Q4 2020 Pentair PLC Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by and welcome to the Q4, 'twenty and 'twenty Pentair earnings Conference call. All lines have been placed on mute to prevent any background noise and after the Speakers' remarks, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone keypad, if you require.
Operator assistance, Please press star zero and I'd now like to turn the call over to your speaker today, Jim Lucas. Thank.
Thank you. Please go ahead.
Thanks, James and welcome to Pentair as fourth quarter, 'twenty and 'twenty earnings Conference call. We're glad you could join US I'm, Jim Lucas Senior Vice President Treasurer, and Investor Relations with me today is John <unk>, Our President and Chief Executive Officer, and Bob Fishman, and our Chief Financial Officer on today's call. We will provide details on our fourth quarter and full year 2020 performed.
And as well as our first quarter and full year 2021 outlook as outlined in this morning's press release before we begin let me remind you that any statements made about the company's anticipated financial results from forward looking statements subject to future risks and uncertainties such as the risks outlined and pentair. Its most recent form 10-Q form 10-K, and today's press release.
Forward looking statements included herein are made as of 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 webcast is accompanied by a presentation, which can be found and the investor Relations section of Pinterest website. We will reference these slides throughout our prepared remarks any references to non-GAAP financials are reconciled in the appendix of the presentation.
And we'll be sure to reserve time for questions and answers after our prepared remarks I would like to please request that you limit your questions to one and a follow up in order to ensure that everyone has an opportunity to ask their questions I will now turn the call over to John.
Thank you Jim and good morning, everyone.
Please turn to slide number four titled Executive summary.
I would first like to say how proud I am of the entire pentair organization and the contributions everyone made to help deliver on our commitments to all of our stakeholders and a uniquely challenging year.
Our teams navigated this unprecedented environment and I believe that our company will emerge stronger as a result.
I would also like to take this opportunity to thank all of our global channel partners and suppliers for their patience and efforts and working with us and our consumers to meet our commitments. Despite the effects of the ongoing pandemic.
We were pleased to deliver 2% sales growth and 5% adjusted EPS growth for the year.
We generated over 500 million and free cash flow and returned over 275 billion to our shareholders through dividends and buybacks.
While navigating this uncertain environment, and making sure our employees and customers were safe as possible, we continue to invest and our top growth priorities through digital transformation innovation and technology.
During the year, we successfully launched both the pentair home and Pentair dealer apps. We also launched a brand redesign and the pentair dotcom website, allowing for better cross functional use and microsite enablement based on feedback and how people want and interface with us.
We also were able to fill out our management team by hiring and Bob is our new CFO Mario has a new leader for consumer solutions, Steve as our chief supply chain officer, and appointing Jerome Pedretti is our Iot segment leader.
We have been busy building out capabilities throughout the organization, including adding over 100, Iot engineers and 2020 to drive connected solutions for consumers and.
And for our OEM customers.
We introduced new products like fresh point, and easy flow and our residential P. L. U category, our connected solutions salt sensor for installed water Softeners and advanced our leading sustainable gas solutions offering to recover and we use methane and C. O two as well as introduced our Brewers and digital services to remotely optimize our beer membrane. So.
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By the end of 2021, we expect to have over 20, new Iot products and the pipeline as we continue to move our consumer solutions platform to smart solutions.
We also made great strides and advancing our ESG stewardship, most recently appointing our general counsel Carla Robertson to the additional role of Chief Social responsibility officer, we recently.
We completed a comprehensive ESG assessment to identify key topics of importance to our shareholders customers and suppliers employees and communities. We are planning to announce specific targets, including science based environmental targets and 2021 to further advance our social responsibility goals and progress.
We have spent the past few years repositioning our portfolio and making investments to build out the pentair brand and create a better experience for consumers to help solve their water treatment needs. While we benefited from a residential focused portfolio and 2020, we believe that the momentum will carry into 2021 and beyond.
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 and our overall strategic position.
Thank you John.
Please turn to slide five labeled Q4 2020 pentair performance.
During the fourth quarter, we delivered sales growth of 5% and core sales growth of 3%.
On a core basis consumer solutions was up 8%, while industrial and flow technologies declined 3%.
I'll discuss the details for each segment on the subsequent slides.
Segment income was flat, while adjusted EPS increased 3%.
Our tax rate was 14% while net interest came in at $5 million.
Price improved from the third quarter.
Activity did not read out in the quarter due to the fact that we paid bonuses. This year and we continue to see some of our facilities disrupted with higher absenteeism due to COVID-19.
Please turn to slide six labeled full year 2020 pentair performance.
Given the unusual timing of 2020 by quarter, we thought it would be helpful to look at the full year results to better appreciate the progress we were able to make and these challenging times.
For the full year core sales increased 1% with consumer solutions growing 7% and.
And industrial and flow technologies declining 6%.
Segment income was flat for the year, while adjusted EPS grew 5%.
Price and productivity, mostly offset inflation, but as we highlighted and the third quarter, the robust growth and pool led to higher than usual and rebate activity that lowered price.
We expect price and productivity to offset inflation going forward.
Given the challenges that we faced in 2000 and 'twenty, we were very pleased to deliver overall growth while still investing for the future.
Please turn to slide seven labeled Q4, 2020 consumer solutions performance.
Momentum for our consumer solutions and the third quarter carried over into the fourth quarter.
For the quarter sales grew 10%.
Net income increased 9% and return on sales was essentially flat.
Considering the challenges the team faced and the first half of the year. The fourth quarter performance was a strong close to a remarkable year and we believe validation for the growth prospects of the segment's portfolio of businesses.
Paul experienced tremendous growth of 15% in the fourth quarter and slightly above that for the full year.
The total pool industry, we're seeing significant tailwind from the COVID-19, pandemic, which force consumers to stay at home and increase their desire to invest and their backyards.
And this trend has continued into 'twenty 'twenty, one as demand for new pools and pool maintenance remained strong.
We believe the business entering 2021 with strong momentum.
While the market dynamics assistant and the growth of the pool business.
And not having been achieved had there not been previous focus on increasing dealers and driving new products into the industry.
That strategy allowed pool to reap the benefit of the remarkable growth in 2020.
This past year, we spent time building the foundation of data analytics.
Exactly around the performance of dealers and channels.
This advancement allows the leaders and the business to better dissect the areas, where the business is winning and where there are opportunities to improve.
Specific plans are being developed out to the individual dealer to accelerate growth and core product areas.
The data shows there is still growth potential and the car, even though the business has seen significant historical growth.
Water treatment grew 4% and the quarter with strong residential growth being offset by continued weakness in commercial.
In particular, we saw the second consecutive quarter of growth in China, which we believe is a positive sign that the markets hit earliest by the pandemic have stabilized and are showing potential signs of a sustained recovery.
Residential components posted high single digit growth with strength and all geographies and product line, we saw very strong growth and our key valves product line, which is a positive indicator for overall industrial industry growth.
We launched the <unk> connect and valve during the quarter and are seeing early signs of market acceptance.
We believe the overall north American industry as well as Europe continues to benefit from consumer focus on in home water quality.
Our residential systems and services businesses, both delivered strong double digit growth.
And our investments to build out these businesses are beginning to read through.
We had two new product launches during the quarter, our salt level sensor and the fresh <unk> easy flow point of use filtration system for existing faucet.
In addition, we recently announced the acquisition of erosion, which builds out our point of view product offering and complements our already strong point of entry portfolio.
Equally important we believe Roche and its product offerings allow pentair to participate and an even more meaningful way to help tackle the growing challenge of single use plastic bottled water and its impact on the environment.
Our commercial systems business was down low double digits and the quarter, but this was an improvement from the third quarter performance and the sharp drop off we experienced in the second quarter. When many of our customers were forced to close due to shelter and place requirements.
While our sales and it's profitable product line had been down for three consecutive quarters. We are mildly encouraged that we have been outperforming the market we.
We attribute this in part to our strong cartridge replacement mix of business and also finding new business opportunities such as our total water management program, we discussed last quarter.
While we have one more tough comparison and the first quarter, we expect commercial systems to continue it to recovery and 2021.
Please turn to slide eight labeled Q4, 2020, industrial and flow technologies performance.
Industrial and flow technologies, or I S. T soft sales declined 1% as residential and irrigation flow delivered double digit growth and the quarter. While the other two businesses continued to be negatively impacted by a global free and capital spending.
Segment income decreased 22% and return on sales declined 280 basis points to 10, 6%.
Productivity was challenged in the quarter, principally as a function of a mix with lower margin and backlog and addition to lower revenue spread across a higher fixed cost base.
I S. T has also begun some notable activities aimed at reducing complexity and reducing costs, which include the discontinuation of several product line.
Residential and irrigation flow grew 12% and the quarter following 6% growth last quarter.
And this business normally does not experienced strong demand and the fourth quarter, but similar to our other residential facing businesses and consumer solutions and there was broad based demand for residential and irrigation following the slowdown in demand experienced during the second quarter.
We saw product lines contribute to the strong fourth quarter performance.
And we remain cautiously optimistic entering 2021.
And channel inventory levels are still slightly below historical levels.
Commercial and from infrastructure flow declined 9% and the quarter as the business continues to experience soft demand.
The business has begun to focus more intently on complexity reduction, resulting and the decision to exit several product lines.
Focus within C&I remains on improving operational efficiencies. In addition to building up the backlog with higher margin business.
Industrial filtration continues to be negatively impacted by a global capital spending freeze as seen in the 8% sales decline in the quarter and.
In addition to the broader capital spending free as many of our industrial customers.
And negatively impacted due to worldwide COVID-19 related locked out.
We are seeing sequential improvements and we are starting to see some modest increases in orders exiting the quarter, resulting in an increased backlog.
Encouragingly, we have begun to see and increase in orders for our sustainable gas solutions business.
Please turn to slide nine labeled balance sheet and cash flow.
One of the biggest positive developments in 2020 was the prodigious cash flow generation, we experienced free.
Full year, we generated $512 million of free cash flow, which was well north of 100% conversion for the year.
One of the biggest contributors to our strong free cash flow was the linearity of pool sales and the second half and a minimal amount of early buy and the fourth quarter.
This resulted in a dramatic year over year improvement and receivables collection.
We also showed further strengthening of the balance sheet and in the year at one three times Levered.
And the majority of our revolver available.
During the year, we returned over $275 million to shareholders through dividends and share repurchases.
Last December we announced that our board authorized a new $750 million share repurchase authorization and there was only a $100 million remaining under our prior authorization.
In addition, the board approved a 5% increase and our quarterly dividend to be paid and the first quarter two.
2021 marks the 45th consecutive year that pentair has increased its annual dividend.
Our balance sheet remains in excellent shape to fund, both organic and inorganic opportunities and as always we plan to remain disciplined with our capital.
Please turn to slide 10 labeled Q1, and full year 2021 pentair outlook.
We are initiating first quarter and full year 2000, and 'twenty guidance for.
For the first quarter, we expect sales to grow 7% to 12% and adjusted EPS increased 6% to 21% to a range of 55 to 63 cents.
Mark just historically and important month for the quarter.
And we are still managing through sporadic and isolated COVID-19 related disruptions due to the recent global spike and infection rates and are doing our best to ensure the safety of all of our employees.
Below the operating line, we expect corporate expense to be approximately $16 million net.
Net interest of $6 million to $7 million.
15% tax rate and a share count of around $168 million.
For the full year, we expect sales to grow 3% to 5% and adjusted EPS to increase 5% to 10% to a range of $2 60 to $2.75.
We recognize that our first half has easier comparisons that become more challenged and the second half. However, we expect continued demand and our larger residential focused businesses.
And remain cautiously optimistic for our commercial water treatment business to show improvements throughout the year.
We remain focused on investing and our most attractive businesses.
Below the operating line and we expect corporate expense to be around $65 million net interest to be and a range of 20 million to $23 million, our tax rate to be around 15%.
And the share count is expected to average near a 166 million shares for the full year.
Capital expenditures are expected to be around $65 million, while depreciation and amortization is expected to be around $80 million.
We continue to target free cash flow to be greater than or equal to net income.
I would now like to turn the call back to John to provide and update on some of our key strategies.
Thank you Bob.
Please turn to slide 11 labeled 2021 execution expectations.
Our focus for 2021 does not change from last year and so we're focused on delivering on our core while continuing to build out our future.
As we enter 2021, our residential business has remained strong and we are encouraged to see ongoing signs of stabilization and our commercial businesses. Although we have not yet seen indicators of year over year growth, we're expecting recovery likely and the tail end of 2021, we.
And we believe that our smaller exposure to industrial capital spending will remain hindered for now.
We have a long successful history of price realization across the majority of our portfolio and we will monitor closely the rapidly evolving inflation environment and respond. Accordingly, we are also pacing our growth investments and have the ability and modulate as needed, but we prefer to remain on offense and build on the momentum of the past two years, we recognize that we.
We have opportunities to address our cost structure, particularly with and <unk> and we plan to act as appropriate.
And we discussed last year, the G&A benchmarking efforts, we undertook and identified that we have room for improvement.
We are well underway in terms of our G&A efforts, there and looking closely at our overall global enable them and structure.
Our goal is to deliver transformation plans that we expect will drive significant hour west expansion by 2024, while funding our strategic growth initiatives.
As we look to the future our priorities aren't changed around growing both our pool and water treatment businesses, we have identified growing interest and our sustainable gas solutions business and I look forward to updating all of you and the future as we believe this business is exciting growth opportunities ahead.
We believe that pool has a long runway of continued growth the department of energy regulation going into effect and mid 'twenty 'twenty, one is shifting and the industry. Even further towards variable speed pumps, which is a category we helped to create over a decade ago.
Today, nearly 60% of the pumps, we sell or variable speed, while the industry adoption rate is closer to 50%.
Over the next two years, we expect the industry, including us to move closer to 85% as it is expected that there will still be certain parts of the industry that will be able to use single speed pumps.
We also continue to invest and our automation platform for pool and see strong adoption of our new offerings. In addition, despite being a leading brand and the U S. On the pool pad when a consumer context is directly on pentair dot com. It has not been the best experience for the consumer.
We believe that Theres, a tremendous opportunity and engaging the consumer and curating their experience through our existing channel while also ensuring that the consumer receive the experience that they desired.
Within water treatment, we believe there are opportunities to rapidly expand our $50 million and to end residential services business and to be the leader and advanced technology and connected solutions and residential point of use solutions through our existing technology and the acquisition of Roche young.
We also have a leading commercial foodservice offering that we look to expand into other segments as well as add important services for our customers.
And sustainable gas it is merely focusing on our high growth segment within industrial and adding global capability to accelerate our offerings.
Finally, I wanted to touch on our approach to capital allocation, which remains unchanged. Our top priority is our commitment to our investment grade rating.
Our strong cash flows allows us to invest and our top organic growth opportunities.
From an M&A perspective, we remain focused on strategic bolt on and tuck in deals and focused strategic parties like I just shared with you.
M&A valuations remain elevated we continue to actively build their deal pipeline and plan to remain disciplined.
Finally, we are committed to returning cash flow to our shareholders through dividends and opportunistic buybacks.
We believe that pentair has a bright outlook and we will continue to invest for the future while delivering on our core business. Our goal remains to deliver more consistent predictable results for our customers the environment, our employees and our shareholders I would now like to turn the call over to James for Q&A, After which I will have a few closing remarks.
James Please open the line for questions. Thank you.
At this time I'd like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad and we'll pause for just a moment, while we compile the Q&A roster.
And our first question comes from the line of Mike Halloran with Baird Go ahead. Please your line is open.
Hey, good morning, everyone.
So a couple of things here first.
Can you just help bounce on a couple of comments about made and on a whole and and how that tracks for this year round and inflation price costs and other the commentary was price cost positive expectations. This year.
But not a lot of channel fill even though there were some rebates last year inflation kind of hits you in the fourth quarter, a little bit maybe just give some context and how you think that bounces out through the year and then what the pricing environment looks like from you as we sit here today.
I'll take the first part I'll I'll have Bob.
The second and it's.
Feel like 18, I think inflation wise, where we're seeing a lot of the commodities that we buy hitting.
Hitting record levels right and if you think about it and it's simple context, and just take a pump the copper goes into motor gets wound and koppers up.
It goes into a metal housing metal is at all time highs and and that goes into a corrugated.
Box that gets shipped to a customer right. All three of those are seeing record inflation levels, primarily being driven by what we think is a spike and China recovery and demand and Mike. So I think inflation is high I think there as we enter this guidance and look at next year. We think were balanced between the price. We think we can realize from the channel and where we are on the inflation.
Pressures as we as we head into next year, if we need to do more I think theres an opportunity to do so because I think the inflation that's hitting us will will also.
Impact the whole entire industry I don't know if you want to add anything I just add debt.
Rice was challenged and in Q3 and Q4, we did see higher rebates that debt mess that masks some of that price gains and.
The planning assumptions for the year or that price and productivity offset inflation and then to John's point as circumstances change we will need to.
Work on the different levers that are at our disposal.
No that makes a lot of sense and then maybe just talk a little bit about the supply chain and the pool side. How are you thinking about visibility as we go into the front part of the year.
Backlog levels channel sales things like that and and any reason to think that.
Weather aside just debt.
And normal sequential pattern isn't isn't a reasonable thought process through the year.
No I mean, I think you're thinking about the right way I think we've got our.
Supply chain and our our plant capacity to a level now where we're shipping at rates that are helping us catch up and a more rapid pace and you know clearly the demand remains strong, but we're able to meet that demand and I think right. Now you know pending any other COVID-19 disruptions, which we're hopeful we're getting through most of those.
We feel good that you're you're assumptions are accurate.
Great. Thanks, guys I appreciate it.
Thank you. Thank you.
Our next question comes from the line of Andy Kaplowitz with Citigroup go ahead. Please your line is open.
Hey, good morning, guys.
Good morning, and good morning, John and Bob You've obviously, you talked about the significant leadership change at the company. We know you've got a plan to get G&A out and as you think about 'twenty, one maybe sort of talk about what's in the guidance and it's interesting you talked about maybe getting out of several product lines and C&I and industrial filtration and so how much could sort of.
The productivity and the self help help you and towards your margin and 21.
Yeah, So Andy I don't think we've.
You know made any decisions to exit any parts of our portfolio. I think we you know we've got you know certainly areas of the portfolio that can do better, but when I step back and we looked at the G&A transformation.
I believe it's more than a G&A transformation I think what we learned from 2020 the way we sell globally. The way, we and act with our customers a lot of the virtual capability that was brought in and how we work with our channel partners the demand to have a more <unk>.
Consumer enabled and and have that be and effortless processed through ordering on the internet. That's a shift and we think we have an opportunity to take a look at our global cost structure and to think about where we should put the work and wheres. The right person doing the right work at and Theres, an opportunity across the portfolio drive significant margin expansion.
Spansion for that segment operations and sourcing I mean, we have factories that are at record capacity levels and we have other factories that are under capacity is right. Now. So all of that is and what we are labeling and a transformation plan and 2021 I think it's more planning the efforts to get after it and then I think we're confident in 'twenty, two and beyond we start.
And realize the benefits of all those efforts.
That bridge.
And then I think you mentioned some improvement and orders within industrial filtration and in turn and backlog. So have you seen in general your customers start to revisit their budgets you talked about still tough environment and capital spending, but maybe is that starting to turn and you mentioned, China, a couple of quarters and rose a little bit better there so in general what.
Are you seeing and some of those capex businesses.
Yes.
And we signed in 2020 for many of those businesses was down double digits and and so the good news as we look into 'twenty and 'twenty. One plan as you know those businesses, we're planning to be roughly flat so a stabilization.
For those businesses you know some some growing backlog and certain cases and and some signs of increased demand. So I would consider 2021 as being a stabilization here and and potentially some upside if things improve.
Thanks, guys.
Thank you.
Our next question comes from the line of Steve Tusa with Jpmorgan go ahead. Please your line is open.
Hey, guys. Good morning, Hey, Steve How're you doing.
Good so you.
Throughout 2018, I mean, I'm not sure that was like that memorable year for your stock.
And I think that there was some difference and the timing of I've seen that inflation. If I recall I mean, you guys got I think like a point of price back then, but then and 19, you obviously got a lot more price and.
I think the realization of the inflation and kind of hit your mid season in 2018. So maybe just talk about like the differences in timing between now and 2018, because it seems to be kind of like.
A slow moving train that you can see from a mile away and perhaps react to it and then what are you assuming for price are you assuming a point are you assuming a point and a half like what what exactly is the kind of price assumption and in the numbers.
Yes, so first of all Steve. Thank you for letting me clarify that I'm not looking for 2018 stock performance efforts, but if you recall 2018 and started to experience a significant tariffs that were put into place and we made some decisions there to wait it out and to go on cycle with a lot of our price increases in retrospect, I think we learned that that might and up and.
The right playbook to use.
What I was referring to is the day 18 levels of inflation and feel like that and I do think we are out in front of the price increases because it was a slow moving train.
And I'm also saying that if we need to do more we would do more Steve because I don't think we want to take that position again that we did throughout 2018, which may just played catch up all year long if you recall.
And so what is the price assumption.
Okay, and so for the question and again the.
Price and productivity offsetting inflation and the assumption for for prices back to historical levels of around two points.
Two points, Okay got it I mean, and 2019 you guys got I think like.
Two 5% of price. So I mean, this is not that level is not.
It's certainly not unprecedented and an inflationary time and my life and that is more normalized and I think when you look at 18 19 and together it felt more normalized but it was very disruptive from timing perspective, as you mentioned.
Okay that makes a lot of sense and then just lastly on this variable speed transition.
How are you embedding that in and guidance and what are you assuming for just remind us of kind of like what the profile is on that is as you know every point of that conversion goes to variable speed kind of what that does from a revenue per unit and margin perspective.
Yes, so I mean, it and think about it is maybe one five times.
You know the product.
Rice or sales price, Steve when we sell a variable speed versus when we sell a.
A.
Single speed and not that the margins any better but the margin dollars are much better I think it's a slower conversion I think we've made progress picked up about five points and the.
The last couple of quarters and as we mentioned you know moving from 60 to 85 I think more of that is towards the tail end of 2021 and into 'twenty and 'twenty two as the channel reacts and begins to buy that for us, but I do think that's out there is a is a nice transition that will benefit us and it's energy efficiency too and so these are better pumps, they last longer and I think.
It is better value for all the customers of items.
One last question for you just on just on balance sheet.
You guys are now at 1.3 times, you would be clearly you're generating very strong free cash flow and a downturn like kind of eye poppingly strong. There. So clearly you can kind of defend yourselves when volumes go down and when you have a volatile environment.
And other residential name like Lennox.
As trade and get a substantial premium to your guys. They have bought back basically 30% of the earnings growth and the last five years has been driven by buyback and they do it and kind of a programmatic way.
Why would this kind of free cash flow yield and with your balance sheet.
You could buy back 20% of the float programmatically over the next two to three years.
Why not.
Be more aggressive on the buyback side and what what are you waiting for to come along on.
On acquisitions to not at least be more aggressive and programmatic about the buyback given how cheap your stock is.
Well I think we certainly have options and Steve and I think we're going to look at all those options to create the best return.
And right now I think we are actively looking and the three areas I said within the M&A side, but you know those M&A deals are going to have to have the right returns to be able to lean into them and if we feel the stock is a better purchase what will make the deal on the stock. So I think we've got flexibility and where to continue to maintain that flexibility and I feel confident we're going to choose the right. One that adds the most value over time.
At this point, we have $150 million of share buyback built into the built into the forecast and so our typical starting point for the year and then to continue to be opportunistic based on the circumstances.
Great Alright, Thanks, a lot guys I appreciate it thank.
Thank you Steve.
Right.
Our next question comes from the line of Joe Giordano with Cowen Go ahead. Please your line is open.
Hey, guys good morning.
Good morning.
We kind of touched around this in line with the transition of variable speed, but.
How do you think about the cadence of the year do you is there may be more like a pre buy and then season or is there more line activity and the <unk> then like non seasonal because unlike a pre buy ahead and the regulatory change and as <unk> kind of see the answer to that and there maybe a little bit of a shift and the and the order patterns. This year.
Yes, Q2, and Q3 would be the heat of the pool season for our customers and yes, we would expect to make significant progress during that time frame I'm, just cautioning and even though there's regulations that go in mid season and I. Just don't think we're going to go all the way to the end point this year and I think is gonna be opportunities for people to work through existing.
And Tory supplies and and worked through the channel.
We're spending all of our marketing effort is helping people convinced that you can try and convince the end consumer that now is the time to buy the better product and so I think we're going to make progress as you said and the pool season.
And I think the tail of that will fall into next year. So we'll see.
And I'd say the good news from my perspective is built into our guidance of up 3% to 5% as a pool business. That's growing roughly mid single digit plus after a year where pool saw 17% growth.
So the natural demand continues.
Could it be better potentially but.
Not a bad place to be after seeing such significant growth in 2020.
Yes.
Certainly not.
And Bob.
On the tax rate.
And if we move into an environment, where the U S. U S tax law changes how protective gear.
And given your domicile and protected do you think the overall rate is.
We would we would see.
A little bit of headwind in that situation, but significantly less than our competitors would see so overall, we like our tax profile.
Perfect and then last from me just John you've talked about sustainable gas a lot over the last couple couple of quarters. There. Some and you focus on can you can you scope that out a little bit like what exactly are you selling into that market, how large and the business for you now and where.
Do you think that can go.
Yes, so real quickly we benefit from significant demand in Europe, because Europe has really leaned into the environmental impact a lot stronger than we have and the United States and most of that of our customers are in the beverage industries and the processing industries and Theres, an opportunity to capture the off gases and turn them back into either energy, which produces value for them.
Or to throw in the back into the process and a form of food grade C. O. Two so it's a business that has substantial legs to it what we're starting to see us and environmental movement globally and certainly our current administration is leaning in to try to do things that are going to help our greenhouse gases over time, so we see and opportunity.
Outside of Europe, now and we want to make sure. We've got the sales force the engineering capability and move more to a standard product offering that's more of a plug and play with global partners that can help promote what we do so we're very encouraged by the order trends and and the projects that we received outside of the traditional spaces and that gives us excitement that wood.
A little bit more investment, we could certainly accelerate the outcomes.
And because of that business and Alberta.
Roughly $90 million and total.
Great. Thanks, guys.
Thank you. Thank you.
Our next question comes from the line of Deane Dray with RBC capital markets. Go ahead. Please your line is open.
Thank you good morning, everyone.
Jim I think hey, can we get an update on the launch of the home and dealer apps for pool.
Any color in terms of how many users the level of engagement, you're seeing online ordering and.
Any updates there would be appreciated.
Yeah, I appreciate that day, and we Theres soft launches on both.
And we moved to more hard launches here as we as we head into Q2. So the experience has been good without giving you actual quantification numbers and and really what you need is the App and then you need some smart products to connect to it which is why we're spending time promoting the salt sensor and also.
The easy flow under sink application as well as other people you units that we expect come from the Roshi on acquisition combined with our technology team. So.
The App is designed to do two things it's to provide a better consumer experience to be able to understand youll salt sensor levels.
Retroactively on install base, the new valve connects to it.
Free installs and then it also gives you and understanding of what's coming through your water and and your flow rates and your you need to change your filters with more exciting aspect is connected with dealers so went up and.
And consumer needs a service on any product they have or they're interested and learning more and we would have our dealers and that app as well and be able to connect the consumer with the dealer to help curate the experience for that individual so very excited about the early stages of that and <unk>.
Connection and <unk> connection and the Google home connection and Apple home all those other features and so we're very excited Jim.
Great to hear so we'll be watching that for the full launch and then.
Second question is could you provide some more color on that growth, you're seeing and China, you said the second quarter of growth.
How does that look for the commercial side versus the residential side.
Yes, so candidly residential was up more significantly I mean commercial is back in China, but they are still experiencing a little lesser demand on the openings of of restaurants and stores as people are still cautious about the pandemic. So you know they are back and they're open and its growing but its not growing at the same rate that the red.
<unk> and water filtration is growing at this stage Jim.
Got it and then just last one from me can you comment on the product lines that you exited and commercial.
Just any color there.
And especially on the site and if you could size. It yeah. These are really small.
Those those those were small price product lines and just just an example of of.
Us.
Reducing complexity and and and driving cost out, but again small product lines in terms of the C&I portfolio SKU reductions more than anything Dean.
That's good to hear I appreciate that I mean, it's.
Walking away from unprofitable businesses, and it's always the right decision, so I like saying that thanks. Thank.
Thank you.
Our next question comes from the line of <unk> with Jefferies. Go ahead. Please your line is open.
Hello.
Thanks for taking my question could you update us on what Youre seeing on the foodservice side and should you start to see that improve as more restaurants open and need to change the cartridges.
Yeah. So I'll take the first part and Bob will give me a second here, we saw a steep decline.
You know significant double digit decline in Q2, and the paying down the kit and <unk>.
And we've seen a modest recovery off of that.
Deep decline into Q3, and Q4, we're sort of and that flattish range now.
And you know that debt.
And that basically has restaurants open at roughly.
We have capacity or quarter capacity, depending on where they are living the piece that we have not yet seen the recovery and is really the hospitality side and the hotel industry and we're expecting that is as we said and our prepared comments probably to the tail end of 2021 that would be a really big help to that business.
Obviously replacement of cartridges are continuing and probably at a slower rate because the usage is slightly slower.
And our portfolio is skewed more to some of the faster service and to the drive thru coffee shops, So we do get a little bit better than the overall restaurant average.
And then you talked about opportunities to learn G&A spending.
And if these planes and over time could you talk to any improvements you're looking for in 2021, and then what's driving that improvement.
Yeah, and we're going to get a little bit of leverage and 2021 and that's about it you know keeping the existing cost base and growing on top of it.
And what we're really looking to do is.
How do we think of our centers of excellence and where do they best serve the business unit the segment and the enterprise within that construct how do we get the best resources the point of impact and that's globally right. I mean, we've all learned that some of our people are now able to work virtually and work from home and we don't need all of them and necessarily facilities, we have but it.
Same time, we want to create workspaces and collaboration centers for our businesses do.
Work with customers and work with dealers on and so we this is gonna be a fairly sizable transformation I think and for 'twenty 'twenty, one as I said not expecting a lot other than the planning element to this and then we expect significant contributions in 2022 and beyond and beyond G&A, even it's a sales and marketing resources also get more effective and efficient.
And I would just add we're really rallying around that theme of <unk>.
<unk> work and the right place and to John's point.
And where should that work be done closest to the customer at the product line is it at that.
Business unit level, the segment or the enterprise and then what is that work. So if I pick my own area.
S. P N a as an example.
And I have big businesses like like pool that debt, probably drive their own kind of FP and a piece, but then I have other businesses that would benefit from and efficiency and effectiveness perspective of having a shared approach or a center of excellence approach that goes to data analytics as well. So those are the type of things that.
We're thinking through.
Great congratulations on the quarter and thanks for taking my question.
Thank you.
Our next question comes from the line of Julian Mitchell with Barclays. Go ahead. Please your line is open.
Hi, good morning.
And maybe just the first question on the assumptions and the guidance for the pool business.
Some of the consumer facing businesses recover guiding for double digit declines and the second half.
Heard your guidance about mid single for the year the pool, but maybe help us understand first half versus second half dynamics.
Yes, so I'll take that one and then John if you if you want to add.
It was important for us to see.
Specify mid single digit plus as our guidance for the pool business.
Embedded in our overall guidance, we continue to see strong momentum as we enter the first quarter.
A good natural demand so as.
And as the year plays out.
We expect obviously stronger growth and as we have weaker comparison and the first half, but still a strong business and in the back half as we bump up against those those bigger compare so all overall I think we're optimistic about the growth and the pool business and.
And that will certainly help our free cash flow as well.
But are you assuming the pool business is.
Both flat or down and the second half.
Year on year.
Right now we would say that we're at high historic levels, but generally.
Generally flattish to modestly down in Q3 Q4, what that's at the mid single digit level. If we get that mid single digit plus we would expect that we could be producing modest growth and the back half of the year.
I think the more important piece that we wanted to make sure. We convey is our quarters last year represented a a softer Q2 as the orders came through the distribution channel we were not yet producing those so we had pretty sizeable Q3 and Q4 as we're catching up and this year. If you think about that.
Demand and the way we are meeting and in Q1, and Q2 will have stronger year over year comparisons there as we assess where the market is going as we start to think beyond this pool year into next pool year, we'll have a better understanding as we exit Q2 with the back half of the year looks like.
Thank you and then my follow up would just be around the the segment.
Margin assumptions.
And so it looks like segment margins, maybe interrupted a few tens of basis points. This year.
Maybe just help clarify that and then also again, how do we think about the first half versus second half in terms of the margin expansion potential understand the volume leverage is the biggest tailwind and the first half and and the second half because of the comp.
But maybe give us any color around that inflation headwinds and how that's falling first half versus second half.
Yeah, Julian I promise the first part of my answer here is not a filibuster, but.
And I want I want to make sure. We described at one of the reasons, we're setting up these three strategic growth investments to our in consumer solutions and one is and I S T.
And then a disproportionately fund those with it with investments to drive the future what we're going to do a better job on and sharing with you as we go forward is the value of the core meaning and you know if you take a look at the core performance absent those incremental investments we're getting the drop through as you would expect we're getting the.
Price and productivity offset inflation and the volumes coming through and a nice flow through rate and then.
And we're taking the opportunity to build out our services organization and residential and consumer solutions build out the front end capability and pool and then also make sure. We put the investment ahead of the likely growth opportunities and STS and Theres, a pretty substantial investment there and those three things which draw down and those those.
<unk> for both of those two segments absent that I think we're pretty balanced and a more normal year and so we'll we'll do a better job highlighting throughout 2021, how we're doing and the core and that and how these investments are starting to roll through.
As noted and rest of the question.
Was there a second part to the question.
I guess it was really around that is the margin expansion sort of steady through the year or do we see a big first half increase because of volume leverage and then the second half sort of rolls over because of the top line comp and more inflation coming in.
It was really just saying that yes, you're right, it's more and the first half and and it's lesser contribution and the second half because of the and that's what I see inflation, but the investments.
Okay.
Great and the thank you.
Thank you.
Our next question comes from the line of Jeff Hammond with Keybanc capital markets. Go ahead. Please your line is open.
Hey, good morning, guys.
Hey, good morning.
I think you mentioned the supply chain stabilizing from your standpoint and pool can you just talk about where you see inventory levels and.
And the channel is there is still need for destock or restock sorry.
Yes, we're catching up and yes.
Okay.
And then just on the first quarter guidance can you maybe give us a little more color on about how youre thinking either of the segments or some other businesses that are driving that that higher growth rate.
Okay.
The guidance, we gave was that 7% to 12% and so you know again.
Think of consumer solutions with with pool driving significant growth in Q1, and think of the <unk> business as being roughly flat and in those numbers.
Okay. Thanks, guys.
Thank you.
Our next question comes from the line of Nathan Jones with Stifel. Go ahead. Please your line is open.
Good morning, everyone.
Good morning Nathan.
I'm going to follow up here on some of the strategic investments that you're talking about day, starting to make I guess ramping up and the second half can you give us any color on kind of what the incremental level of increased investment in 2021, and how you're planning for that too I don't know whether it increases in 2022 2023.
We are continuing to ramp up the level of investment when do you think we kind of all hit a plateau.
And maybe that becomes less of a drag on the margin increases.
Yes, I'll start with the investments that we see.
2021 to 2020 that we want and may cause more than a point of overall pentair revenues.
You know kind of frame that out a little bit Nathan this is uniquely different capabilities and we have today. This is about building out and water treatment brand that people recognize so that they can come in and and work with pentair too to help curate their water experience.
This is about customer experience capability more consumer related so that we can quickly get consumers the dealer help and or the technical support that they need to fix their particular challenges. So its capability. We don't have today. Its capability, we think will add a lot of value and also its about pretty more trucks on there.
Road as far as the services and residential.
Baxter enormous from an IRR perspective or from a two year intervals, but the breakeven point is roughly a year. When you put the sales team in place and you put the dealers and a geography and you wait for the return on the accrual of the annuity base. There. So that's the type of investment, we're making and.
And we paced it a little bit more in 2020 than we would've liked and we really want to accelerate it if we can hear and 2021 and so it can be modulate it but that's an example of what it is and the likely levels of it.
And people and these investments we are building strong business cases, and return on investments holding teams accountable.
Because it's a significant investment for us and we want to make sure we get the type of numbers, John just talked about in terms of return.
And if you don't need to modulate those investments, we'd get back to kind of a more normal business environment through 2021 would you anticipate ramping those investments up again in 2022 or are you kind of going to be at a level that you need to be at for strategic investments.
I think we would think that that would be a new normal level with maybe slightly more Nathan but what we would then start to see is the benefit of what we think the pentair transformation.
Efforts would be as far as our Ros expansion.
And that would fund that and and maybe give us a little more or our west drop through.
Got it that's great color. Thank you very big.
Big picture from my perspective is that even with those strategic and investments.
Our view is that with the pentair transformation return on sales expansion will be significant by 2024.
Yes that all makes sense. Thank you very much.
Thank you.
Okay.
Our next question comes from the line of Rob Wertheimer with Melius Research go ahead. Please your line is open.
Hey, good morning, and thanks for all the clarity.
This is a minor one day, Rob thanks for the book by the way.
Mostly through it so thank you.
Excellent excellent hope you like it.
So just to help me I guess, maybe perhaps a little bit newer but with the pricing dynamic and pool and the rebates. You. Obviously had very strong sales and I understand that sort of generates higher rebates, how does that sort of reset next year. If we continue to have strong sales.
And you retained more of the pricing.
At levels, similar and maybe just explain that dynamic and I'm all set thank you.
Yes, I think most simply you know that the rebate structure resets off that higher base. So it's goodness for the P&L and 2021.
Okay, perfect perfect and the environment, obviously pretty strong I mean Stanley Black and Decker reported and this one I mentioned, which I think is true you can't get a contractor to do any kind of homework I mean, how far out is your visibility do you think on consumer demand heading into the summer I know a lot of folks couldn't get stuff done and they wanted to last summer and I'll stop there.
Yes, we have strong confidence through what I've called this pool season, Rob and.
The real.
Question, Mark, which we'll get through as we as we get more into the summer is how does that lead into the next pool season, and we start to see that at the end of Q2 into Q3 for the next buying season, and and Thats as Bob was talking mid single digits, plus the plus is that we actually see upside and the 'twenty two pool season versus the 2021, which all.
And indications are that that didn't demand is likely to continue we're just not ready to say that yet.
Okay. Thank you.
So I want to be and a chapter and your book on a positive side and the next version and addition, so im going to work hard at that I think.
You guys got a lot underway, which is which is awesome.
Our next question comes from the line of Bryan Blair with Oppenheimer Go ahead. Please your line is open.
Thanks, Good morning, everyone.
Good morning, and good morning.
And we're late and Q&A and I'll, just ask one and I was hoping you could just update us a little more on total water management and how that's influencing your commercial trends stabilization and speed.
See there you are clearly outperforming the market I know that's early stage, but is that initiatives significantly accelerating into 2021.
And could that be more needle moving as we look to the back half and into 'twenty two.
Yeah. So let me let me explain quickly what it is in the commercial office water space. Many of the units that people buy and purchase are actually leased or rented to the maintenance groups and install them so that their monthly contra.
Contract services since we deal on the on the foodservice side with larger restaurant tours or franchises or change the more profitable ones just purchase the product from US and then do the replacement cartridges and they go along.
But there's a huge opportunity to attack the smaller restaurants are the smaller franchises with more of the leasing model and that's what that is about and yes, the uptick and the early going as a really nice proof of concept that shows that that is a business model that people are interested in and has good returns for us and and it's good.
Four way into having the right equipment for the the restaurant and so we're encouraged obviously, we had to do that during a COVID-19 year, but made good progress last year, and we expect to continue to expand and as we go forward.
Good to hear and thanks again.
Our next question comes from the line of Scott Graham with Rosenblatt Securities Go ahead. Please your line is open.
Hey, good morning, nice quarter. Thanks.
Thanks, Scott I appreciate and I do.
And do have a question I'd like to go back and revisit the prepared comments on the G&A, where I wasn't quite sure you're meeting John and the G&A because I thought last quarter, we were talking about with the new management team in place there has been identification of G&A reduction opportunity and some 100 and change.
Q2 hundred basis points per year. The next three years are we on track for that this year.
Yes, I mean to get the not all of that savings, but we're on track for the longer term savings for G&A, absolutely. So I want to compliment my my leaders, who lead G&A, but as we started to work through this and Covid starting to emerge. We're realizing some efficiencies we thought we could bring to the sales and marketing and the operations side as well so.
And maybe slowed the process down maybe 30 to 60 days Scott to make it a more enterprise wide look at what we need to do to support the segments.
Thoughtfully and drive a higher level of return because theres a demand for the newer types of technologies and more digital transformation needs. We do we have to do to serve our customer and I wanted to make sure we weren't putting more of the old legacy costs and at the same time, we're going to add the new cost and I think that ships can drive significant on transformation opportunity for pentair.
And I would just add that as a significant owner of a big piece of the G&A, we are definitely on track.
And in terms of the numbers that you mentioned and we will see improvement here in 2021.
Thank you that's very clear the other question I had is about pools, the new pool sales market in particular, John just hoping you could you.
Based on what Youre hearing from your distributors and anything that youre hearing from contractors about water new pool builds look like this year.
They were up.
The pool permit data we have is partial for.
The states that we work in and there.
They are up anywhere from $20 to 25% and.
And a lot of those markets and regions. So that's I mean, that's encouraging and as you know that's not the biggest part of our business. The biggest one is the aftermarket, but when you're putting your new pools, and youre getting new pool pad and youre filling out that pool pad. It leads to further equipment and the aftermarket space down the road. So I'll encourage you need it right now Scott.
John to that and if I may just tack this answer that because I know that you're trying to look beyond your.
Distribution channel and kind of like right to who is doing the installing do some of that.
The work that Youre doing and data analytics.
Are you finding ways strategically Jim.
Get more content on the pad with the new pools and what are you doing there.
Yes, so I mean, just we believe our pool channel is the right channel and these are professionals that we've worked with for many many years and we want to continue to work through them and with them, but when we sell into the channel. We don't know where the end product went unless it's an automated product that someone downloads and app, which we said, it's only about 15% of consumers today. So what we also know.
Is that consumers out there just trying to get something repaired or replaced and right now what's happening is these contractors are these dealers are really busy. So they are not always able to get to them and so when I talk about getting more through the consumer and it's helping them understand what they should be spec ing into their pool pad as you mentioned would be if they just needed some service how about you can call pentair.
And we can get you a service technician out.
And it will be through our channel because we want to continue to honor it but we wanted to make sure that youre getting served within the timeframe that you need it to be.
What we're really talking about it and I'm really excited about that Scott.
John Thanks, a lot.
Thank you.
And ladies and gentlemen, this concludes the Q&A portion of today's call I'd like to turn the call back over to John.
Thank you James and thank you for joining US today, we continue to believe that Pentair has a strong foundation and portfolio of business and to build upon we have a strong purpose mission and vision focused on delivering smart sustainable solutions that empower our customers to make the most of life's essential resources. We believe that we are and attractive spaces that are expanding.
<unk>, we are a leader and the pool industry and our global water treatment business is helping us become and even more integral player.
To the global residential and commercial segments. We believe we have the right enterprise strategy businesses talent and culture from a win rate values to our pentair integrated management system and through our win strategies, 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 James you can conclude the call.
Ladies and gentlemen, this concludes today's conference call. We thank you for your participation you may now disconnect.
Yeah.
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