Q3 2020 Pentair PLC Earnings Call
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I would now like to hand, the conference over to your Speaker today, Mr., Jim Lucas Senior Vice President Treasurer, and Investor Relations. Thank you. Please go ahead.
Thanks, Mary and welcome to Pentair third quarter 2020 earnings Conference call. We're glad you could join us today.
With me today is Johnson, our President and Chief Executive Officer, and Bob Fishman, Chief Financial Officer, today's call. We will provide details on our third quarter 2020 performance as well as our full year 2020 outlook as outlined in this mornings press release before.
Before we begin let me remind you that any statements made about the company's anticipated financial results are forward looking statements are subject to future risks and uncertainties such.
Such as the risks outlined in pentair as most recent form 10-Q form 10-K, and today's press release forward. Looking statements included herein are made of them today and the company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances actual results could differ materially from anticipated results today's.
Today's webcast is accompanied by a presentation, which can be found in the investor Relations section of Pentair its web site.
Will reference these slides throughout our 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 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.
Now I'll 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 is and remains healthy and safe.
I'd like to start by expressing my sincere gratitude to all of our front line employees for their continued commitment to our customers and shareholders.
This could not have happened without these teams and their dedication to the pentair enter windbreak values and our customers.
Well, the where we live and continue to face much uncertainty, we're pleased to deliver strong third quarter results with double digit gains in sales any P.S. well also delivering robust free cash flow.
He will discuss the details of the quarter. Shortly we believe our mix of residential focus businesses as how to differentiate our results in these uncertain times.
Despite the ongoing challenges and uncertainties that persist we have continued to invest in our top growth priorities and digital transformation.
We have successfully soft launched both the pentair home pentair dealer apps, and we expect 2021 to be a great year for a number of new connected products across many of our businesses.
That business is our seasonally stronger during the second and third quarters, we're expecting a strong finish to 2020 I'm proud of all of our businesses commitment to strong execution continued challenging environment.
I would now like to turn the call over to Bob to discuss our performance and our financial results in more detail after which I'll provide an update on our overall strategic position.
Bob.
Thank you John.
Please turn to slide five labeled Q3 2020 pentair performance.
During the third quarter, we delivered sales growth of 12% and core sales growth of 10%.
On a core basis consumer solutions was up 23%, while industrial in flow technologies declined 4%.
I will discuss the details for each segment on a subsequent slide.
Segment income grew 14%, while adjusted EBITDA increased 21%.
Our tax rate of 13% was a true up as we now expect our annual tax rate could be 15%.
Price was minimal in the quarter as the elevated volumes, we experienced in the quarter primarily in pool resulted in a higher than usual level of rebates with our channel partners.
Likewise, our productivity was offset by additional expenses incurred such as increased hiring to help keep up with demand and higher overall incentive compensation on a year over year basis.
Please turn to slide six labeled Q3 2020 consumer solutions performance.
As a reminder, nearly 80% of consumer solution service residential market.
Many of our products has been in higher demand this year, given consumer staying at home.
For the quarter sales grew 25% second.
Segment income increased 39% and return on sales expanded 250 basis points to 24.2%.
[noise], who was clearly a strong performer this quarter with a 46% increase in sales.
This follows a flat performance in the second quarter, which is worth discussing for a moment.
In a normal year the pool season starts in March or April and too.
In 2019, we saw a late start to the season due to cool wet weather in several key markets.
This year, we saw a pause in business. The first part of April as the industry tried to understand the impact of locked down in the U.S.
By May orders started to return.
As June drew near the industry was experiencing unprecedented demand that's consumer sheltering at home, we're investing in their existing pools.
Grading their pools or seeking a new pool to be built.
In fact dealers across the country began to experience a backlog of activity that resulted in many quotes for new pools being delayed as dealers are struggling to keep up with demand.
Has the most advanced transpired, we experienced some delays in our supply chain and our own manufacturing plants in April as we adapt it to a new normal that included social distancing within the plant.
This had a negative impact on productivity and affected our usual ability to deliver quickly which resulted in a higher than usual disparity between our selling rights and the industry sell through rate.
As the third quarter began we had our manufacturing ramped up and our supply chains in line and we work diligently to meet strong industry wide demand.
Well the pool season officially ends in September orders have remained healthy.
Albeit not at third quarter level.
Not only did pull see consistent linearity throughout the third quarter from a sales standpoint, we saw strong demand across all product categories.
Some products such as heaters have experienced above average demand as consumers are looking to open their pools earlier I closed them later, given we are all still at home for the foreseeable future.
Despite the higher than usual demand and a delayed start to the season, we've continued to invest appropriately in the business and have made good progress in furthering our automation offerings as well as expanding our overall product portfolio.
And it's been focused around the upcoming deal we regulation that we'll see further adoption of variable speed pumps.
We've been working closely with our channel partners on educating them on the upcoming regulation.
We continue to optimize our variable speed pumps to exceed the OE requirements.
In addition to introducing new select model a single speed pumps for category that will still be able to use single speed pump and limited application.
Well the pool season has been far from normal for the second year in a row, we still believe in the long term growth prospects for this attractive space.
Further we believe that the first half of next year should benefit from still solid demand. In addition to an easier comparison.
We will continue to build on our position as a leader in the pool industry and we expect 2021 to be a strong year for new product introductions for pentair.
[noise] water treatment, which was formerly called water solutions is more appropriately named given the breadth of our offering and the markets we serve within consumer solution.
Water treatment as a reminder is comprised of components and systems for the residential and commercial markets.
Well water treatment overall was up 2%. It has two very different stories to tell.
To level set water treatment revenue is derived from roughly 60% residential and 40% commercial markets.
Within the residential facing businesses, we experienced near double digit growth as consumer.
As consumers became more comfortable allowing dealers back into their homes to test their water and install new systems.
We have seen an increase in demand for our brand as consumers continue to focus on the water quality in their homes.
On the commercial side sales were down in the mid teens.
Which is a dramatic improvement from the declines experienced in the second quarter.
While restaurants, our experience is experiencing a slow recovery.
And traffic levels remained depressed our portfolio and focus on the quick service restaurant market.
I did some relief to the depressed overall market.
We have had some success with new offerings like total water management.
Which is a new seamless end to end service, where we specify and install high quality solutions and provide ongoing service to ensure consistent great quality water.
While in the early days of offering this new service, we're seeing strong interest from new and existing customers.
We expect the food service sector to remain challenged for the near term, but we are encouraged that we are not declining at the same rate as the industry and are identifying the new areas of growth. Despite the challenging environment currently.
Please turn to slide seven labeled Q3, 2020 industrial flow technologies performance.
[noise] industrial flow technologies or is he saw sales declined 3% as residential on irrigation flow through in the quarter. While the other two businesses continued to be negatively impacted by a global freeze in capital spending.
Segment income decreased 24% and return on sales declined 360 basis points that 13%.
Productivity was challenged in the quarter.
Simply as a function of a mix with lower margin backlog. In addition to lower revenue spread across a higher fixed cost base.
Residential irrigation flow grew 6% in the quarter following a 12% decline last quarter while.
While distributors are still not stocking across the board than than for some of the higher moving items continued throughout the quarter.
The business experienced gains across all channels, particularly in the pro channel and at retail with.
Within agriculture, our OEM sales were flat, while aftermarket returned to growth.
Commercial and infrastructure flow improved on a sequential basis as we continue to ship, our lower margin infrastructure backlog.
This mix negatively impacted the overall segment margin performance.
Particularly the drag on productivity.
Orders in both commercial and infrastructure were down in the quarter, but the quote funnel in infrastructure remains active.
Industrial filtration continued to be negatively impacted by a global capital spending freeze, but the big.
But the business saw the rate of decline improved sequentially in the.
In the larger food and beverage and sustainable gas businesses, we have experienced softness in both components and longer cycle projects.
The other niches within industrial filtration have also experienced softness you have.
Given this business overall is more exposed to capital spending we would expect the order activity to resume in early 2021 as customers revisit their capital budgets.
Please turn to slide eight labeled balance sheet and cash flow.
While our sales and income performance were encouraging in this quarter, we were exceptionally pleased with our cash flow performance.
For the first nine months of the year, we have generated over $450 million of free cash flow.
The third quarter benefited from strong pull sales spread evenly throughout the quarter and our ability to collect on those receivables.
We talked last quarter about the seasonality of our cash flow with the second quarter historically being the strongest period.
With a later start to the pool season, and the shift of business to the third quarter. This contributed to a higher than usual cash flow in the quarter.
We entered the quarter with a net debt adjusted EBITDA ratio of 1.3 times.
Which is at the lower range of where we have talked about our target level longer term.
Between our $900 million revolver, and no meaningful cash outlays outside of the dividend, we have more than adequate capacity to fund our growth initiatives, both organic and inorganic.
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 greater than our net income.
Please turn to slide nine labeled full year 2020 pentair outlook.
Following our strong third quarter performance, we have updated our full year sales outlook of approximately $2.95 billion and our adjusted EPS range is now approximately $2.35 to $2.40.
Below the line, we expect corporate expense to be $60 million to $65 million net interest other of approximately $28 million a full year tax rate of 15% and average shares to be around 167 million.
We expect free cash flow to be greater than a 100% of net income.
I'd now like to turn the call back to John to provide an update on some of our key strategies.
Thank you Bob please.
Please turn to slide 10 labeled our longer term aspirations.
First two years are focused on developing our new standalone strategy aligning our organization to our strategy, improving our new product pipeline and growth capabilities and developing the right operating rhythm.
During the topline organically consistently and predictably is our main area of focus let's start.
Let's start with growing the entire portfolio at least greater than GDP and delivering income from our core businesses, we realize that not all businesses will contribute evenly, but we believe that our consumer solutions businesses are well positioned to drive above average growth and our portal to building out additional legs of the business and creating our future in it.
Mission, we continue to focus on improving our commercialization process investing in our digital transformation deliver more effortless customer experiences and building our brand.
We're focused on accelerating fewer larger growth actions, including expanding our continent pool and building out our <unk> residential water treatment offerings.
And then I have tea, we're exploring a few promising growth areas around sustainable gas and smart solutions with our food and beverage business unit.
In addition to growing organically, we believe that there are attractive areas to add tuck in bolt on acquisitions. We expect this will primarily be within our residential commercial water treatment business and includes both products and services.
Additional pelican and rain software portfolio have allowed us to both accelerate our learning and improve our growth performance. We're currently focused on building a robust opportunity funnel given many of the businesses. We're looking at are smaller and privately owned.
We're also focused on driving productivity and cash flow, while optimizing our ROI see.
Jim The Pentair integrated management system is extensive tool kit that we must continue to deploy effectively. This includes not just our existing businesses employees, but also future acquisitions and hires we must ensure that PIMS is truly ingrained in our DNA.
Do not have a capital intensive business and we believe this asset light business model will help us further optimize our longer term investments.
We also believe there are further opportunities that our DNA spend that can become sources of self funding for our growth investments are.
Our aspiration to become a top quartile performer in our space is well within our control and we believe we are well positioned across our portfolio.
Please turn to slide 11 labeled living our win rate values through SG.
One of the foundations of our culture is our long standing commitment to our win rate values. These values help guide our organization as we work to achieve our highest potential here.
We are dedicated to holding ourselves accountable to the highest ethical standards as we drive to deliver on our commitments.
Our purpose and our mission help to empower employees to make a difference within and beyond the workplace as you can.
As you can experience at our recent 2019 corporate responsibility report sustainability is not an initiative what is core to how we operate the products, we create and the customers we serve our goal.
Our goal is to demonstrate leadership as responsible corporate citizen in every country and community, where we conduct business and where ever our products are put into use.
As we highlighted last quarter over 60% of our solution support water efficiency and roughly 75% of our solutions support energy efficiency.
Our sustainable gas offerings are supporting Seo to reductions and reuse across the industry.
Pentair, we're committed to building and advancing unity equity and inclusion in our company and in our communities. We have amplified our focus on diversity in leadership roles and bench strength, we're committed to safety and a healthy workplace, we're focused on philanthropy and we walk the talk as our effort spanned six.
Since then reached more than 9.5 million people in 2019.
We have strong governance practices, we have a diverse board of directors, which includes three female directors. The majority of our board as independent and our board is led by an independent Nonexecutive Chairman we also.
We also have an anonymous employee helpline to report compliance or other concerns with dedicated compliance and audit functions. We also have a code of conduct in place for our employees and their suppliers to help aligned around responsible sustainable business practices.
I would now like to turn the call over to Mariama for today, after which I will have a few closing remarks very another please open the line for questions. Thank you.
Thank you as a reminder, you ask a question is star one on your telephone keypad well pause.
We'll pause for a brief moment to compile the kewaunee roster.
Your first question comes from Andrew Kaplowitz with Citi. Your line is open.
Hi, This is a time, but neither on for Andy.
Hey, good morning.
With 46% growth in pool could you give us more of a breakdown of what you're seeing did you see an uptick from the normal 20% original equipment business and can you discuss any progress in capturing further share on the coolpad.
Well, we were very pleased this as we mentioned in the prepared remarks coming into the quarter.
Demand was high but making sure that we were able to fill that demand with extremely important and.
We were able to Matt ramp up manufacturing production significantly.
So again pleased with the.
Execution and.
I'm very pleased with all of the work of our front line workers.
The 46, 6% was really as I mentioned across the board across all product categories demand remain strong going into the fourth quarter and were.
And we're optimistic heading into 2021 as well.
No I would say that I think a good way to look at that would be to spread it over Q2 in Q3, because as we mentioned in bobs remarks and topped off in the last earnings call.
We were catching up and we still are catching up to what the the demand is in the industry as far as expansion. The pad I mean, Bob mentioned heaters heaters is a category that is substantially grown this year that would be another product that we probably added as far as the content on the pool and we're very pleased with our automation pull through over the last couple of quarters.
As well and we think we're getting an uptick in our automation sales is more homeowners enjoy the ability to manage their pool more remotely or utilize that as the control device through their their iPhone. So quite pleased with those two upticks and you know as as I mentioned, we ended the quarter, even catching up as well.
Thank you and just as a follow up for margin and I have to be pulled back sequentially despite higher volumes.
You're going in the second quarter can you talk about some of the factors that impacted margin and what you see as the outlook for margin or about Rightsizing the segment going forward.
From a an overall.
Margin perspective, and I also mentioned this somewhat in the prepared remarks is that we did have a catch up of items like our compensation related expenses in the quarter rebates were higher than than typical as the pool.
The pool revenue grew significantly again ramping up production expediting.
Inventory to make sure we kept up with the demand. So those were some of the head headwinds that we saw in the quarter I I would say that that Q4 from a drop through.
Drop through perspective does does return to more normalized levels.
Thank you that's helpful I'll pass it along.
Your next question comes from Steve Tusa with Jpmorgan. Your line is open.
Steve.
Steve Tusa your line is open.
Yeah.
Yes.
Next question.
Your next question comes from Brian Lee with Goldman Sachs. Your line is open.
Hey, guys. Good morning, Thanks for taking the questions.
Maybe as a follow up to the to the prior one a little bit if you guys could can you quantify a bit.
On some of the trends here heading into Q4 I know.
You got a point of pricing in Q2, but then nothing in Q3, and then and then productivity did swing from being kind of a good guide to a slight bad guy as well in the quarter.
Can you kind of talk about trends on those metrics in the context of Q4 expectations and then I guess separately any early read on those two heading into 21.
Yeah, I would say that.
From a pricing and productivity perspective, a lot of the.
The benefits in those two areas are somewhat mask pricing.
The rebate.
And then productivity by by some of the compensation related costs and some of the expedite.
Expedited and ramp up costs relating to pool. So below that it was very very much in line with kind of what we saw in Q2 and as I mentioned price and productivity do return to more normalized levels in the fourth quarter.
Okay fair enough. So so maybe.
Not to put words in your mouth, but a point.
A positive point on each if we're thinking about putting that into quantified terms for Q4 and heading into 21.
That would make sense at this point.
Okay Fair enough and then just a second question on the <unk>.
The guidance here would imply.
Low single digit revenue decline implied in for Q year on year can you give us a sense of.
How that breaks down between consumer solutions and I have to be and then also I know you guys just put up a very big re queue. So was there some pull forward activity or just trying to get a sense for.
The sequential is here into into Fourq you. Thanks, guys.
Okay I view last years Q4 is having having been a solid quarter. You know this years Q4 pool will continue to to grow significantly demand is good we satisfy the natural demand here in the fourth quarter. So.
So pool continues to do well the residential businesses continue to grow so outside of pool in the residential piece within.
Within IP, we continued to face headwinds on volume within our commercial and industrial.
And so that is what's bringing the overall growth rate down we're hard at work in terms of addressing productivity challenges within the IP business and.
And so as I mentioned again in my prepared remarks, we expect demand to continue for pool in the.
In the early part of the year and we expect that you know I have p. productivity will improve as well.
All right. Thanks, I'll pass it on.
Your next question comes from Steve Tusa with Jpmorgan. Your line is open.
Hi, good morning, guys.
Hey, Steve I don't I see.
Sorry for missing the missing about no worries about late this morning, I guess, just just getting out of that here.
Got it.
So just as we are I'm not going to ask you to make a call on the weather or cold It next year.
But when you guys kind of look out to what's coming your way.
In particular on kind of the regulatory driver.
When we turn the corner the next year or is this is this just like a really hard comp or is there something that kind of bridges you.
[noise] into future years, and can kind of keep this growth.
Growth rate at a reasonable level, obviously for pool, not not saying that 20% is sustainable bought.
Maybe just curious as to how you kind of gauge next year.
Okay.
This is Bob let me take a shot at it and then I'll I'll I'll, let John add to it he is probably better at predicting the weather than than that than I am but yes.
Well, we we we've mentioned that Q1 Q2, Steve faces easier comparisons obviously within the pool business.
Demand is strong in the fourth quarter and we expect it will remain strong.
In the <unk> as we go into 2021.
So feel feeling good about that you know as as we face the tougher comparison in the back half next year, primarily through three we should have a number of things going our way, we will have a number of new product introductions.
I'll have the deal we regulation.
We'll have a high of tea business, that's facing softer compares.
And hopefully an improved capital spending outlook on so those are the things that could help us in the back half, but in terms of the the first half of the year again.
Again much of it is pool and residential driven.
Got it.
Hi, Steve I mean without guessing the weather and co bid, we're expecting pool to have a very strong year next year as well based upon the dealer activity and the pools in the pent up capacity.
I don't know what it looks like by quarter, you had I think Bob's given you a pretty good looked at Q1 and Q2 will probably be easier compares in Q3, obviously with this type of growth maybe slightly more challenged in.
But at the same time will probably have the same desires of the dealers and the channel to ensure they the rebate is matched and I think we're expecting good year and what we're doing now is how do we get the IP margins Roland how do we get the year over year contribution is via T. Two to produce a lot of value next year.
That's how we're thinking about 2021, Steven we're excited about the way we expect to end.
And then just on on on the earnings Bridge productivity was a little weak this quarter.
Is there anything in kind of price and productivity in the fourth quarter that would.
You know influence the result, there or is it really just kind of a a function of the of the volumes.
It really is volume related you know as as was mentioned our guide six jet suggest that and down low single digits in the fourth quarter, a strong pool offset by continued chat.
Continued challenge in commercial and industrial but price and productivity will return to more normalized levels because they are facing the Q3 headwinds that we saw round rebates and catch up compensation.
What I don't quite understand about the fourth quarter is that you know I have t. wasn't that bad this quarter. I mean is there something that makes it worse next.
Next quarter year over year.
Yeah, I know I think I think we're starting to see the you know we had the backlogs and you know we carried in from Q2 into Q3, Steve that we were able to ship through that backlog that we have and now we're trying to build the backlog, but most of the orders that we've taken in Q3 are really shippable next year. So we're not seeing our our cost.
For a step up in what most of their products and I have t. and Q4.
And I think they're looking out in the horizon and trying to work more their deliveries in the next year. So we'll will weather the storm in Q4 would die of Ti, but I do think we're starting to build the order rates and coming off the bottom as we look at IP going forward.
Right. So a shift from kind of a week to Q into Threeq, you and then a I guess a step back down and it still seems like with the economy, where it is.
Now to go from positive tend to you know negative fives or negative four event is seems like a you know a real kind of step back and it doesn't seem like the trends in the business support that step back.
Yes, I hear you Steve I also just.
I know were unusual compared to the most in most of the industrial companies, but Q4 is not a highly strong quarter tear would mitigate that a little bit is the pool early buy and the shipments a pool into the channel.
Other than that we tend to have a slightly weaker industrial and yes, though makes sense all right Hey, Steve I know you've always been focused on cash I did want to mention that I always felt that linearity of operations and drive great cash flow and I just want to make a note that that came through this quarter.
Got it got it sorry, sorry, I meant to say great quarter, guys, great quarter on cash and I'd say that early thanks.
Matters.
Your next question comes from Brett Linzey with vertical your line is open.
Hey, good morning, guys congrats on the quarter.
Thank you. Thank you.
I appreciate the color on the top.
Appreciate the color on the topline for next year, but just wanted to focus on the cost side, you talked about some catch up here on incentive comp in the quarter, how does that roll into next year and then as you think about the temporary costs that come back some of the restructuring savings you're going to have.
That do rollover, what's what's sort of the netting effect of those next year and what's that in form for incremental margins for the for the total company.
At that time, you know we continue to be hard at work driving those productivity improvements I mean, the fact that.
Booking compensation this year means that won't be a headwind next year, which which to me as a good thing I had.
I had talked earlier about opportunities within DNA.
We had a benchmarking.
He done and.
It's apparent that our our g. in a structure is really sized more for a much larger company.
Post spin and so we have call it a three to four year runway here to now.
Not only improve how we spend our DNA dollars, but to get back closer to benchmark.
You know that study suggested that our our spend today is roughly a 150 to 200 basis points higher than than our peers and so we've got an opportunity within gionee.
Weve guided an opportunity within complexity reduction within the eye of tea business, primarily in skew reduction on Theres also opportunities within supply chain and procurement to become more efficient.
So plenty of things that we're working on now that that should drive margin expansion next year.
Okay, Great and just as a follow up on the idea of T. margins you mentioned the negative mix in backlog was that a one quarter year over year event or should we expect some drag there for another couple of quarters.
Before it starts to normalize.
We're seeing a little bit of mix challenges within the commercial and infrastructure space.
We are hopeful that that and normalizes going into 2021.
Okay, Great I will leave it there and pass it along thanks guys. Thank you.
Your next question comes from Joe Giordano with Cowen Your line is open.
Hey, guys. Good morning, good morning.
Morning morning.
Hey, I just wanted to kind of follow up a little bit on the regulatory pushing.
Pushed into next year and how do you think.
Never bet the positive benefits on a price that you're going to get versus like maybe the volume benefit that you'll get ahead of that from pull through a single c., but how do you how should we think.
How should we think of all of this in totality and maybe are you entering 21 with a higher level on a visible backlog into the first half.
Well it to two different answers I mean, certainly we were heading into next year.
Still catching up with the demand that we feel the dealer is trying to satisfy.
Satisfied from the consumer so we feel like we're we're going to be catching up for several quarters on on the demand pull through and pool as far as it relates to deal we.
I'm always cautious on these transitions as to how the the industry.
Reaction and smooth as these transitions over time, so I don't think there is a huge windfall necessarily in any one particular quarter Ida I think plays out thoughtfully overtime.
People work around state by state and building out the inventory and still putting in the older product the March.
The margin actually the operating margin or the drop through margin on the variable speed is slightly lower but the variable speed pump and itself is almost 1.8 times more expensive than the single speed. So overall from a content and a simplification of our business model and giving people quite frankly, a better Paul we think those things work that way.
Out over 2021, and 22, but I think it would be a smoother transition over those periods.
Fair enough and I as Ti as you look through your your total company new product introduction being more from very focused on some of the rosy applications and your capital deployment likely targeting there.
What's the business evaluation process looking like on IP like how core all these businesses are you thinking about that has that changed at all over the last.
Two years.
Well listen I, certainly understand that the margins and I have to be at this point in time are not where we want them. They are definitely not where leadership wants them, but I do want to compliment. The team. This is a truly global business.
This is a hugely complex business, it's an engineering awarded business and if Cogut has been hard from a manufacturing standpoint across one part of the portfolio. It's certainly been really hard to the eye of team and I couldn't be more proud of how they stepped up and they're answering the bell as far as getting their customers. The products. There's a lot of inefficiencies in the way that you ship product or you delivered.
Product.
In an engineered to order business when you've got challenges as well.
As we are experiencing with stayed home orders and Covance. So again I just want to say that I think some of this is going to work its way out over time naturally as we get better and working through the new rules. The second piece is we're seeing the activity around the focus in the portfolio. We believe we have a really investable industrial business, where we provide technology, especially.
She's smart technologies, a membrane technology to a lot of sophisticated.
Sophisticated customers around the world that we are getting a lot of momentum on I'll cheat related those products are also participating in Seo to recovery and Seo to use that's getting a lot of a push from regulatory isn't it's an environmentally friendly products. So really excited about some of those growth aspects. We've got a good ROI business.
You know, it's not going to be a rapid grower, but it's got high margins and contributed nicely to the the cash and the PNM and and we got some project challenges and see an eye, but we got a new leader there and we're focused on what we need to do to to right. The ship there and make sure that we're going more after the aftermarket products at less after the projects. So I think we're going to see recovery in 21 in a meaningful way.
In margin and I have t. and I think over the longer haul. This is going to be a good contributor to pentair portfolio.
If I could just sneak one last one in for Bob.
You in there about six months now obviously interesting time to be starting a job anywhere just curious as to are you worried about what you thought going in in terms of how you know how to budget and how to do this process like what's gone according to plan and a little bit different and what kind of changes you are you kind of adapting to.
Yeah. Thank you for asking that it's been a great decision from my perspective to join Pentair I could not be more pleased.
With the people that I work with on a day to day basis and the opportunity for for the company. So.
So for me that I I have joined the company that has a great foundation, but there.
But there are opportunities for for improvement on the things that that I'm probably.
Probably more focused on is.
Around helping to drive consistent.
Consistent organic growth, we've implemented a number of processes around driving growth product category level.
We're developing better analytics, so so think of analytics of product.
As diverse as as opposed to necessarily just in ALS.
We have opportunities to drive.
To drive efficiencies in March.
On margin expansion.
And.
I'm excited about both consumer solutions and I see so from my perspective.
Really great future here at pack there.
And look forward to the to the start of 2021.
Okay.
Your next question comes from Rob Wertheimer with Smelliest Research Your line is open.
Thank you good morning, everyone.
Turning.
So you've touched on this in a number of different ways, but just to just to sort of get a broader overview. You mentioned just trying to catch up with the strong demand that's been going on with pool can you just sort of talk across the segments on backlog Slas channel inventory.
Versus normal weather, mostly fully caught up or whether the channel has with that much in some good just sort of characterize that across segments. Thank you.
I would say that the catching up is Joe.
Generally a theme that applies across the portfolio I think right now we believe that inventory levels are.
Correctly right sized with the.
With the exception of what we think.
Still a channel that need more inventory for pool, but I think most of our distributors and dealers are being prudent even in areas like commercial filtration, where there hasn't been any pre stocking ahead of the expectation of restaurants opening or hospitality opening so.
So I think right now we're seeing a really nice situation, where their demand is equal to the shipments that were experiencing.
Okay. That's perfect. If I may just ask a little bit more of a structural question you mentioned.
Consumer water treatment, how dealers are able to get in the homes again sort of stuff and I know you're working on education and I'm, just making people aware of all the good solutions that there are from the home can you just touch a little bit on what the structural growth drivers are there whether its signing up dealers or how are you going to manage not how you really for you know.
Take advantage of a reasonably large opportunity. Thanks.
There has been tremendous search demand so people on the internet searching for water filtration water treatment needs and pentair isn't a brand yet that you recognize if you do that and we are going to be and the consumer Poland demand that we think people want is the right solution for their particular.
Their need water is not consistent both from an input across the world and it's certainly not consistent from the way that you desire your water and Pentair has all the technology capability to take whatever impact water, you have and deliver the quality and the taste of the water that you want and that's where we think the biggest opportunity for pentair is and we think we have to build.
The channel.
In the consumer poll, the demand and we have a lot of new products. We're launching next year to do that to make you aware and the second piece would it be make sure that were aligned with our service channel to be able to meet the demand and then give you. The technology you need so we've been at this for a couple of years, we've learned a lot from the Pelican and the AUC, we on acquisitions and we're poised to really make a lot of progress and.
2021, and 2022 around the residential water treatment side. So we're excited excited about the progress excited about the learnings and excited about the future.
Excellent. Thank you.
Your next question comes from Deane Dray with RBC capital Your line is open.
Thank you good morning, everyone loads.
Hello, Dean I think.
It would be interesting hearing some more about this total water management initiative you have in commercial water treatment, just probably the sound of it it would seem to be some or what you're doing at one of the major coffee chains globally. So could you size for us what the applications would be what the operator.
He is what kind of investment thanks.
Yeah, Deane I mean that that's really in reference to their our franchises and or.
Restaurants.
You know mainly that don't necessarily the higher wealth or the company owned stores in which franchisees are buying a lot of equipment, and we're really giving them an expertise and allowing them to lease their solutions from us right and really building up.
Connectivity between us and that end customer and renting them or leasing them. The solution instead of them buying the solution. That's what total water management is about the.
Great and is there a been investment upfront investment that you need to be making and can.
Can you give yeah, we're obviously pretty yeah, we're obviously, putting that unit into the field and instead of collecting the revenue from that unit at ones were connecting that revenue over time.
As a way to promote our solutions. So I mean, it's in its infancy right now several million dollars of revenue theme and we just want to make sure. It's a solution that we have out there for our our customers if they choose to rent that model and we're doing them and aiotv enabled so we know what they're being used and how they are being used and we have the ability to.
Work with that partner to make sure they are optimizing their their water experience were excited about that.
Good to hear and then on capital allocation, just given the strength in the balance sheet given the cash.
Cash flow and see the line of sight on your cash flow, where do buybacks fit and a priority stock sitting right by our calculations at the low end of its relative PE range for last three years. So it really does look attractive if you want to make that case. So just.
Update us on buyback plans.
From a from a buyback perspective.
We start most years with the goal of buying back roughly a $150 million of of of shares. This year we have.
On a $115 million in the first quarter and then we suspended our buyback period, our buybacks as we assessed freak.
Free cash flow and liquidity, obviously as as free cash flow has been robust the last two quarters.
We you will see in the Q later today, we've we've removed the suspension around buybacks and certainly have that opportunity as we close out the year and move into next year.
Great that makes sense. Thank you.
Thanks, Steve.
Your next question comes from Jeff Hammond with Keybanc.
Your line is no hey, good morning, guys.
Good afternoon.
Doing well just wanted to go back to pool and kind of the momentum in the fourth quarter. I mean, I think if I hear you. You. You you are seeing strong underlying demand and you expect that next year and inventories are still low. So just any read on you know further catch up on inventories in the fourth quarter and what your distributor.
Those are saying about you know about early buy.
I'll I'll I'll start on that one I again, I view Q4 is being you.
You know satisfying natural demand, so really not dipping into early buys which which is a good situation as as we get into 2021.
So our Q4 is all about you know bill.
Delivering on on the.
The the orders that we have.
That then set ourselves up for a good start to 2021 as we deliver on our early buys.
And more of the standard orders that will come.
And then is it fair to say like underlying demand as you know if you kind of put to Q3 to Q togethers like high single digit as kind of a deal.
The order run rate into Fourq.
Oh, I think it'd be higher than that Jeff I I I for sure believe it's double digit.
As far as the underlying demand and.
Absolutely double digit then are you doing something different with early by incentives to disincentive early buyer.
No.
Okay.
Okay, and then just quick on I have to you know in your presentation.
In your presentation, you talked about growing the entire portfolio above GDP, which would obviously include I have t., but in the earlier question the focus kind of continued to be.
You know more on the margin and margin improvements. So just talk about you know what.
What changes to kind of drive the.
Growth profile for that segment going forward.
Yeah, I think its focus I mean, there are some of these businesses that you know just doing the basics is going to generate 2% to 3% of growth and that's okay. I think some of them have margin opportunity and let's just do the 2% to 3% consistently and predictably every single quarter and let's do a well there's other businesses I mentioned sustainable gas and.
Our I O T offerings, and FNB that have an opportunity to be high single digits over over a cycle.
And that's where we want to focus and so its really disciplined Jeff I you know when you when you have projects in front of you can chase whatever projects you want and by the time you realize the lower margins.
You are challenged in some of that still exist in this portfolio and we're working through that.
And that's what we're don't want to do anymore. So we want each business to play its role and pentair and by choosing what that is and making sure. They are focused on it I think they can be a big contributor to pentair as outcomes.
Okay. Thanks, guys. Thank you.
Thank you.
Your next question comes from Scott Graham with Rosenblatt Securities. Your line is open.
Hey, good morning, very nice quarter guys. Thanks, Scott appreciate that morning.
So I wanted to understand a little bit about and I guess, maybe I'm just not.
Just put a finer point on this for the fourth quarter.
The low end of EPS guidance.
Just a quarter are very similar to the second quarter, yet your highest margin businesses.
Demand is up double digit you're seeing productivity is going to be better tax rate goes little bit the other way perhaps.
Maybe there's some cost to push things out the door because of Covidien bottlenecks, but.
Yes, there is there something that I'm missing here I mean should we is there like a flood fractures in the fourth quarter No. Scott I mean, it is simply that the hardest thing for companies today is to produce a low end of the guidance range that incorporates what you think a hiccup related to cove. It could be to you that that is it we're guessing at that end of the range to do.
Our second wave or third wave RG, one described Colgate might impact pentair, we know nothing today that would suggest that but when you put a range out there we want to have a range that we can address throughout the quarter, that's simply what it is Scott.
Understood. Thank you for that further.
A further question about your capital allocation, but maybe more from the M&A side, you talked about water treatment being an area of potential targeting.
2021, now that you know your residential businesses are doing better you have a better. So you have a better understanding of what consumers are buying off of your kind of very long and elaborate study of consumer buying habits and desires.
21 be a pretty big year for M&A.
You guys in water treatment.
I hope so I mean, we're continually looking at options Scott I'd.
Actually look at M&A as an accelerator to what we can do organically water treatment is definitely a focus area I think we're that's where the funnels more robust and I certainly hope it's accelerated.
Got it last question productivity number obviously being a bit of a net number was depressed by the things that you guys talked about.
What was the gross productivity for the quarter.
It was more in line with what you would have seen in Q2.
So so and then again I had mentioned that that will return in the fourth quarter. So.
Productivity continues to be a consistent.
Enhancer of of the margins, it's just unfortunate that debt.
In Q3, we caught up on compensation.
And on the pricing side.
Had had higher rebates, but.
But behind the scenes or underneath that are gross numbers very very much in line with what we saw in the second quarter.
Right, which I also know I think includes some of your productivity cost out actions that you talked about two quarters of a quarter and a half ago and I guess I'm wondering have we enacted any of those did did we need to enact any of the you know call. It 80 plus million dollars that you identified is the potential to.
Lower cost this year.
Yes, you know we our goal was to take out cost in line with the volume drop and we've done a reasonably good job. There are a lot of hard work has gone on within manufacturing and supply chain.
We continue to spend less on what we call purchase spend discretionary spend we've re negotiated we took a hard look at policies across the board from travel and entertainment all the way to.
All the way to.
You know, how we we train people recruiting relocation and so those those are finding their way through as well and.
On a full year basis, well will help 2021.
Understood. Thanks appreciate it.
Your next question comes from Nathan Jones with Stifel. Your line is open.
Morning, everyone.
Good morning.
Great cash flow quarter that John Thanks.
Thank you thanks for noticing.
No.
A follow up here on pull you guys got off to a slow start to the selling days in into Q nine Jane around some of the bad weather in southern States and the Big States, where coal installations.
Happened and last year, you were pretty cautious telling us that they was labor constraint is difficult to catch up with some of those things as the year went by.
This year in Twoq or Threeq, you have 20, you're probably closer to 20% overall growth can you kind of square those comments from last year to this year, where where you know you weren't expecting to be able to catch up because of labor constraints in in the later part of 2019 and yet the industry has been able to support.
Such fantastic growth.
This year over the last six months I'm sure. There was some inventory restocking I know you said pull pull call up and others were selling out of there on EBITDA or into Q I'm sure you were catching up with some inventory refilling for them in Threeq here, but just if you could square those comments.
Yeah, I can eat and let me just give you some the way I think about it I think given the weather we know happened this year because it was a good weather years, let's say nothing abnormal happened against US we would expected to double digit full year.
Primarily because of the.
Challenges, we had last year and where we thought overall inventory was I mean overall double digit I think let's say, we're closer to mid teens.
I don't think we're seeing you know more than the five point tailwind in my opinion for what would be the co bid on order rates because I do think there is a constraint in the industry anyway, I think what we're hearing and feeling is that demand is going to extend and that extension will be managed.
Managed through the capacity that you're mentioning so that's why we are sitting here today relatively confident we're going to have a good year next year.
It does seem like there's still plenty of demand lift going into next year to continue to see growth in the pool business in 2021.
I know, it's a long way out to look to 2022, but do you think your we are pulling some demand forward, there and potentially maybe you're below average growth for a year or two after we get past coated if that ever happens.
Nathan I would not get I haven't figured I'd point 21, yet so to too far out just way too.
Way too is that got coal good I got elections, there's all kinds of things that have to unfold first but I think what they're seeing is people I think people are realizing vacations might not be on the horizon and they're choosing destinations for second homes that they can retreat to add.
I think that it's been a unique paul across the entire industry and most of those states are where a pool in the backyard I.
I think that's a fair fair.
Valuation I just want to follow up on Jeff's question about the grow all your business greater than GDP.
There's a number of business, primarily the industrial businesses that but you know the last number of years of not being able to do that.
Do you have different strategies that you're going to deploy there now to get those pieces up to growing GDP and what are the plans for those businesses. If they are if you're on able to get those up to growing at GDP levels.
I think you know just to put in perspective, we're product categories. It slipped below our businesses and there's some you know htwo.
23 of them and when we talk about that we're talking about averaging and if something is not able to grow we would look at how it's doing across that cycle and is it still doing well relative to the cycle that it's in we want to make sure predictably and consistently that we can deliver that core every single year and that it starts with a positive contribution.
To our shareowners. The second piece is now let's talk about the strategic growth plan top of it and we're trying to get both and that's not something we've done consistently over time and I want to be consistent with both of those you need a stable core growing and then a few incremental things you could put on top of it and then if you could put M&A on top of that now you're really.
It really light it up and that's our goal.
And just one clarification I think I heard you say you believe that the inventory levels in per pool in the channel are balanced at the moment.
No I think we're still catching up were balanced across that portfolio that should open cool. Okay. Thanks very much for taking my questions. Thank you.
Your next question comes from Andrew Obin with Bank of America. Your line is open.
Hey, Good morning. This is an issue on for Andrew Obin. Thanks for squeezing me in.
No problem.
Were there any supply chain adjustments made in the quarter to deal with.
The outside pulled man and the catch up if you could just.
If you could just give some color on the overall state of.
Your supply chain that would be very helpful. Thanks.
I'll take that.
We've talked about emerging from covert stronger I would say that that's an example, weve added second suppliers, where it made sense you know closer to the markets we serve but.
But generally speaking Q3 was a quarter of ramping up manufacturing production, adding a second shift adding more people. So I do think weve addressed the supply chain challenges, but also given us more ops.
More optionality around manufacturing production.
Okay, Great and then my last question is just.
With the federal election coming up.
Potential change in administration.
Have you guys. Thanks.
Be any impact your business.
Potential green new deal.
Thanks.
Well we're [laughter].
Finally, we are learning how to balance risks or opportunities.
All the time between tariffs and co bid and now election.
I think you know we are sustainable solutions provider. So we would expect to be.
To benefit from any movement in green initiatives or societal changes that affect the environment in a positive way.
Okay. Thanks, so much guys and congrats on the quarter. Thank you.
Thank you. Thank you.
Your next question comes from sorry did ski with Jefferies. Your line is open.
Hi, Thanks for squeezing me in so.
So, we'll probably patients that pull demand remains strong next year. How are you thinking about the opportunity to push through pricing, which is really not contributing to sales according to given rebates.
Yeah, I think listen we we as Bob mentioned, we're deep into planning cycle right now and one of the key inputs to any pricing decision is what are you seeing with inflation and what's going on with suppliers material and.
I'll make those assessments and based upon those assessments will make sure that we're pricing effectively. So this is the time, we do that and if we need to make.
Make adjustments we make adjustments.
And then just following up on 150 200 basis points and Genie opportunity can you touch on how you're thinking about the timing on that how we should think about it if any benefit into next year.
We think of it as a as a three year runway or less linear so so not not back end loaded so improvement and again as as the improvement in margins will come in two forms that will be some cost out but also avoiding cost as revenue ramps. So.
I think it's good that we've got a three year path here and we're hard at work at.
Operationalizing that improvement.
Hi, Thanks for taking my questions.
Thank you.
Your next question comes from Julian Mitchell with Barclays. Your line is open.
Hey, good minus attrition on for Julian and maybe just one more follow up on seasonality I know you mentioned, perhaps there's some contingency in the guy that implied Q4 guide suggests sales decline and a high single digit sequentially and versus normal seasonality at mid single digit increases and so you mentioned I have t. is kind of normal seasonality, it's typically down into the fourth quarter.
There should we expect consumer to follow normal seasonality as well I know you said, you're satisfied and Thats, what the man, but I think that typically.
Quarter over quarter into the fourth quarter.
Yeah. So so simply stated I think our normal seasonality.
Seasonality is Q2 is our strongest quarter.
Followed by Q3, Q4, and then Q1 and pool is the strongest in Q2 and Q3 because of how it ramps for the season and then it usually has what's called an early buy which is a level loading of the distribution base. So that we can maintain our employment levels and satisfy the industry demand other than that we tend to see a tail off.
With you know the Christmas season, meaning that we've only produce probably to mid December and shipping products in mid December so the NAV.
The natural tendency is to Q4 to be a little soft across our particular.
Lines as Bob mentioned, we had a good Q4 last year and so I have two businesses are still experiencing that headwind on a year over year basis, that's simply what the challenges in Q4.
Okay got it. Thank you and then just maybe one follow up on free cash flow given the strength to date and as we look out how should we think about working capital movements and maybe free cash one to 2021 do you think it's possible to grow free cash flow next year can you probably have to build some supine pool.
For for free cash flow again, our starting point is 100% of net income and that that will continue to be our goal I mean to me. It speaks to the quality of the earnings that we have here at pentair.
Well one thing is as John alluded to was there is nothing like linearity to improve free cash flow either from a quarterly perspective or from an end quarter perspective, so with the strength that we're seeing in pool. Our factories are busy from the start the quarter to the ended the quarter on that revenue that comes in earlier.
The quarter allows us to collect that by the.
By the ended the quarter. So I would say linearity will continue to be in our favor. We will continue to drive free cash flow at or higher than the net income and all.
And also remain disciplined around things like Capex.
Got it thank you.
There are no further questions at this time I will now turn the call back over to John Stone for closing remarks.
Thank you for joining US today, we continue to believe the Pentair has a strong foundation and portfolio of businesses to build upon we have a strong purpose mission and vision focused on delivering smart sustainable solutions that empower our customers make the most of life's most essential resources. We believe that we are an attractive spaces that are expanding we are.
A leader in the pool industry and our water treatment business is helping us become an even more integral player in both residential commercial water treatment.
We believe we have the right enterprise strategy businesses talent and culture, where I went right values to our pentair integrated management system, we are enabling all of our employees to continuously improve.
Finally, we continue to prioritize providing superior customer experiences and delivering more predictable and consistent results. Thank you for your continued interest very I'm glad you can conclude the call. Thank you.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect [noise].
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