Q2 2020 Pentair PLC Earnings Call
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Thanks, Mary Alma and welcome to Pentair second quarter 2020 earnings Conference call I'm glad you could join US today I'm, Jim one 'cause senior Vice President Treasurer, and Investor Relations and with me today is John stock, our President and Chief Executive Officer, Bob Fishman, Our Chief Financial Officer.
Today's call will provide details on a second quarter 2020 performance as well as our full year 2020 outlook as outlined in this mornings press release.
Before we begin let me remind you that any statements made about the company's anticipated financial results are forward looking statements subject to future risks and uncertainties such as the risks outlined in terms. Most recent form 10-Q form 10-K, and today's press release forward looking statements included here in our made as of today and the company undertakes no obligation to update publicly.
Statements to reflect subsequent events or circumstances actual results could differ materially from anticipated results.
Today's webcast as a company by presentation, which can be found in Investor Relations section of Pentair as website <unk>.
We will reference disliked well prepared remarks any references to non-GAAP financials are reconciled in the appendix of the presentation.
We will be sure to reserve time for questions and answers after our prepared remarks I.
I would like to request that you. Please limit your questions to one and a follow up in order to ensure that everyone has an opportunity to ask their questions I'll now turn the call over to John.
Thank you Jim and good morning, everyone.
Please turn to slide number four titled Executive summary.
First and foremost, we hope that everyone remains healthy and safe.
Well the impact to the covert 19 pandemic continues to create uncertainty.
Focus on the health and safety of our employees, our customers and our businesses continue to be our priority.
Throughout the quarter, we built strong cobot 19 management capabilities, which are now part of our standard work process. It.
We recognize that there will continue to be disruptions due to the pandemic, but we believe we're better positioned to help manage any potential impact.
Well, we had withdrawn or guidance entering the second quarter. We we're generally pleased with the overall performance of the company, we anticipated that our commercial industrial facing businesses would face challenges as global capital spending came to halt in April but the rate of decline did moderate as the quarter progressed.
Oh residential facing businesses, including our leading pool franchise saw healthy improvements during may and June and exited the quarter with continued improvement in trends.
That's consumer shelter in place during the quarter. It appears swimming pools were being opened earlier and demand for swimming pools overall grew resulting in increased demand for our equipment.
Consumers also remained focused on their water quality, which led to improve orders for water solutions business.
We're extremely pleased with our free cash flow performance as we generated over 400 million a free cash flow during airport in second quarter. We use this cash flow to reduce our outstanding revolver balance and the result was further strengthening of our liquidity profile.
We continue to position ourselves to take advantage of opportunities has business recovers.
Residential comprises roughly 60% of our portfolio and we believe these businesses should continue to benefit from improved demand.
Well, we anticipate that the rest of the portfolio serving commercial industrial will likely remain challenged remain focused on aligning the cost structure appropriately while continuing to invest in longer term opportunities.
I'd like to thank all of Antares employees for continuing to deliver for our customers. Despite these unprecedented times.
Please turn to slide number five label segment focus.
We wanted to remind everyone of our focus within our two segments, which remain relatively unchanged.
Within consumer solutions, our largest segment our primary focus is advancing our growth in pool, both in gaining content as well as extending our aftermarket reach.
As a reminder, there are approximately 80000, new pools built each year and they're roughly 5.5 million pools installed in the ground.
We believe that automation represents a longer term opportunity and we continue to evolve our product offering.
We have launched the pentair whole map and a rolling out a number of new products that can and will interconnected.
We also wanted to comment on an upcoming department of energy regulation that goes into effect in July of 2021, which we expect will result in further adoption of very variable speed pumps.
As a reminder, this is a category that we helped in bent over a decade ago.
We estimate that roughly 30% to 40% of in ground pools have a variable speed pumps today and we expect this number to only increase after the new D.O. eat regulation takes effect.
Well, we believe we are well positioned from a product standpoint, we're working closely with our dealers and distributors to better educate them about what the new regulation means as well as help them manage the transition away from single speed pumps.
Within our water solutions business, we continue to invest in innovative components, such as our flight connected valve for water softwares, while also expanding our residential system business within our commercial systems business. We continue invest in new areas around commercial office water and total water management. We see this is a long term opportunity where we.
I believe we are well positioned and we look forward to updating you in the future.
Finally, we continue to focus on our M&A funnel, primarily around tuck in and bolt ons during the quarter. We made a small acquisition of an end floor pool cleaner company that expands our product offerings, we see opportunities for other product line extensions and pool and much broader opportunities within water solutions.
Well our focus within consumer solutions is principally around growth industrial flow technologies or I have ti as more of a focus on productivity.
We have reinforced our PIMS processes as we believed that there are a number of opportunities across the segment to improve the cost structure and also improved quality and delivery within a few select businesses, we continue to invest in productivity enhancing technology in our manufacturing plants.
Well, the focus and I have t. as more and margin improvement. We believe that there are some potential niche growth opportunities, particularly in our food and beverage business focused on C. O two recovery as well as our beer membrane business.
We continue to prioritize our opportunities for both segments to ensure we are allocating our resources most effectively to optimize our shareholder value creation opportunities. We have a balanced focus between growth and productivity and believe that both segments are well positioned to make contributions to pentair and all of our stakeholders.
Please turn to slide number six labeled what we do really matters.
Doing well by doing good has been a longstanding tradition at pentair.
Our purpose at our mission helped to energize our employees to make a difference within and beyond the workplace sustainability is not an initiative at pentair, but instead is core to the products, we create and the customers we serve.
This slide is a brief snapshot of how summer or products are helping to make the world a safer more sustainable place.
And Theres, a water focused company and many of our products are energy efficient solutions are variable speed will pop has helped us be named energy star partner the year for six consecutive years, while helping consumers saved nearly $2 billion and energy costs.
Our residential water solutions business has helped reduce the need for almost 10 billion water bottles annually. We also have a leading seo to recovery business within industrial filtration does help customers capture and we use over 11 million metric tons of Seo to every year.
We remain focused on leveraging our strong product and technology offerings to help our customers sliver smart sustainable solutions. This is core to pentair and essential to our purpose in mission and building a leading water treating the company I would now like to turn the call over to Bob to discuss our financial position and our results in more detail.
Bob.
Thank you John.
Please turn to slide seven labeled Q2, 2020 pentair performance.
For the second quarter, our sales declined 11% decreased 10% on a core sales basis.
Consumer solutions was down 8% on a core basis, while industrial inflow technology core sales declined 13%.
I will discuss each segment's performance in more detail shortly.
Segment income declined 19% and return on sales contracted 180 basis point.
18.5%.
We made progress on our cost reduction efforts, but the timing of these actions reading out you're not fully offset our decremental margins in the quarter.
Below the operating line, our net interest and other expense ended the quarter at $8.1 billion. Our adjusted tax rate was 16% and our average shares outstanding in the quarter was 166.4 million.
We delivered adjusted EPS of 59 cents.
Represented 14% decline year over year.
Overall, we were very pleased with the progression of the quarter following a difficult April.
While there's still much work to do we feel positive about our ability to align our cost structure, we can topline.
Please turn to slide eight labeled balance sheet and cash flow.
While the PML faith its fair share of challenges during the quarter. We were extremely pleased with our cash flow performance and the further strengthening of our balance sheet.
For the quarter, we generated free cash flow a $417 million over a 20% increase for the comparable period one year ago.
We use our strong cash flow performance, primarily to pay down our revolver balance.
We ended the second quarter with $764 million available under our $900 million revolver.
Our net debt to EBITDA ratio ended the quarter have very manageable 1.6 times.
While we have one small maturity upcoming in September we have no other pressing capital needs outside of dividends in the second half.
We plan to remain disciplined with our capital and we feel good about the strength of our balance sheet and expect to deliver free cash flow for the year equal to or greater than our net income.
Please turn to slide nine labeled Q2, 2020 consumer solutions performance.
Consumer solutions sales declined 8%.
Segment income decreased 11% and return on sales declined 80 basis points to 24.1%.
Before discussing the full results of the two businesses within the segment. We wanted to remind you that consumer solutions, 75% residential at 25% commercial.
Our full business delivered flat sales for the quarter.
This included a mid teens decline at April followed by continued improvements in May and June.
As consumers were sheltered in place it appears that more and more people were opening their pools earlier than usual.
Further demand inquiries for new pools were up substantially throughout the quarter has confirmed and various publications about dealers, having limited ability to keep up with the increased demand.
This resulted in strong demand across all of our product categories.
While we were focused on meeting this demand we were impacted in the quarter by covert related manufacturing delays at supplier disruptions.
Notably during the early part of the quarter. When we went historically be wrapping up productions.
We have seen less downtime in our own manufacturing facilities and have been able to wrap up production in several key product life.
The supplier constructions occurred principally outside the U.S.
And we have worked to add suppliers. In addition to our current suppliers being able to produce once again.
Within water solutions, the mid teens sales decline does not help bifurcated story of the business.
Smaller commercial business, which is exposed to restaurants, another hospitality industry experienced a double digit sales decline.
It was encouraging to see the rate of decline moderated throughout the quarter, but we're not expecting any meaningful recovery for this business for the remainder of the year.
Our residential business with a different story as we did see signs of improvement throughout the quarter and what can best be described the stabilization exiting the quarter.
Early in the quarter, many of our dealers and customers were unable to get to consumers' homes.
Yes, there water install systems.
In the quarter progressed, we thought dealer activity increase and we also saw some pockets of stabilization in our components business.
We believe consumer solutions as well position as we entered the third quarter based on the strong demand and pool and the continued improvement in orders.
Please turn to slide 10 labeled Q2, 2020 industrial flow technologies performance.
Industrial and flow technologies or IP saw sales declined 14% with all three businesses out in the quarter.
Segment income decreased 26% and return on sales declined 240 basis points the 14.1%.
The rate of decline and I have T was steep limiting our ability to quickly take out costs.
There was a sequential improvement in sales as we exited the quarter.
We are working on Rightsizing, the cost structure and IP. According to the demand run rate as we believe that top line will likely stay pressured in commercial and industrial as customers continue to pause there capital spending and reduce their aftermarket orders to lower asset utilization.
Our residential and irrigation flow business experienced a low double digit sales decline as customers were actively managing their own balance sheets and their demand was severely impacted earlier in the quarter due to many state rest states residents being sheltered in place.
We experienced an improvement in activity as the quarter progressed with orders in June up significantly versus April.
Commercial infrastructure flow hosted a high single digit decline in sales with commercial demand down low double digits as the smaller infrastructure business continued to ship its backlog.
We are monitoring orders closely in this business, but it appears to be too early to determine.
Right the backlog will be replenished.
Industrial filtration was hardest hit during the quarter with sales declining just over 20%.
This was broad based as virtually all industry circ sauce severe freeze in capital spending as well as lower asset utilization that had a negative impact on our aftermarket sales.
It remains to be seen when these trends will reverse and we're preparing for this part of IP to remain under pressure for the remainder of the year.
We expect the top line to remain pressured and I have team and we're taking appropriate actions to rightsize the cost structure.
Expect detrimental to improve throughout the second half of the year.
Please turn to slide 11 labeled full year 2020 planning assumptions.
Despite a brief period when covert first appeared in the you asked in a meaningful way our pool business has enjoyed an otherwise stronger first half of 2020.
We expect this trend to continue in the third quarter as demand remained strong across the channel and we make progress and satisfying the strong demand the industry is experiencing.
Our water solutions business on the other hand is not expected to have a second half recovery as hospitality and commercial offices are likely to remain impacted by the cobot 19 pandemic.
We're also watching closely at co as hoping infection infection rates increase in key water quality states, such as Florida, Texas and California.
Tighter shelter in place restrictions or instituted this could have an impact on a residential water solutions business.
As we stated earlier I asked he is expected to not seen much in the way of recovery as we anticipate customers continue to pause there capital spending for the remainder of the year.
Finally, the pandemic environment continues to create challenges for us as we make base economic assumptions.
We expect continued uncertainty.
But with the expected performance of our pull business. We are reinstating guidance as we expect the rest of our portfolio to face continued challenges.
Please turn to slide 12 labeled full year 2020 pentair outlook.
While full visibility remains limited with half the year behind US we are reinstating the full year guidance.
For the full year, we expect adjusted EPS could be in a range of $2 to $2.20.
On a total sales up roughly $2.8 billion.
Below the line, we are expecting an adjusted tax rate of 16% and average shares outstanding of approximately 167 million.
We continue to target free cash flow greater than 100% of net income.
Capital expenditures are expected to be $60 million to $70 million.
While DNA should approximate $75 million.
And noncash stock compensation should be around $20 million.
I would now like to turn the call over to Mariama for Q anyway.
After which John will have a few closing remarks.
Mariama. Please open the lines for questions. Thank you.
Thank you.
I'm either to ask a question you will need to press star one on your telephone you withdraw your question has to pound or Hauske. Please standby, while we can pile of acuity roster.
Your first question comes from Josh.
Oh Kaczynski with Morgan Stanley Your line is open.
Josh Pokrzywinski How're you.
Morning, Mr. stock how are you.
Good.
Excellent.
So no surprise first question on on pool, John can you just talk a little bit about <unk> point of sale in the marketplace versus your business anything on backlog channel inventory that we should be thinking about as we head into the second half and how big those two coming from oxide.
Yes, I think.
First of all I think we're we're pleased with the with the order trend in the sell through rates and pool and very excited about.
The businesses resiliency.
And as we think through what's happened in the channel I think most of that those orders in Q2 are served through inventory. So theres an opportunity and certainly the demand is to refill that inventory in the channel and continue to meet the external demand. So that that's why Bob's comments were very optimistic about with the back half it looks like.
And we're very.
Overall that we continue to see that strong demand.
Got it and then I'm, assuming I, when some sort of prize or a t. shirt for and onto a question.
Just on commercial filtration.
I would imagine that shelter in place was was pretty punitive to things like restaurants and institutions any any kind of swing factor that we should be aware of where twoq you maybe doesn't tell the story by June exit rates or July some of these organizations went from zero to something better than zero.
Any shift in demand there that you can speak too.
No I think because even in June you'd have to look as to ask I think you know as the as the country started opening up certainly in June very strong demand recovered and and as we started to see a pull back across the you know the main states and certainly across the United States, We started to see.
The trends start to slow again, I think our forecast assumes we just don't see recovery and in fact, we continue to see continued pullbacks too.
Deal with the pandemic and so I think thats, a balanced place to be right now.
Bob's notes determined we saw a big we did see big pickup in residential residential water quality, especially in People's homes as it is a high demand area that accelerated throughout the quarter and we've we've muted that expectation the back half the year as well as well as we're concerned if it stayed start to reverse there their views on the openings.
I think I like it would be we did see China recover in the quarter and we're very optimistic you know certainly at its year over year June rates and then what we see as the trends heading into Q3, so that does give us the indications that when things start to stabilize around the pandemic that we really feel the strength of our portfolio will start to unfold.
Okay appreciate I'll get back in June.
Your next question comes from the line of Jeff Hammond with Keybanc capital markets. Your line is open.
Hey, good morning, guys.
So.
Just on on the pool kind of supply chain issues can you just talk about what you think.
Differs into Threeq you as a result to that and just you know what's your assessment of kind of those supply chain issues, you know they fully abated or are they still lingering.
Yes, so Jeff we're carrying a fairly substantial backlog into Q3.
The order trend was very positive throughout Q2, and yes, we did have some supply disruptions primarily related to co bid and our supply base and so we are continually consistently trying to meet that demand that we expect a very strong July.
And we're doing everything we can to meet the existing demand and also the demand that was create into Q2.
Okay and then.
I have T.
Kind of surprised me in the model on the upside like where did you see maybe better trends versus what you were expecting.
Then I think Bob made a comment on Decrementals getting better how should we looked at.
You know decrementals for the back half or for I have two.
Yes, we'll split will split this on this answer Jeff I I think I have to you first of all I think.
On long cycle business as you carry a little bit backlog into the quarter. So we did have a backlog from from orders that we had booked in previous quarters that would continue to ship throughout Q2, but also I was pleased that we become less dependent on large projects and we've got more of a recurring revenue stream across the I ft portfolio than we had maybe three.
Five years ago. So I think I think the the efforts around the team to position ourselves and more predictable revenue stream started to show through especially and as our orders started to pull back and I think were position not not to return to growth anytime soon but at least to mitigate the downside growth hotel.
So is that we had in the in the last cycle. So I feel good about where we are the portfolio as Bob mentioned, we still have cost actions here too to rightsize the business to where the trends are going to take it.
We've been encouraged with the little bit of the order pattern as we started Q3, but.
He got to get this business in line with with the longer term revenue stream looks like and those are actions that will be discussing here throughout Q3, I'll, let Bob talk about decrementals.
Thanks, John there is a tremendous amount of work going on around the cost structure understanding fixed variable discretionary non discretionary.
Especially within the iced tea business I would say the best way to to model. The back half is to continue to use low to mid thirtys as decrementals for that for that business.
Okay. Thanks, guys.
Yep.
Next question comes from Andrew Obin with Bank of America. Your line is open.
Yes, hi, good morning.
Andrew.
Just just to.
Follow up question our pool.
As we look to sales reported by public distributors.
How long do you think will take for your sales sort of to match what the industry is doing and as I said I'm using public guys. As an example, but it's just a disconnect. Your guys were flat the industry pointing reported up 14%.
Sure, we expect the gap to close on third quarter or how long does it take.
Yes, I mean, we're we're going to do everything we can to close that gap in Q3, and as I said I think the orders continue to remain strong. So I think through the back half the year were expected to see.
Our our revenue increased significantly Andrew.
So again just on the supply chain you did talk about adding suppliers are you at under say geography or are you guys, considering maybe de risking supply chain and moving some of the suppliers to the US can you just talked about how youre thinking about your supply chain post call that thanks.
Yeah, I think like most companies I think we have to first do what we need to do to get our demand out and and what we have is in a couple of cases on we have suppliers that.
Use Mexico is as the source of that production and as you know Mexico was hit hard coded here throughout Q2 and that that disrupted the supply chain a little bit.
As we move forward I think we're very aware that supply chains are going to need to be much more localized not just the U.S., but also in Europe and also in China I think.
The disruptions ever caused as the pandemic worked its way through highlighted a couple issues, but as a reminder, army tariffs were another indication of where supply chains needed to move as well and there hasn't really been any movement on feeling better about where tariffs are going to be longer term, which really.
I think drives all of us or the manufacturing space to think about more localized production to to serve the demand in the needs, but also to balance.
In de risk.
The aspects associated with disruption to global supply chain, Sandra So I think thats a trend not just for us but for everybody.
Thank you very much.
Your next question comes from the line of Steve Tusa JP Morgan Your line is open.
Hey, guys good morning.
Hey, Steve I think.
What to do what what the impact of the supply chain issues dollar volume wise.
Well it it was a it it was a big piece of what does help close the gap between the industry trends and where we shipped our products Steve lets just let's just put it there.
Part of that being that as Bob mentioned, we got off to slow start.
In the quarter as the already started coming in just from our manufacturing operations and ramping ours up to the demand, but then when the supply disruptions happened as I mentioned earlier.
That put us further behind and now we're digging out of that that aspect, we've seen strong demand across the entire equipment portfolio. So it's not just a product line.
And as we head into Q3, we're confident we have a path to get the customers their orders.
Within Q3, but we also see the demand working its way into Q4 as well see how how strong.
Were our orders kind of in June and July you said, you can grow significantly I mean are they up you know.
More than double digit.
Yes, no not more than double that'd be triple right.
Sorry, they're up double digit they're definitely.
[laughter], they're not 100% right.
Are they up more than 20.
Yes.
Okay.
So can you in consumer actually hold the Flatlined. This year do you think for the segment.
I think that would be aggressive.
Okay, I think I think like we said on I think its slide 11, Steve we expect in less than we acknowledge that pool. We think we're it's going to have a good year. This year anyway. As you know we had easier is easier comparisons year over year, and we didnt have great weather last year, and we've had tremendous weather for the pool season. This year in addition to that.
Take that the shelter in place has changed the consumers' behavior is primarily around seasonal products that are always purchase you know, okay. We're going to use our pool earlier, so let's talk about our heaters.
We were home and we're maintaining our pool should we consider coordinators should we consider automating our pool. Those are all the things that we are hopeful for long periods of time that our consumers would begin to understand and start to invest in and we're really encouraged about those order trends related to to that so we're acknowledging cool is going to have really good year and our only limit there is.
Our supply chain and making sure we're managing through it we are acknowledging the fact that we probably had a much more optimistic forecast and water solutions.
And the commercial impact in the likelihood that people are going to open up their offices for people to come back to work or that hotels and hospitality sections are going to see travel to level that we used to that's what we're taking out of this look as we build this guide Steve and so I wouldn't think it'd be very hard for consumer solutions to get all the way back.
But I do think we're encouraged by the trends and as we started to see things open in June we really liked our positioning in the water solutions business and we started to see that recovery, but then towards the ended June we saw a pull back a little bit as a lot of closure started to happen. So I.
I know, it's a long winded answer, but I just wanted to give you the color and I felt that slide is important because while there's lot of optimism in our businesses. The final bullet point as the sobering reality that none of us know, what's going to happen with this pandemic both in the impact that has on the economic outlook to our businesses, but also on what it's going to due to our global supply chains and our old man.
Are you factoring factories right sorry, one last quick one on productivity you did 9 million this quarter.
Is that is that kind of good consistent run rate for the back half or do you have some more kind of cost coming through timing wise. They can improve that I'm in the last couple of quarters.
We're focused on improving that number I again looking at the portfolio of businesses, we think theres theres opportunity to do better than that.
Okay, great. Thanks.
Thanks, Steve.
Your next question comes from the line of Brett Linzey with vertical research partners. Your line is open.
Hey, good morning, everybody.
Morning.
Just wanted to circle back on the deal we efficiency changeover, how do you see that playing out as we roll into next year do you expect some pre buy of the single speed.
Ahead of the deadline and then you get the mix up kind of beyond 22 or.
What's your what's your thought process there.
Yeah, we've always felt that there would be some prebuy just because the way the other industries have handled.
Transitions of dislike I think we obviously are working with our distribution dealer channels to help understand that the value of the variable speed is significant.
Both in the form of how quite it is its efficiency and just the fact that plainly as a better pump so.
Well, we do expect some of that pre buy to mitigate the impact of not having available next year. We really are hopeful that more of the mix switches to the variable speed pumps in a very short order here.
Got it and then just on price encouraging you're able to hold the line there in both the businesses in the quarter just given the strength in pool, you've got some commodities moving again shoe do you think you have a price lever to kind of move price back up through the through the second half of the year specifically simple.
I think it's going to be a more normalized pricing environment.
Similar to the way we approach this year, while there are some challenges across certain product lines. I mean overall commodities have generally held in there and we haven't seen significant inflation. So I think as can be more normalized year as we head into the season.
Okay got it ill pass it along thanks.
Your next question comes from Joe Giordano with Cowen.
Okay.
Hey, guys good morning.
Just.
Theory.
Yes, we can show very good.
Just following up on my question on the on the regulatory change just can you kind of frame out what that means for you guys are not unlike our margin profile basis or on and what it means the competitive landscape and who is who is producing petition single speed versus variable season, how that kind of works for you guys. They given taken the industry.
Yes. This has been a product that's been out there for 10 plus years and now as I said in my comments you know we helped with the channel.
The needs primarily on the.
Hi costs energy States.
Introduces products. So we've been a leader in it for a period of time, but but candidly everybody has got to variable speed bump and you know I think our biggest challenge across the industry things getting people to understand that even though the cost of that product is almost double.
Value in the fourth and how long it lasts.
And evaluate creates its significant so it's not really a change in margin profile that goes out at more revenue.
Throws out more margin dollars, but not not higher Mart.
Got it makes sense.
And I was just curious.
How about kind of like a channel evolution and you see more of your business going through like an Amazon.
Hi type sale more recently, how has that kind of shifting over time.
Online is definitely picked up on you'll do it yourself products like filtration or replacement Gration card is.
Definitely interest in there.
Operation that is going through those online channels and then just as a reminder, we have our own online capability that we've got through the Pelican acquisition that we utilize to take some of that demand in shifted over into more of a.
Other expertise because what we want to do is get people the right solution not just sell them a product that they think they need.
And when I mean, I think shifts towards that channel what does that mean for you guys know margin standpoint. Thanks.
Well I mean, we think I mean, there's there's always going to be a curated set of products in any industry in which people are going to be able to do and replacement itself.
We don't necessarily feel in school or in our water solutions businesses that thats, all the real consumer concerns around taste and quality of their water and so we believe long term that creates lead.
Really drives a nice services revenues for us over the longer term.
Thanks.
Thank you.
Okay.
Your next question comes from Brian Lee with Goldman Sachs. Your line is open.
Hey, guys. Good morning, Thanks for taking the questions.
Just maybe firstly on the Decrementals on consumer solutions specific retailers and they seem to come in pretty pretty strong a bit better than we would've expected given 8% decline in sales anything in the quarter that might have helped the margin profile was it all a function of mix or was there something else and then you know how should we.
Think about whether this level of Decrementals in the segment sustains in the next few quarters.
For for consumer solutions.
Again.
Mix mix was helpful.
In the quarter and we expect that trend to continue in the back half of the year.
Theres Theres also within consumer solutions.
A number of productivity plays that that.
Our underway, so I expect decrementals.
To continue to do well within the.
The consumer solutions segment.
Okay Fair enough and then.
Just secondarily with respect to mix and the pool business, specifically do you see different margin profiles when it comes to.
Business coming from renovation projects as if as opposed to new construction and are you seeing I think you mentioned, both but are you seeing trends in those two segments being similarly strong there is one.
Outperforming the other it sounds like backlogs on the new construction side are actually above average according to some of the supply chain players, but securities to hear you read and also what the relative impacts our from one.
What type of business versus the other.
Right when we when we've been looking at it both new construction and remodel are both strong.
In this environment and the margin profile is very similar between between those those two pieces. So.
Again.
Good news from from our perspective in terms of consistent demand in both of those areas.
Okay, Great I'll pass it on thanks, guys.
Your next question comes on line of Scott Graham with Rosenblatt Securities. Your line is open.
Yes, Hey, good morning, Thanks for taking this question I have three for you.
You can you just give us a quick comment on iced tea mix.
You maybe tell US also when the new pool inquiries.
When youre dealers and one trade is expecting that to manifest into actual breaking of grounds.
And if you could also tell us what your thoughts are on reinstating share repurchases. Thanks.
Sure so effectiveness with Bob I mean, what.
Interesting and I want to.
Frame that I think when we heard the pandemic hit.
We saw it start to hit late March April.
When we checked with the channel and pool I mean, it was fully support ringing and people were nervous and.
What happened throughout Q2 is people started to focus again on how do I get a quality of life with what I have versus maybe vacationing in going elsewhere. So we saw that demand come in very very strong and continues to be strong through this call. Today. So I think that has a signal and usually people know.
So that they're not going to get a pool built in weeks, it's usually a couple of quarters and so I think we feel good about that trend and what could happen in the new and remodel cools as it goes forward as a reminder, Scott we look at every one of those opportunities as a way to convince that particular homeowner that there is a best solution for that.
Pool that includes automation and includes their ability to.
The chemicals in themselves and maintain that pool themselves and get the best overall experience. So we love the new pool trend to end the remodel pooled trend because it's our best opportunity increase the content. We obviously continue to serve the install pools, which is again, you're using your pool and you are going to run through your equipment, but that tends to be more of a like for like replacement. So.
We'd like to trends right now we think it's its continue the right direction and we're hopeful it it continues into 2021.
Bob you want to talk about there the capital allocation question, yeah on share repurchases.
To me it fits within the whole approach around capital structure, we continued to have a very balanced disciplined approach.
First and foremost to me.
It begins with.
Driving free cash flow greater than or equal to.
Net income and.
We're on our way to do that here in 2020, and very pleased with the second quarter from a free cash flow perspective.
Debt position that the company at 1.6 times very manageable.
Especially with covenants at 3.75.
And our liquidity position. If you were to take you know whats available in the revolver and added to the cash it's over $850 million and to me what a difference 90 days makes.
We're coming out of Q1 with.
Same liquidity position closer to $500 million, so $350 million higher going into the back half the year no. All those things then get gave us the.
Optionality around return of cash to shareholders and investing in the business.
We targeted $150 million of buybacks this year, we completed $150 million.
We may resume the share repurchase in the future.
But depending on market conditions in our capital needs, we still need to make make that decision.
We'll continue obviously to pay the dividend and invest in our highest margin growth opportunities.
Both organically and Inorganically, So I would best describe it as a.
Balance capital structure with with really a lot of optionality that based on our liquidity position.
Your final question was really about mix and I have t. and I would say, they're all relatively the same across the businesses, except we do better what agriculture does better. So we haven't seen that uptick in demand on AG. This year as it pertains to OEM AG or or spray irrigation AG, but that's the one piece of the portfolio, we love when they come on.
Good strong.
Got it thank you.
Thank you.
Your next question comes from Brian Blair with Oppenheimer. Your line is open.
Good morning, guys. Thanks for taking my questions.
Morning.
I wanted to circle back on the runway for new pulled and answer for minutes is it reasonable given construction backlogs labor constraints the limited linked to the construction season.
Assume that.
Spike in new pull demand has been remained significantly supportive through 2021 or my over simplifying that.
That's a reasonable expectation.
Obviously, theres all kinds of things that you need to consider like economic.
Impacts how people are feeling about therefore, one case those type of things, but based upon the trends we've seen right now it's very realistic to assume.
Scenario that you shared.
Okay.
And you touched on M&A the M&A funnel in your prepared remarks has the pen deneke in any way shifted meaningfully impacted the specific technologies or capabilities that are of interest to you as you scale water solutions or tuck into the global.
Yes, I mean, it's reinforce several I think.
So.
We just did a small one and pool that we think really fits nicely in the portfolio. It is in floor cleaning. So as you build and create a remodel pool, it's the ability to put.
The jets at the bottom of the pool to to create more of a a mixture of differ filtration capabilities. So that's an example of a technology that you wouldn't go retrofit, but you'd certainly put into remodel pool and adding thats a portfolio is really nice to have as we think about where we want to take water solutions, we really believe more than ever.
Now that the trends are going to shift faster, meaning people want touchless solutions. When it comes to dispensing water, they're going to come back into office buildings and have a different feeling about the the water. They drink and so people are going to maybe tend to think of branded water or certain forms a water being.
Dispensed to a taste profile or help profile that they seek so all of those things were in our portfolio and I feel we want to accelerate the innovation internally or augment them with channel accelerators and or.
Service offerings into the markets that will go to so I expect that we'll have some.
Looks at some some deals over the next six to nine months.
We're going to continue to be disciplined as Bob said, because most of this capability, we can do organically, but if theres an accelerator out there that we can put in as a bolt on or tuck in we're going to consider it.
Appreciate the color. Thanks again.
Your next question comes from Andy Kaplowitz with Citi.
Your line is open.
Hey, good morning this.
Morning.
You, obviously had a big cash flow quarter in Q2, and we understand the cash flow strengthened seasonality coming on a pool, but could you continue to see working capital tailwind in the second half given the strength in pool, and obviously your guidance of greater than or equal to 100% conversion I mean, it's a little they exit so given where we season, we're ready it would suggest to you.
Because he conversion well above 100% soon if you could just comment on that.
Yes, so I would I wouldnt describe this year as as.
Difficult year from a free cash flow perspective, I would not describe 18 and 19 as such because of.
Movements in working capital, but two to us it's playing out like we thought it would.
In Q2, we saw.
Strong cash collections.
And we could not have.
The headwind a payables in the first half that we had in 19.
So thats you know two reasons why.
We are up so significantly at the turn.
Well continue to drive.
Positive free cash flow in the back half the year.
What I really liked about the profile right now is that the linearity.
Both in Q3 in Q4 is going to be much better.
And what it's been into pass so I I start.
Each each quarter off level loading the plants and then having the opportunity collect that cash so I liked the linearity.
We do have potential to be better than 100% of net income that's what we're calling right now.
But overall I think we've got exactly the right focus on free cash flow.
One other things we changed in the last 90 days as a building out a free cash flow forecast down to the business level and so we have accountability around everything from capex to inventory to cash taxes throughout the company. So it always helps me when.
And the company as a whole are focused on on this metric.
So I expect you know well, we'll continue to have strong cash flow performance in the back half of the year.
Thanks for that and then John can you give us a little more color into your comments regarding frozen Capex industrial filtration is I'm not mistaken backlog business. So could you comment on the backlog trends, you're seeing and as your customers is fully come off from shelter in place. They started to spend at all or is it today just waiting for more economic certain.
I think you mentioned in the past the you had a number of self help opportunities in this particular business. So what are they in our the helping you at all.
Yes, it's a great question I think when you think about our industrial filtration offerings and you think of food and beverage and then you think of our mid teen applications into broad industrial many of our customers just don't yet have any economic outlook for the business that they can feel comfortable at and even within FNB.
Even though that the the stay at home liquor and beer sales have been pretty tremendous we have to offset that with the hospitality demand that has dropped off considerably. So a lot of our food and beverage and and beer customers that were very intimate with our considering you know beer manufacturing in.
Remote locations around the world that they are uncomfortable, making that strategic investment right now given where the pandemic is so we I don't want to say, it's a phrase and I've been very careful with that because our dialogues really been about more where theyre going to put it and when they're going to do it versus if they are and then in the industrial side.
Customers again are in need of capital investment to accelerate productivity and most of our membrane offerings create that but they're in the evaluation stage, where those will be so we've chosen that word carefully pause because we think it is really paused right now pending either more of a freeze or.
Hey, reboot to that capital spend to drive the productivity they need.
Very helpful. Thanks, John.
Your next question comes from Deane Dray with RBC capital markets. Your line is open.
Thank you good morning, everyone.
Good morning.
Hey.
I wanted to circle back on the new pool construction industry and we've been stuck at this 80000 capacity.
For a while do you think the industry is going to put new capacity in place.
You are seeing any signs of that and how would that change your mix, meaning you're typically 85% more about aftermarket, but would that increase the new new pool sales.
Yes, I don't know if I can get there yet I mean last year. You know we did have a pull back as we talked about due to weather and in this year. This little catch up and we'll be looking at those pool permits the pool permanent trends by these states as we go forward.
I am encouraged because I do think most people in these warm weather states, when they retire and or they choose to be there.
Look at the pool as a necessity.
For their lifestyle. So I think we believe the trends are still in our favor where it goes and how fast it goes I'm not ready to make that that choice yet on Dean I do think what we can do is continue to make you aware of if you have a pool, how we can help you maintain it better and how we can.
Next you with our professional channel that can give you the solution that we feel is best for you.
Got it I'm, just an observation I'm surprised that there's not more penetration of the variable speed pumps, because it is such a compelling economic decision.
So anyway that looks like the natural lift there is for more sales.
And then second question on the home App App for automation worst that stand today, how many installations are our users do you have.
What's the expected pull through in terms of products and then more of a qualitative question is does that in any way puts you in competition with the pool service folks having these are your channel partners typically where does that enhance the relationship. Thanks, Yeah seeing thanks, you for asking I mean, we soft launched it.
So we've got it into test phase right now.
Around a couple products that we've introduced.
And so I believe we'll start to see that acceleration into 2021, we want to make sure that we work the bugs out in and it we're giving you a better end user experience.
It brings all of our in home products into one pentair App and it makes it more consumer friendly. So we havent dealer specific app that we'll have so that more tactical needs in understanding will be supported through the dealer network and then the consumer App will give you things more like things are good or any more salt or I need to adjust appropriately.
We think it's actually going to augment and accelerate our dealer relationships Dean because the main point of the App and I call. It the by that analogy now that called the Uber App is how do we connect you with the best dealer for your particular solution or need.
We still believe and I strongly believe that we're going to be best served if we're giving you the right expert.
Decision for your water quality needs and then we're connecting that with our best dealers to give me the best experience. So we're trying to create the awareness through the App and give you a better experience, but when you need something we're not going to be at odds with them, we're going to connect.
The consumers through our best dealers.
That's real helpful color. Thank you.
Your next question comes from Damian Caris.
Your line is open.
Hi, good morning, everyone.
Morning.
Thanks.
All the color around the business just just a few minor model question on my end.
First of all or nothing about the investment it just it looks like you've been cutting back on R&D, a little bit in the first half.
And in particular in the second quarter.
I know you've talked about John continuing your long term strategic investment just wondering if if that's perhaps the result of maybe some of the facility shutdowns that you had in the second quarter or just any.
Any thoughts on what's going on there.
You nailed it it wasn't by choice. It was because R&D was one of those functions that was hard to maintain at the at the consistent levels that we had on prior year. It was the one function certainly in pentair, but probably in the industry that that was hard to do remotely and work from home and and we are candidly on some.
The key Npis programs, probably last 90 days and I would expect that R&D spend to pick up here in the back half the year as we try to catch up on some of those introductions and those on projects. We are back now.
Obviously, social distancing and working through all the different requirements.
Yes that was a result to cobot not from a strategic choice.
And I would I would just just add to that we do spend $60 million to $70 million capital.
Which is to be honest, probably a little bit higher than what we talked about on our last call and we look at that capital spend in three buckets safety growth and productivity on the safety piece, we won't compromise on on that.
On growth and productivity.
Spending a little bit more they're building the business cases to drive positive NPV and holding the teams accountable.
We're also.
We expect to see benefits from that spend in the future as well.
Okay, great that makes sense I'll leave it at that appreciate the time.
Okay.
Your next question comes from Nathan Jones with Stifel. Your line is open.
Morning, everyone.
Data.
I guess I'll start.
Just a question on the overall guide I mean, it looks like you've got pretty good visibility into a strong second half for pool.
And it looks like you've taken a pretty conservative approach.
To the IMF tea business in the guidance.
Can you talk about how you how you approach to giving guidance for the full year, particularly the second half have you taken a pretty conservative outlook to I'd say, where you really confident that you can deliver that second half guidance and if things get a little bit better than you've built into the guide then maybe there's some upside or do you think it's more of a realistic Khan.
Look at the second half.
Anything I mean first of all I'm pleased that we could introduce guidance again.
I think it's important externally to to frame the goalpost of what you're trying to accomplish but also it's very important internally that people are working towards expectations and and actions and targets that they are held accountable for an i. I feel really good that we worked as hard as we could in Q2 delivered the best result, and that's always been our goal here how do we keep our.
People safe and how do we continue to lead and improves the best financial results possible that being said the fourth bullet that I'd put on that one slide is that uncertainty around how the pandemic plays out is still a question mark for us it's easier to to think about an hour the only six months.
No in front of us and really more like five as we as we work through July. So I think we've got to a better reasonable estimate of where we're going to land and so I think we think it's an appropriate expectation and other scenarios that get to the high end in their scenarios that are in the low end Nathan but one of the things. We don't want to do is have to pull back guidance because there may.
Or may not be some issue that we have to deem to be material. So a big thought process was what do we feel comfortable with.
And how can we give the street, what they need and give ourselves what we need to continue to operationalize the business and then deliver the best financial results possible.
Your next question comes from Julian Mitchell with Barclays. Your line is open.
Hi, good morning.
Maybe a question around the cost reduction.
I think you'd alluded earlier in the school to some stepped up cost cutting perhaps that the IMF T segments.
But.
I look at the guidance provided in the release it looks like you're only assuming about.
4 million of restructuring for the year.
Maybe one of the 1 million and also in the second half.
So just trying to understand.
I am I misreading that or is there a lot of pending restructuring to be announced stories the cost cutting more as a variable type approach and that sort of flows back once the topline recovers.
Yeah, I would not associate and any of the cost reduction efforts relating to restructuring, we're primarily focused on our variable labor and our discretionary spend.
So those typically do not brings significant restructuring costs with them.
We'll continue to evaluate the top line and take actions as we need to but.
The focus is primarily on those those variable components.
Thanks, and then my second one sticking with clients see that relative resilience you saw in the commercial and infrastructure business with the organic sales any down high single digit in the quarter.
He is not a trend do you think.
Stays fairly similar through the second half.
Or is there something whether as the backlog softens. It gets worse just trying to understand what's moving that business specifically more is it the backlog or is it the slow driven Todd and how you see it in the second house.
Well, that's specific to a business and I have tier is that abroad, yes.
Yes, no so specifically around the commercial.
Such a piece.
Yes, so we had a fairly decent backlog and we saw orders remain strong through Q1 I.
I think what's your feeling from us as the anticipation that nominates municipalities in some of the commercial building needs might be lower in the future and so it's not necessarily indicative of a trend we know it's more indicative.
Sequentially of a trend we're anticipating.
I see so the down high single digits is a reasonable sort of run rates in that sense yet yes.
Yes fantastic. Thank you.
There are no further questions at this time I will now turn the call back over to John South for closing remarks.
Well. Thank you for joining us today, we're all navigating these uncertain times together and I would like to offer my best wishes to all of our employees customers and shareholders in urge you to all stay safe as we grind through this pandemic.
Well no one was expecting the type of year, we have all experienced we continue to believe that pentair as a strong foundation to build upon we have a strong purpose strong mission and strong vision focused on delivering smart sustainable solutions that empower our customers to make the most of life's most essential resources.
We believe that we are attractive spaces that are expanding we're a leader in helping people move improve and enjoy their water and we're making the world more sustainable through our smartest systems and applications. We have the right enterprise strategy businesses talent and culture I wouldn't take values, our leadership competencies and our pentair integrated.
Management system enable all of our employees to continuously improve customer experiences and deliver more predictable and consistent results. Thank you for your continued interest Mariama you can conclude the call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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