Really nice quarter, really nice quarter. So a couple of questions here. First on the Man Ice side of things. Maybe can you just talk a little bit about where you're seeing the outperformance from and then also a little bit of context on how you're looking at the forward outlook? What kind of visibility you have? What customers are saying? Any kind of context around that?

Mike Halloran:

And then on the pool side of things, obviously, the margins were particularly impressive given where the volume levels we're at. Maybe you can just frame, provide a little bit more context around the drivers behind that? I know you commented on price transformation, but a little more detail on that. And then how should we think of the sustainability of this margin range, particularly given you still have a lot of volume variability ahead of you?

Bob Fishman:

The only thing I would add is I think pool has done a really nice job back in Q3, Q4 of last year and seeing the channel correction ahead of us, they did a nice job of rightsizing to those lower volumes.

John Stauch:

Thanks Mike.

Bryan Blair:

Thank you. Good morning everyone.

John Stauch:

Good morning.

Bob Fishman:

It is a ROS number to answer your first question. And again, our view is that Manitowoc Ice is an extremely well-run business as part of our portfolio. Our goal is to continue to keep the margins in that high 20s range and have them take advantage of the transformation initiatives as well. But we don't want to get ahead of ourselves with that business either. For now, the performance is going exceptionally well.

Bryan Blair:

All makes sense. It's good to hear. And within Water Solutions, resi weakness to start the year, that was obviously anticipated. Any update you can offer, insight into current channel trends and whether over the next couple of quarters, we may be more in balance in terms of channel inventory?

Bryan Blair:

Understood. I appreciate the color.

Operator:

The next question comes from Brett Linzey with Mizuho Americas. Please go ahead.

Bob Fishman:

Good morning.

Bob Fishman:

Yes. And just as a reminder, we have the four major initiatives in transformation. They all have different waves, in particular, around sourcing the wave one negotiations is complete now. So we're moving on to the wave one implementation, and at the same time running a parallel activity around the next $500 million, $600 million of spend in wave two. So our view is it's a really nice runway that benefits more significantly in 2024, but then also gives us upside in 2025 and beyond.

Bob Fishman:

It was a little bit better than we expected. We always knew that Q1 would be our better price quarter and that it would slowly come down throughout the year. But we have seen less discounting than we thought. So we're certainly comfortable with pricing and had a little bit of upside in the first quarter.

Bob Fishman:

Thank you.

Andy Kaplowitz:

Hi. Good morning everyone.

Bob Fishman:

Hi, Andy.

Bob Fishman:

So to start the question, it was a couple of points relating to weather in Q1. So it did cause us to come in slightly lower than what we thought. We – our belief is still that we are back to normal inventory levels by the end of the pool season, which will be the third quarter. So that continues to be our assumption there. Third part of your question, Andy, was what?

John Stauch:

Yes. I mean we're excited about the new product offerings, as I mentioned, and getting the industry and the market again focused on those new products. I think when everybody is busy and things are active, you just kind of want to put in more of the products that you know very well. So we've been very actively training the dealer channels on the new IF3 Pump, as I mentioned in my comments, which was really the first product that has the Internet capability and WiFi and Bluetooth built into the pump itself, which allows us for some basic features that can be run without the full automation pad. The second one that we launched is – we're excited about our new IntelliCenter and the improvement in the IntelliCenter app, which we've been able to, again, get the channel excited about. And then the third element that we still have coming is a new filtration capability both for safety and clarity of space. So I think if we talk about winning, it's going to come from new products and having, again, the most innovative products for the channel and getting the channel excited to be partnered with Pentair to bring those to the consumers.

John Stauch:

Yes. I'm extremely impressed with the IFT team both under Jerome's leadership when he was there and the way that De'Mon has continued to lead it. Our business leaders know that what we want is predictable growth and growth that comes both profitable on the project element but also brings with it the aftermarket and services component. So we've limited the growth opportunity to those projects that we feel like we can bring forward at a positive margin for Pentair and also then bring on those future businesses. So I think we feel good about the engagements we have with the customer space, the investments that are happening and the solutions we're providing, which again are taking waste to value. So, in most cases, these projects are bringing value to our end customers while they are investing in it. So, we're keeping an eye on it. You would expect higher interest rates to slow that industrial investment. But right now, from what we can see, the pipeline remains strong.

John Stauch:

Thank you.

Saree Boroditsky:

Thanks for taking my questions. Just kind of building a little bit on Pool. You talked about inventory normalizing after the Pool season. So if you could just update on how you're thinking about the early buy potential as we get into 4Q and what that should look like as we get into 2024? Thanks.

Saree Boroditsky:

Thanks. And when you talk about the demand normalizing for 2024, I know it's really early, but any color on how we should think about new pool construction versus aftermarket if we are entering a weaker macro environment? And then how are you thinking about price increases, does that normalize after the recent high levels we've seen?

Saree Boroditsky:

I appreciate the color. Thank you.

Nathan Jones:

Good morning everyone.

Nathan Jones:

Follow-up on Manitowoc Ice to start with, Bob, you talked about them working down backlog in the quarter. Can you quantify kind of that increasing sales from 75 to 95, how much of that was burning off backlog? And are we going to be talking about a difficult comp there next year with that backlog reduction contributing to the performance in the first quarter?

John Stauch:

Yes. Nate, and if you look at order rates, our order rates there continue to be strong in the space. I don't think we would believe that our normal organic growth rates in the ice business will maintain at these levels. But right now, the visibility would suggest that getting back to being able to ship at the same order rates is where we're at today, and we'll begin to work that backlog down as we exit the year.

John Stauch :

In the majority of our businesses across the majority of the high-running SKUs, we're back to normalized lead times. We still have a few specialized products and SKUs, but those are becoming fewer and fewer quarter-by-quarter.

John Stauch :

Thank you.

Unidentified Analyst :

Hey everyone. This is Miguel on for Brian. I just had one question, maybe high level. For the – for your commercial end markets, have you seen any concerns out there on financing just given everything going on with the banking sector? I guess, what are you seeing in real time there, if anything at all? Thanks.

Unidentified Analyst :

Okay, fair enough. Thanks a lot. I’ll pass it on.

Steve Tusa:

Hi guys, good morning.

Bob Fishman:

Hi Steve.

John Stauch:

Yes. So I mean, first of all, relative size, this business has been really focused. We're talking about those two markets, Steve, being roughly around 300 and some change on an annualized basis for us, so just to frame what the teens growth would be. And I think these are projects that we won primarily to our focus around the aftermarket, the services. And again, as I mentioned, we're into larger irrigation, we're into industrial wastewater, and we're also into commercial buildings. That would be the end markets.

John Stauch:

Well, I think it's probably in line with our expectations, but it's stronger than historical averages. Correct.

Bob Fishman:

No doubt that that pool will face down 16%. They will be down a little more than that in Q2 and Q3 and then should be turning the corner in the fourth quarter. So, from an EPS perspective, we think Q3 will probably be the most challenging quarter, and then Q4 EPS will improve as a lot of these transformation initiatives kick in and then Pool starts to improve.

John Stauch:

Steve, we don't anticipate that there is hardly any dealer inventory out in the channel anymore. And obviously, the financing that they are paying, they are working more of their jobs in the sense of how do they bill and pay in the same cycle. And so the inventory we are referring to is the channel inventory distributors. And based upon feedback and conversations, everybody is aligned to try and burn all that inventory by the end of Q3, which would mean for us, our normalized Q2 will be a lot lower than normal. And then we'd expect that to be gone and behind us by the end of Q3, meaning we're growing sequentially from Q3 to Q4 for Pool and then continue to grow from there as we head through 2024.

John Stauch:

I think we would be going back to really normal areas, Steve.

John Stauch:

Low single digits, like more normalized based upon – I mean way too early to call it, but I mean, your general assumptions are making sure that you're selling the value, that you're going out and you're pricing effectively and you're being able to handle any fluctuations in commodity or labor wages.

John Stauch:

Thank you.

Scott Graham:

Hey good morning all. Thank you for taking my question. I was – just on Slide 20, where you break down the Pool view for the year. So the new remodel went from 20% to down 25%. How much of that was the first quarter weather was there, I mean, how much of this is sort of rest of the year versus what's already happened?

John Stauch:

Yes. And then, Scott, it's Q2 and Q3 and Q4, not Q1. I mean, Q1 related to the West weather, but most of all this adjustment is in Q2, Q3 and Q4.

Bob Fishman:

Yes. Our view is the mix of that, so the down 20% is roughly two-thirds relating to the inventory correction and a third relating to the aftermarket or items that were bought in advance over the last couple of years, so think heaters, lighting, those types of products.

John Stauch:

Yes. I appreciate the question. I mean, first of all I'd say the fits and starts are more on the residential side. Global business and always experimenting or trying to think about how to go to market differently. We're now convinced that just accepting where we are with our pro channel, partner with their pro channel, drive leads to pro channel, that's our strategy in residential, and that's going to be consistent as we go forward. On the commercial side, we've always had a strong offering with our filtration products in Everpure and the RO systems that we sell into our commercial customers. What Manitowoc brings is added strength and capability across a wider selection of customers. And ultimately, we're able to discuss the end-to-end solutions that really drive productivity and value to our core OEM customers. So very excited and very pleased with the progress. And as a reminder, I mean, we're using the Manitowoc team to run that combined business. And we've integrated all those go-to-market strategies under one leadership team, and I believe that that's going to drive sustained value for our customers.

Operator:

The next question comes from Deane Dray with RBC Capital Markets. Please go ahead.