Q1 2020 Earnings Call
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I'd like to hand, the conference over to Mr., Jim Lucas. Please go ahead Sir.
Thanks, Shelby, Washington Trusts first quarter 2020 earnings conference call. We're glad you can join us today.
Jim Lucas Senior Vice President Treasurer, and Investor Relations and with me today, John style for President and Chief Executive Officer, Mark born our Chief Financial Officer.
Today's call we will provide details on our first quarter 2020 performance outlined in this mornings press release.
Before we begin let me remind you that any statements made about the company's into state of financial results are forward looking statements subject to future risks and uncertainties touches the risks outlined in pentair as most recent form 10-Q form 10-K, and today's press release forward looking statements included here in our guidance today and the company undertakes no obligation to update publicly such things.
As to reflect subsequent events or circumstances actual results could differ materially from anticipated results.
Today's webcast is accompanied by a presentation, which can be found in the Investor Relations section Center website.
People reference these slides throughout our prepared remarks any reference to non-GAAP financials are reconciled in the appendix of the presentation, we will be certain reserve time for questions and answers after our prepared remarks, I would like to request the limit your questions to one other follow up in order to ensure everyone an opportunity to ask their questions I will now turn the call over to John.
Thank you Jim.
Good morning, everyone.
Please turn to slide number four titled Executive summary.
This is certainly a store time that we are experiencing in the last few months and tried to patients the entire world Pentair I'd like to extend my sincerest sympathies to all that have suffered losses during this horrific global pandemic.
I would also thank all of our employees their continued efforts to stay safe protect each other for taking care of our customers ever continue to focus on delivering the best financial results possible.
I also want to take a moment to take our coated 19 crisis response team for all their efforts to respond to this global challenge in a very special. Thank you to all of our manufacturing employees for their tremendous commitment to our customers and to pentair.
They truly represent the spirit of our culture and I appreciate their dedication their courage and their contributions to the first quarter results.
We were very pleased to deliver adjusted for the quarter that was above the high end of our prior guidance range inclusive of the challenges from cold at 19 that initially impacted our business in China earlier in the quarter and they globally toward the end of the court.
We also recently announced that key hires for CFO and for our previously announced when structure.
First I'd like to welcome Bob Fishman will become CFO Tomorrow may 1st as part of an orderly transition from our corn, who previously announced you would be leaving pentair for another opportunity.
Bob joints Pentair after long successful career and see our where he was essential part of the company's transformation from a hardware in systems manufacturer into a software and services provider.
We also announced the hiring of Mario the video to lead our consumer solutions segment Mario joins US. Most recently from Electrolux brings a strong background from several consumer influenced businesses focused on multiple channels.
Mario will bring a growth mindset in a sense of urgency to our consumer solutions businesses.
Our own Pedretti, who has been with pentair for nearly 15 years will lead our industrial and flow technologies segment drone is held experiences at pentair. This proven himself as a developer of talent.
He also embraces art pins processes and culture, and we utilize experiences to improve the operating capabilities of the industrial and flow technologies businesses.
Finally, we now see elimination of the COO role and that Carl Frick men will help oversee an orderly transition with Mario and will also work with me to the ended the year and especially adviser I'd like to personally think Carl for his leadership and partnership over the years.
Turning back to market demands, while we formerly withdrew our quarter end annual guidance at the end of March due to lack of visibility we're planning for significantly reduced demand throughout the remainder of 2020.
We do not have clarity at this time around the potential impacts to each of our lines of business or when the markets will recover.
Because of lack of clarity, we are taking appropriate actions to adjust our cost structure, while still keeping a focus on the longer term as we expect that demand will eventually return for most of our businesses.
Finally, we are focused on maintaining a strong liquidity position.
There's a long track record of being a strong cash flow generator and our balance sheet is in a solid position.
We understand that the remainder of the year will be a challenge to bring uncertainty. However, we believe that are strong operating culture, and well positioned businesses will eventually prevail over this pandemic, it's impacts on the economy.
Please turn to slide five labeled covert 19 updated focus.
Our focus has been and we'll continue to be on the safety and well being of our employees, while also being mindful of serving customer demand to the best of our abilities.
Our business in China, and Southeast Asia saw considerable negative impact in the first quarter, but we did not see much impact in Europe or the U.S. until later in the quarter.
While we have seen her operations in China returned to more normalized levels demand still has not returned to China and southeast Asia to levels before the pandemic.
Outside of China, we have seen softening demand to start April and we took actions to reduce the bottom line impact of expected revenue declines in the short term we are focused on cost reductions in line with lower revenue levels.
We feel good about our balance sheet cash flow and liquidity and believe that we're well prepared to survive the storm.
We remain focused on our long term goals and strategy and we will continue to prepare to take advantage of opportunities what business recovers.
Please turn to slide six label consumer solutions.
I wanted to spend a few moments on our portfolio exposure and what demand trends. We are currently experiencing.
Similar solutions is a $1.6 billion segment comprised of our pool and our water solutions businesses as.
As you can see on this slide consumer solutions is approximately 75% residential and approximately 75% revenue servicing installed aftermarket base.
Our core business is a leader in the North American food equipment business.
There are approximately 5.5 million pools installed in the ground.
Our dealers continue to operate in most geographies and we expect the aftermarket business, which represents roughly 80% of our pool business to see some short term softness but not to the extent that we might expect will occur in the new pool construction and remodeling parts of the business.
While we had a solid start to the season in March we have seen some softness to start April.
We believe that inventory levels in the channel are in line with historic levels, but we will be monitoring demand throughout the season.
Our water solutions business is made up of components residential systems and commercial systems.
Within our components business, we have not yet seen many changes within the important wholesale channel.
Residential systems, which includes the Aquion at Pelican businesses, we acquired last year are somewhat dependent on in home visits and retail traffic.
While we have not yet seen a material drop off in demand there are concerns over consumer behavior in the short term.
Finally, our commercial systems business has large exposure to restaurants, and hospitality and has seen significant slowing the demand as expected the closures businesses and these industries.
While we expect some short term disruptions for consumer solutions segment. We continue to believe that water quality will remain a key focus for consumers and other commercial businesses and we anticipate this business will be well position with markets eventually recover.
Please turn to slide seven labeled industrial and flow technologies.
Industrial flow technologies or I have key is a $1.3 billion segment comprised of our residential irrigation flow commercial infrastructure flow and industrial filtration businesses.
As you can see I have T is a more diverse segment than consumer solutions with approximately half of sales tied to various industrial markets I have t. does however, generate approximately 65% its sales will be installed aftermarket days.
Within residential irrigation flow, we've seen some slowing among our distributors, but this is more in the retail than professional channel.
This business is where we have some exposure to agriculture, and while the OEM exposed businesses down our aftermarket business is performing better than it did a year ago.
It is important to note that the majority of the residential irrigation flow portfolio consists of products that are breaking fixed in nature and tend to be less discretionary purchases.
Our commercial infrastructure flow business manufacturers larger engineered pumps it tends to be a backlog driven business our commercial businesses at seeing some slowing of orders backlog has not yet been impacted.
Within infrastructure, which is a smaller piece of this business, we're seeing strong backlog, but we'll be watching orders for any signs of slowing given this is a long cycle business.
Our industrial filtration business is comprised of a number of product lines that serve a wide variety of applications. For instance, we have a strong niche in beer membrane filtration and other components. The beer industry. We also have a sustainable gas business that we cycles feel too.
We continue feel comfortable about our overall portfolio given our large installed base unlimited industrial manufacturing exposure our products our solutions that help customer solve needs and we'll be prepared to serve demand when it returns.
I'd now like to turn the call over to Mark born to discuss our financial position and our results in more detail.
Thank you John.
Before discussing the business I want to first welcome Bob to the team and I feel proud to be leaving a strong finance an ITC team as I move onto the next chapter of my career.
It is hard to leave after 12 years with pentair, but I believe the company is well positioned and will emerge from this current situation stronger as a leading water treatment company.
Please turn to slide eight labeled cost structure and actions.
This chart is to help illustrate our cost structure and the levers available to us as the topline visibility remains challenged.
Materials is our biggest cost at approximately 40% of sales and as the one piece of our structure that is truly variable.
We are engaged in a number of and supplier rapid renegotiations to continuously look for opportunities to further reduce input costs.
The rest of the cost structure has variability but requires actions on our part and many of the actions come with cost since our and our consequences.
In the short term, we will look to drive manufacturing labor reductions in line with volume declines with temporary measures such as furloughs to keep us much of the team intact for the eventual recovery.
Although a significant portion of our overhead is fixed we're focused on deferring and reducing non labor outside spending we are targeting overhead reduction at roughly half of the potential volume drop.
On the operating expense side, we have implemented hiring freezes and we're driving significant savings from delaying reducing or eliminating purchased services and travel.
There are other cost to go after depending on the extent and level of the volume decline and we also recognize if the declines expected globally in the second quarter carry over to the remainder of the year, then sales and management incentive plans may not pay out at planned levels.
We are taking necessary actions in the short term to mitigate the expected topline decreases and we'll watch closely for signs of stabilization before looking to pull additional levers.
Our goal is to manage through this environment to the best of our abilities, while doing what we can to prepare for an eventual recovery.
Please turn to slide nine labeled balance sheet and access to liquidity.
With liquidity and focus we want to spend a few minutes highlighting why we feel comfortable with our financial position.
As this slide illustrates we do not have any meaningful debt maturities for the next few years.
We ended the quarter with $169 million in cash and $326 million available under our revolver.
Given the seasonality of our pool business, we tend to use cash in the first quarter and our second quarter tends to be our strongest cash generating period, given the collection on the pool receivables.
We do not expect that trying to change this year and therefore, we anticipate our financial position strengthening even further as the second quarter progresses.
We ended the first quarter with a leverage ratio of 2.1 times, which is well below our 3.7 times covenant.
Given the dramatically changing environment, we have lowered our capital expenditures forecast by over 10% for the for the year.
During the first quarter, we repurchased $115 million of our shares but we suspended the buyback during the quarter and are currently choosing to remain on the sidelines as we focus on our strong liquidity.
Please turn to slide 10 labeled balance sheet and cash flow.
This is our standard slide we present each quarter.
On the left hand side of the page our free cash flow improved rather dramatically from the comparable period last year.
As we highlighted on our fourth quarter earnings call. We did see some timing issues around payables at the start of 2019, but we believe that this year's performance is more reflective of our normal seasonal pattern.
The right hand side of the page highlights our debt position at the end of the quarter.
While we covered our liquidity position on the previous slide we would point out that we have a healthy mix between fixed and variable debt. Our average borrowing rate for the quarter was a very respectable 2.6% and we ended the quarter with 14.4% ROI C.
Overall, we feel our balance sheet is strong and while the outlook for the PML in the near term is a bit challenging given the lack of visibility we believe that our balance sheet is well positioned to help us navigate through these uncertain times.
Please turn to slide 11 labeled Q1, 20 pentair performance.
For the first quarter overall sales grew 3% and core sales also increased 3%.
Segment income grew 13% return on sales expanded 140 basis points and adjusted EPS increased 21%.
This performance was helped by positive sales mix price cost and productivity.
Below the line, we saw an adjusted tax rate of 16% net interest other expense of 7.5 million and our average shares in the quarter were 168.7 million.
Please turn to slide 12 labeled Q1 20 consumer solutions performance.
Consumer solutions saw sales increased 9% with core sales growing 7%.
Cool grew at a low double digit rate against an easy comp and more normal weather patterns.
The pool season appeared to start off more positively this year and as John alluded to earlier in the call. It seems anecdotally that pool owners, who are sheltered in place our opening their pools, perhaps a bit earlier than normal.
Our water solutions business grew high single digits in the quarter as positive acquisition contribution helped offset sharp declines in China and southeast Asia that were impacted by the global.
You asked market demand had not begun to fall off at the ended the quarter and we are monitoring trends closely.
The segment had strong segment income performance growing 13% year over year, and our last expanded 80 basis points to 21.8%.
We're pleased with the strong start to the year by consumer solutions, but we expect that this will reverse course in the second quarter, while we plan to manage the cost structure. Accordingly, we remain focused on the long term opportunities for the segment.
Please turn to slide 13 label, Q1, 20, industrial and flow technologies performance.
I have t. reported a 3% decline in sales with core growth down 2%.
Residential in irrigation flow soft flat sales performance as positive pricing and is still healthy professional channel was not enough to offset weakness in agriculture in retail.
Commercial and infrastructure flow experienced a mid single digit decline in sales as some of the backlog driven business was negatively impacted by cobot 19 related delays. In addition, we continue to focus on improving internal delivery rates for this business, but overall backlog remains solid and we are monitoring the order book closely.
Industrial filtration saw sales declined low single digits, due primarily to global delays and global projects.
Similar to commercial and infrastructure flow. This is a backlog driven business and we will also be closely monitoring the order book for the business.
Segment income was a positive story with a 9% year over year increase and our last improved 150 basis points to 13.9%.
While mix and price costs were part of positive contributors productivity was especially strong.
While it's mix of businesses will create some near term challenges Fry if I have tea.
They remain a number of self help opportunities that we remain focused on intently.
I would now like to turn the call over to John to discuss our assumptions for the rest of 2020.
Thank you Mark Please turn to slide number 14 labeled 2020 current planning assumptions.
While we have suspended our guidance until better visibility returns we wanted to provide some of our current planning assumptions to help you understand how we're approaching the outlook for the remainder of the year.
First we are planning for recessionary environment.
Forecast call for double digit declines in GDP in the short term, it's hard to imagine that we would be immune from these external forces.
While we have some businesses that may fair, a little better than others, such as our cooling water solutions businesses. Other parts of the portfolio might see more significant near term headwinds.
As a result as Mark highlighted earlier, we are aligning our cost with a lower expected volumes.
We do have additional cost levers to pull if necessary, but we want to be thoughtful including any of these levers to soon we've made a number of significant investments to better position, our consumer solutions business and while we may delay some of those investments, we do not want to cut them off altogether.
Pentair employees had been a big part of building our businesses and I would like to keep our talented teams in place and I'm hopeful that we can weather the storm and aggressively pursue opportunities and our segments as the economy recovers.
It's mark highlighted earlier, we feel our liquidity is in a very strong position.
We have historically been a strong cash flow generator and I believe that we're well positioned financially to whether this uncertain environment.
Finally, our goals remain on protect their employees customers and our businesses, we will continue to optimize our free cash flow and liquidity and we expect to deliver the best financial results possible in near term, while focused on our longer term strategies.
Before I turn the call over to Shelby for Q1 day I wanted to think markers partnership to me since 2008, and his tireless dedication to pentair.
I'm sure Woodmark steady with state oversee a smooth transition you never envision to quarter like this.
I'm very excited to have Bob on board Indian market, driving a seamless transition I'm very confident that Bob will be a great place, but primark, but I'm still losing and we'll Miss one of my best friends I wish you only the best Mark.
Truly deserved.
I'd now like to turn the call over to Shelby for Q1 day, after which I will have a few closing remarks Shelby. Please open the line for questions. Thank you.
As a reminder, if you would like to ask a question via the phone.
Thanks.
Number one on your telephone keypad again.
I would like to ask your question.
First question comes from Josh Pokrzywinski of Morgan Stanley.
Hello, Josh hopefully good morning Gallery.
Good morning, well. Thanks, how are you guys doing.
Good.
Excellent. So I guess just first question anything that you can show with as John on exit rates.
Yes, he kind of shutdown impacts impacting the commercial and hospitality level, just just trying to get a sense of of maybe kind of the snap the line impact on demand today.
Yes, Josh I mean, clearly we thought we are going to have a Q1 and quite frankly it it would have even been better than it was given the fact that we had to that given time, we had five factories that will completely closed and we're working through all of the global challenges around the shelter in place or the orders.
Country by country, So as I'm sure. Many companies have already shared that became a little bit disruptive really proud of the teams about how they moved to create the social distancing and get most of our factories up and running as we didn't see supply chain disruptions very much but we did we did leave a little bit of backlog heading into the quarter. We did see is starting April that the.
The rates are declining and as I mentioned in my comments were not going to be immune I think you know the fact that most global restaurants, hospitality et cetera closed its going to take a while for our distribution channel to balance that inventory need.
One of the things we did learn though is that when these restaurants come back and open up they're more likely to change those cartridges out for our our water filtration units. So that's the visibility we need Josh to be able to call it but across the portfolio. As we started April we we certainly started to see order declines and revenue declines.
Got it and maybe just a follow up that might be a little bit easier to some points you anything in the portfolio or any sites that are.
Closed the non essential as we sit here today.
Right now all are factories are open the degree of open the degree of capacity berries, obviously, Josh but right now we have 100% of our facilities.
Deem to be essential and therefore available to produce products.
Great. Thanks for that best of luck.
Thank you.
Your next question is from Jeff Hammond of Keybanc capital markets.
Hey, good morning, guys.
Hey, Jeff warning Jeff.
So really I understand the guidance pull but.
Just trying to get a better sense of kind of April trends as we you know.
No. If you can go through other by business, what you're seeing in order of magnitude or what's proving most resilient versus most challenged you know as you look across the board just trying to get a a sharper.
More granularity there.
Yes, Jeff I appreciate the question I mean, I'd I'd answer to couple ways first of all our global business as you know so.
Everything's in a very degree.
Response to what's going on its pandemic.
I don't think April's, a great month to judge anything on.
In general just because it's a very short month, it's got some holidays in but if I put it in the context I mean, nothing was immune from an order softness even including our pool business.
As we mentioned in our comments I do I do think while we believe our cool business is likely to hold up.
Through through this.
At least Q2, because it is a key season and we do think those in ground pools are going to be service.
We do think that we're going to see a slowdown or push out some of the remodeling or the new pool built.
As people monitor their their spends so you know I would just say overall I mean, where we saw a pretty sharp decline in April to start and we think our steepest decline for the year. We'll beat Q2 that being said we also have the season for most of our businesses that might help mitigate it so we're going to observe.
Our remote here for the next week or two as we watch orders and the order patterns and also as we make sure that we're checking beyond our distributors into the sell through into the channels.
Because that is key for us is whats happening the sell through to the consumer and then we can make our decisions on what we think the volumes going to be for the rest of year.
Okay and then so you mentioned pool is maybe one of the more resilient ones what.
What specifically are seeing the sharp declines into April.
I would see things like AG OEM.
You know, where we have the you know the OEM offerings or we have into on the maintenance or equipment builds that would be on the sharper side, but very there you're in.
Sort of like a 20% decline kind of range.
Okay, and then just on.
Industrial segment margins looked really good there.
See you know, 10% to 15% decline in that business on a full year basis like what how resilient in the margins be or how should we think about decrementals.
We're thinking mid Thirtys.
Okay. Thanks, a lot well get back in queue Vicki.
Your next question is from Steve Tusa of JP Morgan.
Hi, guys.
Dave.
Sorry that last answer was that for kind of total company. What you would target for what was that decremental margin comment again related to.
I would say it was the question was specifically die of T., but I would say would be relatively same across stuff.
Within the portfolio and so thats, both the total company and an IP response.
And that's for Twoq you are that's for like total year I.
I would say if you look at the revenue for the total year I think that would be the relative.
Expectation, we would have so you know sales might as material and then mitigated by cost actions to get to somewhere around mid Thirtys decremental.
And are you taking any any of these cost actions are you.
Taking a structural cost should we see are we going to see restructuring go up or is it.
More of the temporary actions like furloughs and things like that and just kind of waiting and seeing how the volumes play out.
Yeah, our actions right now been limited to try and pace the manufacturing labor.
Warrants with the volume declines and utilizing.
Furloughs in those particular areas to make sure our employees are well taken care of and be there when the volume comes back as well as aggressively attacking purchased services and obviously getting benefits and things like Genie and no trade shows for the remainder of the year, Steve. So that's been where we are today, which has been a cash focus.
We have not yet looked at those auto nine levers those the ones that we're talking about would be the next lever to pull or any permanent reductions and that would be based upon how we see things start to uncover here as we work our way through Q2.
Got it Okay and is there is there a revenue declined it kind of.
Breaks those decrementals like if revenues are down I know Lennox talked about if revenues are down you know greater than 20% that Theyre Decrementals you know kind of go to how are you.
Is there like a level of revenue that you're thinking about that like.
Hey, all bets are off on kind of those those decrementals.
For you guys. Thank you you probably gave a pretty good answer there that once you get up to that like mid Twentys. Then then I think our decrementals start to get.
Worse right I mean, there's there's a level one of cost actions, we're taking right now we feel very confident in volume continues to get challenge. We take that next set of actions and can still hold those decrementals, but yeah. When you start if you got up to like a mid 20 number I think the Decrementals would start to get worse I don't what do you that Steve at the moment.
I don't see that happening in the long term and so what we're really looking at is really where are the longer term order rates and what are the longer term sell throughs of our products and that have more visibility of product line by product line. What we think the impacts going to be not just for 2020, but what we think a potential recovery could be into 2021, So I mean really what.
We are doing is trying to position ourselves fast for how we recover.
Right and what are you seeing so far in April in the pool business.
Sell throughs have hung in.
Through the visibility that we have.
Got to our original forecast, but they're they're doing relatively okay, but as I mentioned I would be concerned as we proceed here through Q2 in Q3 that we start to see a slowdown or pull back in the new construction build side or the new remodel, which them much higher price tag for the end consumer Scott.
One last one for you inflation has been kind of a stop stubborn drag for you guys.
Any any potential relief there and then.
On free cash flow.
Can you guys kind of.
As volumes go down.
Can you translate that into better cash you know really some working capital.
Yeah, Mark So first just on inflation is we had talked previously on certainly see that moderating this year and continuing to just focus on kind of that price cost being more neutral and not being a headwind that had been in the past so and looking for opportunities to mitigate.
Continued inflationary pressures so.
Pursuing those things pretty aggressively and then on the cash flow side.
Yes, that's certainly the way we would think about it as well as is looking as as we see that volume decline looking for opportunities on the working capital side to help US further further improve the overall cash flow performance by keeping track of that as you would expect.
Really really close monitoring of our of our customer receivables and and ensuring that we feel comfortable that that those are continued to be credit worthy in those those are going to come in as planned managing and monitoring our payables and then being opportunistic if necessary to the extent, we see places where we can help customers we haven't seen a significant.
Amount of that yet, but if opportunities come up where we need to help customers or work with our suppliers were certainly going to look at that as well I'm all within the context of managing our own liquidity, which as I said in my comments, we feel very good about.
Yes, great alright, thanks, probably detail guys appreciate it.
Thanks, Dave Thanks, Steve.
Your next question is from Brian Lee of Goldman Sachs.
Hey, guys. Good morning, Thanks for taking the questions and good morning.
Not to beat a dead horse here, but just on the pull business no a lot of focus here just around the.
The run rates and sort of activity levels, you're seeing just because it's such a big piece of the business for you and it sounds like it's been it's been more resilient here at least in that in the early part of this code crisis.
Would you say that it's actually been tracking better year on year, even through the month of April I know, you're saying theres, some slowdown, but the comps from last year at least for the early part of Q2 are pretty pretty soft so wondering if.
If you're still true tracking better to that degree in double digits.
I'd say no I mean, I mean, it's clearly a share with you where we are I mean, the sell through to us matters because it's it's ultimately.
Indicator of how our distribution channel is going to prepare to support the dealer channel for those views and held up like I said for the most part, but we expect that as we move through Q2 and head into Q3 that we're going to see the order rates decline primarily around servicing those new cools remodel pools that.
The working assumption right now so I would say as we as we head into Q Q2, I don't think this tool business. It will fare better it's not going to be immune to a year over year headwind.
Okay fair enough.
And then just second question here on.
On price.
You had a positive two points here in Q1, so wondering if you're expecting this to soften through 2020, given the weaker demand outlook or just maybe if you could provide some context around how you've seen pricing trends in prior downturns and how you'd expect this one to compare to those.
Again, given the nature of our business.
Much of it through distribution.
We would expect to see kind of price continue to read out.
Lot of that price has already been put in and so it's.
It's in place and it's at lower levels again, as I as I mentioned earlier lower levels than we saw in late 2018 and into 2019, but.
But continue to expect to see kind of price read out and again offset inflation I think we thought about price.
Judgments as we had in 2021, that's probably where you'd see less of an increase if things continue the way they were.
Right.
Okay fair enough thanks, guys.
Thank you.
Your next question comes from Joe Giordano of Cowen.
Hi, good morning.
Hey, good morning morning, Joe.
And you touched on these things in your prepared remarks, or some issues getting into recall, but.
Can you talk about the.
Ascending that here in our plan on doing for some of the new AD Tech enabled parts of the consumer platform like how and how does that change in an environment, where you are managing cash in there might be slower adoption of these things as consumers are a little bit weaker. So can you just talked about how you're thinking about those businesses given how how fundamental they are to the forward.
You have the dumping.
Yes, so just to put in perspective, and you know the big Big consumer enabled on investment, we're making across consumer solutions is really the front end when capability.
To be able to create a digital lead and to be able to transact.
Lead all the way into a collection.
That projects ongoing it will be completed by the end of year, but but order of magnitude take about a $3 million to $5 million kind of cash flow spend there. So not not sizable are significant at any one quarter and certainly something that I want to get after because of the impact it hasn't business Theres natural delays and spend things like.
New product developments, new product development actions.
Those are going to delay even if I did want them to because our lab capacity is not yet back up to 100% and a lot of new product designs are being pushed a little bit at least at quarter to the right.
As I mentioned the trade shows the marketing activities et cetera, theyre going to have a lot less impact and so they are easier to moderate to spend on as as we think about the investment cycle and the value of that investment so.
I think the only one that keeping going really is our web enabled and I think it's important that we continue to build our brand and lean into this as though as a water expert and consumer solutions leader and that's that's really just that wed capability, which I think it's pretty modest given our overall cash generation.
How you're thinking about like.
The pacing like once economies open how willing are people are going to be people in their house. So.
How fast to commercial facility start ramp up like I know, you're not giving forward guidance that how you guys kind of framing that out and.
Once once kind of orders are lifted.
You got it right and then my remarks, I said, our consumer solutions water business or water solutions has has several different channels there be traditional lead generation, which would be more localized in nature.
Probably not going to stay fares to do that business or.
Our kitchen, and Bath show, but still doing direct mail.
We are seeing a lower response rate as far as the overall customer asking people to come into the water filtration installs that being said, we have a higher yield.
People that are asking to the actual convert right so less quotes but.
But overall a higher percentage those quotes turning into the sale and that's what we monitoring here as we move through.
In other industries are dealing with this too.
And I think we're just move into contact less.
You know visits.
Training, our employees to touched things, whether they're looking at wearing masks all those types of things to prepare for safety environment. So we'll see how that unfolds over the next couple of quarters, but that's that's really where we are Joe. Okay. This last for me understand can you touch on the productivity you saw.
On consumer this quarter being a little bit line.
Yeah, I would say, primarily two things mix of business.
I would call me both businesses geared here did well.
We did have some challenges.
Get product out in our pool business.
We continued some of those investments as I said, but we also had to move too.
The shelter in place expectations, primarily in China, first where we had China shutdown and so you know across all of our factories, even though were up and running between social distancing is in the types of things we had to do to keep those factories running we certainly weren't at a 100% of our expected productivity yields.
Thanks, guys.
Your next question is from Andy Kaplowitz of Citigroup.
Hey, good morning, guys.
Morning.
John can you talk about your China, and Southeast Asian business. In particular, you had good momentum going into the pandemic. You mentioned you back online, but demand hasn't recovered so where is it versus pre pandemic demand is there any more color you can give us in the shape of the recovery you. The anything you can give us there.
Yes, Hi, Ken.
Obviously.
Very interesting curious of how things unfold because they were the first experiencing experience things there first to go back to normal or salt they work, but but candidly, even though we're having and seeing restaurants open in China were not seeing the traffic in those restaurants anywhere near pre pandemic and bigger that maybe as a third.
Third or 50% and the aspects of people coming back into the capacity used to have.
When it comes to the residential commercial side and.
The retail elements the way people transacted was going into retail area looking at the particular device that they wanted to buy and then ordering online that traffic is also a lot slower than it was pandemic. So while our capacity is up and running we're seeing demand slowly recover but at a very moderated rate.
And I can't predict when it's going to come back to pre pandemic levels, let's say, it's climbing up the curve slowly.
That's helpful and then if I if I look at your food and beverage filtration business you know around the world not just China, obviously, you talked about it falling off significantly.
When the shelter in place initiatives ramped up has done read of decline stabilize yet you know outside of China, China and how much overall exposure do you have to that particular filtration business.
Yes, a couple of things and filtration, our FNB is really around your membrane filtration components into dairy and too.
A year and has the steel to be covering the sustainability, so productivity and efficiency is what it really promotes on industrial filtration side that business is still doing relatively okay, especially given the fact that beverages.
Generally up across across the world.
With that into consumer solutions, that's what we've got the water filtration into hospitality, so hotels restaurants.
That is the business that's been extremely challenged and while we expect that to come start coming back on line as we see states and countries open I think thats going to be along slug.
To get back to anywhere near pre pandemic levels.
Thanks, guys.
Thank you. Thank you.
Your next question comes from Sammy boarded ski of Jefferies.
Thanks, So you suspended share repurchases in lower capex in the quarter to his talk to how you're thinking about capital deployment in this current environment, what would you need in the market in order to start listing these restrictions.
Sure. It is as I talked about the really a very strong focus on liquidity and maintaining our liquidity.
In light of the uncertainty and so.
We're going to we're going to wait and see on with respect to share repurchases.
And and just how we deploy and utilize our capital so really pulling that back and sitting on the sideline and waiting to see how things play out.
We continue to pay our dividend and that's something that's very important to us and.
We need to look at that as well.
But that would be something that we would see as as a priority as we think about how we're allocating spending our capital.
And then you highlighted material savings is one cost about that you're targeting could you provide some color on how your conversations with suppliers are progressing and are you get any pushback there.
Yes couple of things I mean, I want to be clear I mean as far as direct sourcing savings, we're expecting inflation, a moderate but we haven't put a lot of savings into the forecast regarding that just because the length of time it takes to realize.
What I was talking to is purchased services more discretionary spend or outside purchased services and listen we're not the only company doing that so you know delaying deferring.
Eliminating is really what we're doing there so it's not really supplier negotiations more of our choice not to spend.
Great. Thanks for taking my questions.
Thank you.
Your next question is from.
RBC capital markets.
Thank you good morning, everyone.
Good morning Dane.
Hey, just wanted to wish Mark all the best and a welcome to Bob What do you starts I think you said tomorrow.
He is actually officially there to borrow he's been here for he's been here for two weeks and he's intently listening to this call and then.
This forecast the owns this forecast and is that a big part of it so I think you're doing.
That's good to hear Alright. So first question I guess I would qualify it as one of these high quality problems to ask because I'm still kind of unclear why did you pull the first quarter guidance. When you ended up with what we would consider a high quality be could you pulled guidance in the right towards the end of March. So you probably had a good sense.
How youre going to shake out in the quarter.
Yes, I appreciate it being that is a great question to me, but your peers really where it was that I got to a point, where we have large facilities, especially as support pool and pool. As you know is a big piece of our overall revenue stream and as the state shelter in places started to be named and there was confusion about what was essential.
Non essential.
Well, we needed to pull the guidance because the decision on any given day could become a material event pentair as earnings disclosures.
So we able we're able to work through those better than I anticipated.
And we shipped more product than I thought we would but that's that's the short answer.
That's that's real helpful. And then just on that team.
We were watching this carefully regarding which businesses states were saying were essential and it wasn't clear whether pools servicing was going to be consistently considered essential or not like in Connecticut. It was in parts of New York and off the whole state it was not.
So where does that stand in terms of state by state not go through them all but just.
Are they all now considered essential or are there are pockets, where it's not.
I would struggle, saying all I think we're well into the 90% type of range were our.
Pool dealers or.
Sharing with us that are servicing pools, and their particular areas and you probably even higher than that I mean, you know turns green if you don't do anything with it so.
You know, it's also a outdoor backyard type of activity.
So I think they've been able to work through that relatively wealthy, but where we were constant contact with that channel that channels reporting that they're back servicing pools for sure.
Yes, we agree we think thats well positioned and then last question is I know, it's not a big piece of the business, but on the municipal side, what's your sense of the muni budgets over the near term a big chunk of your business is break and fix that tends to be really resilience, but.
Terms of projects.
There's usually a delay before muni start pulling back but is there anything different this time, what's your expectation.
I think it's you know its its lack of visibility right now damning one hand, you would say in your got.
That states are going to be challenged certainly for budgets and tax revenue and they're going to see a compression of the overall.
Tax revenue and how to how to spend it so you'd say that that would be a negative potential headwind that would start to unfold in Q3 in Q4 and the same sense a lot of these states in the federal government are talking about infrastructure bills to try to get people working again, so I don't know yet and Thats a big part of the lack of visibility that we're referring to so were.
Monitoring the backlog we're monitoring the orders it is a break and fix for the most part Deane. So thats one that I really have no visibility into at the moment.
Got it much appreciated and best of luck to everybody.
Thanks, Dave.
Your next question is from Nathan Jones with Stifel.
Good morning, everyone. Thanks for taking my questions.
And I think.
Let's just.
Channel inventory outside of pool, you said on on the pull business GT the channel inventories there, okay, but could you comment on.
The channel inventories outside of pool, and any expectations you have for de stocking and what kind of impact that could have on the top line over the next Q3 quotas.
Yeah, I really really don't have the specificity, except everything looks more normal Nathan it doesnt look out at line that being said, we don't yet have all of that visibility around the sell through on into the dealers into the channel and one of the things will be monitoring one of the areas that I would envision the inventory being slight.
Hi, I don't mean by a lot, but little bit would be in the food service area, where when do you think about our revenue streams as we exited the quarter, it's where we are and what mode that channels in right now I think these inventory in the channel will service the startups.
And we'll have that slower ramp up in that particular business that we will in most of the others.
Fair enough.
A follow up on that productivity question for ammonia.
Volumes Laclede to decline ahead here does that put pressure on your expected productivity numbers for the year. If we take out you know discrete events like having to close down a facility or something like that need pack that could have.
Or are you able to accelerate productivity actions to make up for that just how you're thinking about productivity in a declining volume environment.
No you're right. It does put pressure and if you don't get the cost out.
You know in the labor in the overhead of the factory you end up producing unwanted inventory, which usually challenges you when the recovery occurs. So it is the keenly. It is the most focused area. We are we also learned and the last recoveries. Both in this one in valves and controls or the downturns in auto nine valves <unk> controls its area that you.
Got to have the most amount of focus on because if if you don't get after that costs and the input side.
Your you don't see in the short run from a PML issue, but you start seeing in the form a cash and then you don't benefit when the market recovers as I said so it is playbook one a one to make sure we're pacing that manufacturing.
Cost with the downturn value and it should reflect orders more than sales data.
Okay.
One more I'm going to add one more crack at the top line question, because we didn't have a lot of historical data about the businesses and have reacted in recessions you said, you're preparing for recessionary environment can you give us any color on what the businesses have typically seen in a recessionary environment and whether it's a reasonable expectation for this time.
To be sure and shop and historically.
Nathan I got all these notes and try to me don't give guidance on revenue don't get so I'm not going to give it to you even though you asked a different way.
Here's here's the challenge we have this is not like anything we've seen before.
You know we when we took a look at this and you know people say looking at all eight or nine we looked at 2000, what recessionary going back to.
Keep in mind, our businesses got residential significant residential exposure and when we entered that Oh, six or seven await timeframe. We're talking about housing starts you know two or three times normal levels and that that was an inventory that had to work its way down we're not in that situation with housing today, what we're at is the pandemic.
Causing stay at home, that's causing loss of employment, it's causing stress to people on where are they on their spending patterns and until this visibility there it's hard to predict how those wallet is going to open up again, and then how that demand comes back across our businesses. That's why I can't give you a number Nathan.
Okay fair enough. Thanks for taking my question.
Thank you.
Your next question is from Scott Graham of Rosenblatt Securities.
Hey, good morning, and good luck to Mark.
Thanks, Scott Scott so.
I'm going to beat that dead horse, a little bit further I'm sorry, that's the best way. So we are.
April Thirtyth, and we're kind of the first month and.
You were kind of giving us some order rate numbers as sort of we turned into April.
I guess I was curious to understand the that.
The use of who were short, which we're just trying to hang on to anything year to try to.
Make or models work essentially.
And then you turned around you. The first place you went to was AG, which is very small business and you said down 20.
Down 20 doesn't.
Field sharp to me, maybe that's to you but.
It's AG OEM down 20 in April on orders are you, suggesting that.
That was the worst.
Business that is sharp.
I would.
You'll start to me, especially given the Q1, we had Scott so keep in mind, we were continuing to see orders rising throughout Q1, and even though the pandemic worked its way across the globe in various degrees, we did still see demand hang in there to what would it likely been up until last couple of weeks.
Arch.
And even some of that was.
We still saw orders and we didn't know if that was in.
Customers buying inventory with the anticipation of supply chain disruptions et cetera, et cetera, So, but you know yet in April and I think most people have been very planful and the way they thought about reacting to shelters in place and overall volume in demand and just like us if we're going to see a decrease in.
Q2, I mean should we pace our.
Manufacturing in line with that at expected decline and get in front of it into Planful way as I think a lot of their customers were doing.
So yes, you got you got the outer end of where I think you could be.
But that being said I don't think April is indicative of any pattern or trend yet and as we head into May and June will have a much better clarity primarily because this is our season. This is usually our peak quarter in the year Scott.
Yep understood understood Thats, great additional color. Thank you.
One other question I'm, hoping you can connect these thoughts maybe very simply.
You haven't your Jack Jack mental of 60.
And.
Thats with no cost actions and you're now alluding to sort of mid Thirtys number so.
Can I take that mean that.
That line that connection is very simply all of these variable cost actions that you're doing because obviously, you're not doing anything structural yet is that.
Is that how you yes here.
Yes.
I told you would be simple thanks a lot.
Thank you Scott Scott.
Your next question is from Julian Mitchell of Barclays.
Hi, good morning, and all that you're the thank you some accruals or how maybe just my first question around you've mentioned several times the issues in the hospitality in restaurant sector, maybe just size those for us in terms of Penn kind of.
From White, how large is that piece of your end market exposure way most worried about sluggish recovery.
And then could you just remind us or updates this on the status of organic sales trends within actually an pelican and how satisfied you are with their integration to date.
Yes so.
6% of sales roughly would be that that commercial foodservice revenue for overall pentair okay.
Most of that tied to cartridge replacement.
We're aftermarket replacement.
And call that the predominant 70, 580% of it and the 20% maybe on original equipment. So.
As far as the second question, yes, very happy with both of the acquisitions for different reasons. So as a reminder, what we liked about the Aquion acquisition was that it made softener systems appeal, you systems and that systems integration and capability is something we're excited about as we start to branded pentair Antero <unk>.
Runs and offer it to a broader channel set.
It's front end, though is insulated channel and that affiliate channel primarily works through home depot.
And the traffic and home depot is not there to demand or ask for.
Those leads and also a lot of those leads come from larger appliance purchases were softening. The water is kind of critical so lets say we've seen a drop off in the demand on that front ended the channel.
Opposite story on the Pelican water solutions, where we do our own direct lead and we market and we can market digital.
Media things like Facebook I see us on linked in et cetera. So those are different channel.
Dynamics and as I mentioned earlier, even though we're getting less leads we're converting those leads at a higher rate meeting we have a much more interested party to gaining so the revenue up on the direct channels up significant late I mean, it's in line with what we expected.
And on the other side, we have seen a follow up demand because that retail traffic as I mentioned, but we're happy with assistance capability that brings and that's why I want to continue to invest in the front end of the channel because I think if we're doing our lead generation and we're converting that into our our systems and the things were selling we gain that higher margin, but we're also.
Petrolear own destiny, and so thats why im excited about seeing through the water solutions piece.
Thank you very much and just my follow up question you'd noted that the sell through of pool product has been good so far in Q2.
And I'm, just trying to home and on that sell aid.
That was company. This morning also in the sort of building prototypes arenas focused on tools.
They talked about double digit sort of point of sales.
The increase in April but this sale in into that market was could be down 30% also so enormous disparity between the selling in the sell through I.
I guess, what I'm looking at Penn said, I am I right in thinking that there is a large disparity, but perhaps not on the scale of what that tools company had mentioned they had seen in April.
Yeah, I think you're thinking about a right I think the magnitude is is a lot less than tool company, but that is exactly where I'm at meaning I think the cell.
Sell through the channel remains positive I would expect us to be in a sell in negative.
Not because there's extra inventory today, but because that channel. It's got to anticipate the falling demand is it looks forward into the new pools, and the remodel pools and I think they'll moderate their orders until they see that that part of the the market continues to unfold.
Very helpful. Thank you.
Steve Tusa of JP Morgan as a follow up question.
Hey, guys, sorry did I did I hear you hadn't basically no disruption from the from the kind of plant shutdown in California.
I did not say that so thank you for the clarification, what I said was at one point we were.
Shutdown or told to shutdown, we deemed ourselves as essential got backup on line, obviously not at full capacity quite frankly, Steve It was as I mentioned having backlog.
Past due with the ended the quarter, which is not enormous pool that is actually a facility, which we have backlog in past even still do today.
Okay. So so like you would would you have been able was there any meaningful impact to the quarter.
There would have been.
At least another $10 million revenue.
From that one plant alone.
That said Thats on that thanks for not I mean, a lot of companies are kind of using obviously as many.
Trying to kind of uses as many excuses possibles we appreciate.
You guys, just kind of eating that to a degree and.
Bring it in the result, so thanks, thanks for the clarification best of luck in the second quarter.
Thank you thanks, Steve.
There are no other questions. Thank you John do you have any closing remarks.
I do.
Shelby. Thank you for joining us today I just wanted to take a moment to remind everyone of our long term strategy, which remains on changed we believe we serve large and stable end markets, particularly within our consumer solutions segment. Our core business is a proven track record and we believe we are positioning our water solutions businesses to take advantage of helping consumers and businesses.
Solve their water quality needs, we still see a number of growth levers longer term, our 2019 acquisitions of Aquion at Pelican help move is closer to the consumer and we have continued to invest in building our digital capabilities and new product pipeline. In addition, we are accelerating PIMS health on many of our growth initiatives, we have been and we'll continue to be.
Focus on disciplined capital allocation, we start with our commitment to our investment grade ratings, we've increased our dividend for 44 consecutive years and they're proud to be a dividend aristocrats.
We expect to continue to use our strong cash flow to fund the most attractive growth opportunities before I turn the call over to Shelby for Q1 day.
I just want to let everybody know that we are navigating these uncertain times together and I would like to offer my best wishes to all of our employees customers and shareholders. Thank you for your continued interest.
You can conclude the call.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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