Q1 2021 Pentair PLC Earnings Call
Good day and thank you for standing by welcome to the Q1 'twenty 'twenty One Pentair earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. 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 please.
Be advised that today's conference is being recorded.
If you require any further assistance press star Zero I would now like to hand, the conference over to your speaker today, Jim Lucas. Thank you. Please go ahead.
Thanks, Stephanie and welcome the Pinterest first quarter 2021 earnings conference call for 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 Chief Financial Officer.
On today's call, we will provide details on our first quarter performance 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 are forward looking statements subject to future risks and uncertainties such as the risks outlined in pentair. Its most recent form 10-Q form 10-K, and today's press release forward look.
These 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 in the investor Relations section of Pentair as website. We 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 limit your questions to one and a follow up in order to ensure everyone an opportunity to ask their questions I would now like to 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 start by thanking the entire pentair organization and the contributions they have made to help deliver on our commitments to all of our stakeholders I would also like to take this opportunity to thank all of our global channel partners and suppliers for their patience and efforts in working with us and our consumers to meet our commitments. Despite the effects of decrease.
As in the South Canal blockages supply chain constraints and of course, the ongoing pandemic.
Building off the momentum from last year, we started 2021 strong with sales up 22% adjusted EPS, increasing 56% and free cash flow improving significantly from the comparable period last year.
Residential businesses led the way as consumer solutions experienced a 34% increase in sales.
Currently we saw sales in all three businesses in industrial and flow technologies returned to growth for the first time in over a year.
We announced the acquisition of Ken's beverage earlier. This week. This is a strategic bolt on acquisition that for.
<unk> Pentair valuable National direct service network to expand our commercial water treatment business.
We believe we will be in a position to seamlessly manage the full customer experience from product development sales installation and service to ensure the best quality products are matched with the most reliable and dedicated service network for all commercial applications. We believe Ken's provides us a platform to grow from as well as an opportunity.
We continue to expand our products offered to this important channel.
Our balance sheet remains in excellent shape, and we are well positioned to fund organic growth and inorganic growth opportunities and return capital to our shareholders through dividends and opportunistic share repurchases.
With the strong start for the year, we are raising our full year adjusted EPS guidance to a range of $2 80 to $2 95.
While inflation remains high we have instituted a number of selling price increases across the portfolio that we expect to help mitigate inflation in the second half of the year.
The strong start to the year and continued strength in our residential businesses gives us confidence that we will have another strong year of growth for pentair.
Equally important are the signs of recovery and our commercial industrial businesses.
Plan to continue to invest in our strategic growth initiatives, and we will remain disciplined with our balance sheet.
Please turn to slide five labeled 2021 execution expectations.
As we highlighted at the end of last year.
Understand the importance of delivering the core while we also build our future.
Our focus has been and will remain consistently making our commitments our actual results for the past three quarters have come in significantly better than our expectations as residential demand has been very strong.
We have experienced robust sales and EPS growth. We have also improved our cash flow and our balance sheet is the strongest it's been in years.
Building, our future means focusing on the things that are within our control.
We look forward to providing more depth on this topic at our June 10th Investor Day. However, this is a continuation of the hard work we've been undertaking for the past several years.
Starts with a focused growth initiatives, primarily in our consumer solutions segment.
We are a leader in the pool industry and we continue to build on our leading position.
Since in this area include automation smart and connected solutions energy efficiency offerings, and now better filtration solutions within water treatment, we have expanded from components into systems and services within both residential and commercial we have made significant investments in digitally building our brand and expanding our.
Reach.
We recently created a transformation office as we embark on a journey to drive growth, while be more agile and flexible.
Transformation can have many meetings, but to us. It means that we will have the right strategy organization leadership and culture, while accelerating growth and driving margin expansion by leveraging our internal capabilities and reducing complexity.
This is not an either or but in both and we recognize that we must grow and drive productivity in order to maximize our ability to deliver for customers and create value for shareholders. We.
We plan to continue to accelerate our digital innovation technology, and ESG investments and we expect to fund many of these initiatives through our complexity reduction efforts. We believe that we are better positioned to deliver consistent growth and margin expansion, while also generating strong cash flow.
Our goal has been and continues to be delivering consistently for our customers employees shareholders and the 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.
Uh huh.
Thank you John.
Please turn to slide six labeled Q1 2021 pentair performance.
First quarter sales grew an impressive 22% with core sales increasing 19%.
Consumer solutions grew in excess of 30% and.
In industrial and flow technologies returned to growth for the first time in five quarters.
Net income was up nearly 50 per cent as we saw strong drop through and return on sales expanded 330 basis points to 19%.
Adjusted EPS jumped 56 per cent to 81 cents.
We saw price and productivity offset inflation in the quarter.
This was the third consecutive quarter of strong double digit sales growth within our residential business as well.
But just as encouraging was our commercial and industrial businesses, showing sequential improvement and some pockets of growth.
We were very pleased with our first quarter performance and we believe the momentum should continue.
Please turn to slide seven labeled Q1, 2021 consumer solutions performance.
Consumer solutions sales growth was 34% as both businesses delivered double digit growth.
Segment income increased 54 per cent and return on sales expanded 330 basis points to 25, 1%.
Well experienced a remarkable growth of almost 50% in the first quarter.
Traditionally the first quarter is preparing for the upcoming pool season.
But we saw strong demand flow through the channel as we believe pool dealers continued to do their best to keep up with robust demand.
Theme of consumers investing in the backyard as part of their home Oasis continued.
Demand for new pools remained strong as many builders saw bookings well past the current pool season.
And already strong pool maintenance space grew only stronger as the freeze earlier this year in the southern U S caused many premature equipment failures due to water free thing within the equipment.
Pool has experienced strong double digit sales growth for three consecutive quarters.
And this would not be possible without our operations and supply teams and their ability to continuously increase capacity and execute at historically high volume levels.
We saw strong demand for pumps during the quarter and continued to see broader adoption of our variable speed pumps as a new D. O regulation goes into effect later this year.
Demand for heaters remains quite high and we have significantly increased our production capacity.
Water treatment delivered 12% sales growth as residential demand has remained robust and a decline in commercial volumes showed further sequential improvement.
Within residential products, we saw strong growth in valves tanks pictures and faucet we.
We experienced strong growth in the U S Europe, and especially in China.
We're in the early stages of integrating Roshan.
But we believe the acquisition will greater enhance our product offerings going forward.
Within residential services, we continue to experience strong demand and healthy conversion of leads into actual orders.
We made good progress on our journey to become the trusted national nationally branded experience led in part by our brand transition to pentair water solutions.
We are launching a number of new recurring revenue services, including preventative maintenance programs.
This bolt ons for plumbing services cartridge change outs and extended warranty programs.
We are seeing continued signs of these foundational building blocks coming together, leading to more consistent predictable growth.
We believe that commercial demand is finally, finding a bottom and expect comps to get easier going forward.
We continue to build a strong new business funnel, particularly for our total water management offerings.
We believe the addition of tens of average will help strengthen these offerings.
Please turn to slide eight labeled Q1, 2021, industrial and flow technologies performance.
Industrial flow technology sales increased 7% in the quarter led by another quarter of double digit growth in residential flow.
And both commercial flow and industrial filtration encouragingly posted modest growth in the quarter segue.
Segment income increased 12% and return on sales expanded 60 basis points to 14, 5%.
Residential flow grew at a double digit rate for the second consecutive quarter as demand remained strong across residential irrigation and AG spray.
We also experienced strong growth across retail pro and OEM channels.
Commercial flow returned to growth with backlog growing for the first time in many quarters.
While infrastructure remains soft we were encouraged by our growing backlog within commercial.
We were pleased to see industrial filtration returned to growth in the first quarter and improve its backlog both year over year and sequentially.
Headwinds remain in our longer cycle businesses due to caution and larger capital investments, we saw solid improvement in short cycle component demand.
Within our food and beverage business, we are beginning to see orders for our beer membrane filtration systems, including a new system for beer stabilization.
In addition, we continued to expand our Iot offering with existing customers. Finally, we have seen a substantial increase in backlog for our biogas systems.
Industrial flow technologies remains focused on reducing complexity selective growth and margin expansion and we are encouraged by the improving top and bottom line to start the year.
Please turn to slide nine labeled balance sheet and cash flow.
While the first quarter is historically a period of cash flow usage due to seasonal working capital being built we were very pleased to see only minimal usage this year and over $150 million year over year improvement.
This was driven primarily by our pool business and improved linearity.
We expect another good year of free cash flow driven by strong demand and continued disciplined working capital management.
We ended the quarter at one three times leverage and a return on invested capital was a strong 16, 3%.
As we look at our cash flow needs going forward, we have a bond maturing in the second quarter, and we will be paying our quarterly dividend.
Beyond that we will continue to be disciplined in our capital allocation as we continue to work the M&A pipeline and we continue to have in our plan of buyback of at least $150 million of our shares this year.
Please turn to slide 10 labeled Q2, and full year 2021 pentair outlook.
We are initiating second quarter and updating our full year 2021 guidance.
For the second quarter, we expect sales to grow 13% to 16%.
Segment income to grow 12% to 20% and adjusted EPS to grow 17% to 25% to a range of 69 to 74.
For the full year, we expect sales to grow 6% to 11%.
Segment income to increase 10% to 16% and adjusted EPS to grow 12% to 18% for a range of $2 80 to $2.95.
We continue to work through material shortages and inflation that is impacting the second quarter.
We believe that our pricing actions taken in the first half will help mitigate full year inflationary pressures.
We have not factored in Kansas Bad for age into our forecast as we are awaiting finalization of the transaction.
Embedded in our full year sales guidance.
As anticipated low double digit growth in consumer solutions.
With pool expect it to be up mid teens and water treatment up high single digits for low double digits.
Within industrial flow technologies, we expect the top line to be up low to mid single digits with residential above the segment average.
While we are experiencing an increase in orders for the short cycle parts of our commercial and industrial businesses.
We have not yet seen larger capital spending materialize.
Below the operating line, we expect corporate expense to be around $65 million net interest to be in a range of $16 million to $18 million, our tax rate to be around 15% and the share count is expected to average between 167 million and 168 million shares for the full year.
Capital expenditures are expected to be around $65 million, while depreciation and amortization is anticipated to be about $80 million we.
We continue to target free cash flow to be greater than or equal to net income.
I would now like to turn the call over to Stephanie for Q&A.
After which John will have a few closing remarks.
<unk>. Please open the line for questions. Thank you at this time at this time, if you would like to ask any question. Please press Star then the number one on your telephone keypad again Star. One. Your first question comes from the line of Andy Kaplowitz with Citigroup.
Morning, guys nice quarter.
Thank you.
John just focusing on your Q2 guide for a second I think we all understand that pool was unusually strong in Q1 versus normal seasonality, but is there any reason why pool would be down sequentially and you usually seasonally strongest Q2, how much of a boost did you see from Texas weather related issues in Q1 or are you worried at all.
All of that supply constraints could get worse can you just give us more color because for the overall company youre still forecasting lower year over year growth in Q2 than Q1, despite easier comparisons.
Andy totally understand I'm going to have Bob answer that one.
Yeah.
Pleased with the net.
Q2 guide versus the prior year, you know, it's not lost on us that with the demand that we're seeing in the overall business not just pool.
You know why why couldn't we have done as well sequentially versus Q1.
We look at that and we do face some material shortages in <unk>.
Key components residents motor circuit boards.
And while we have shown an improvement over the last couple of weeks. It is it is an impact to the second quarter.
We're also place facing some inflationary pressures in the second quarter and while we have increased prices most of that will read out in the back half. So we're doing everything we can to cash.
Up in and.
It basically satisfy this this increased demand, but there are some supply challenges that we are facing in the second quarter.
Thanks for that Bob and then you know just focusing maybe on net inflation looks like you've got a nice uptick in productivity in Q1 and productivity plus price is more than offsetting inflation I E.
It seems you've been able to get over the labor availability issues you talked about in the past and we know your guidance in the past was for price and productivity to offset inflation, but is it possible feed actually stay ahead of inflation. Despite all these constraints.
That that that that is certainly our goal obviously than in the second quarter, where we have the inflation challenge, but for the back half for the year. What what you. Just mentioned is our goal I did want to congratulate the operations team the supply chain a lot of the issues that we saw in 2020 as we ramped up production.
Are we really address head on and did a nice job. So a lot of that productivity improvement is driving.
The leverage over our fixed cost base and driving the efficiencies.
Really cost effective manner.
And Bob you're able to get the labor you need to to meet this ramp up.
Labor continues to be a challenge and it's something that we need to address it's.
And in many places of the business, it's a challenge to be totally honest, but we are our guidance should not be impacted by that but it's certainly on our radar screen.
I appreciate it guys.
Your next question is from the line of Brian Lee with Goldman Sachs.
Hey, guys. Good morning, Thanks for taking the questions great job on the quarter.
You alluded to this John during the prepared remarks, but can you quantify a bit what your exposure is you know to Texas. We know it's one of the top three pool markets.
In the country, but specific to kind of your I guess indexing there versus other parts of the country can you give us some sense and it sounds like that's driven some near term demand just the winter freeze and the fallout of that but do you see kind of with pull backlogs and how does he dealers.
Or that's something that's even having to push into 2022 for people that are needing to.
Go go to their pools in Texas and in fixed things are or outright replace them.
Yeah, I think it's fair to say that there's an industry capacity constrained and overall pool that we're always working to the dealers the pool builders the.
The availability of that as it relates to the consumer demand as far as Texas goes we did get a little near term on some of the break and fix that happened in Q1, but most of that will also be satisfied here in Q2, and the normal course of shipments.
What I also alluded to and in.
The Texas was more related to material supply chain challenges and.
Many of the rest of it right resins are produced in that area of the country and those that capacity is coming back online its getting better every day, but that's what Bob was referencing as well.
So net net I can't call, Texas, a win for either Q1 or Q2.
And I think it just goes into the overall demand being a large pool state that we always surf.
Okay Fair enough that's helpful and.
And then I guess, just second question here and I'll pass it on.
Clearly we've seen a good housing market here, we've seen it in the new pool number steadily ticking up for the past several years, especially here recently can you give us a sense of I know you're heavily aftermarket a levered, but per cent of new pool mix versus retrofit how much has that changed here.
And do you have kind of an expectation on that trend continuing to shift maybe a little bit toward a new pool, even through the balance of the year and into a into next year.
Yeah, I can take that one.
Our mix remains fairly constant.
Roughly 20% new pool 20 per cent remodel and roughly 60%.
Aftermarket.
And you know the new pools are definitely up.
Large on a year over year basis, and we still see that trend continuing but as an overall impact to the business. It's not you know.
As beneficial as continue to build the aftermarket growth.
The remodeling growth for us that being said you know every new pool. It goes in we want to convince those consumers and the pool dealers to put all the new content in and make those smart automated pools and.
That adds for the aftermarket opportunity later as well.
Alright, Thanks, a lot guys. Thank.
Thank you.
Your next question is from Mike Halloran with Baird.
Good morning, everyone Hey.
Hey, Mike.
Just some questions on the guide here the first one at least.
No obviously good answer to understand why you know two to maybe a little bit more muted relative to what you would imply from a pool perspective.
You know, but inventories lean in the channel I mean, how do you think that plays out to the bounds for the year, then I mean, it seems like youre, implying that there is some push outs into the second half of a year's supply chain constraints are kind of ramping throughout the industry.
Not like that demand goes away.
So maybe just help with some of the cadence seeing and how you're thinking about the year and with all of these challenges can equate to as you move over the next few quarters not just too cute.
And and in terms of the day the year.
You know when you look at the what we guided for in Q2, and what that implies for the back half.
It has.
Slight revenue growth.
Over some some pretty pretty big compare so you know business did well in the back half last year or so but pleased to see growth can we do better potentially but for US. We're also focused on on margin and while you know we will win the.
Price cost war.
There are continuing to be.
An element of strategic growth investments in the back half.
That are putting a little bit of a.
The impact on our overall margin expansion, we think it's it's it's money well spent that that'll benefit 'twenty 'twenty, two and beyond primarily in in the pool space in the water treatment side, but that does have an effect on our on our overall.
Margin expansion.
Just to put a clarification on the first part of that are you, implying pretty normal sequential from Q2 into the back half of the year on the pool side.
I think Mike were you know the way I would say right now we're still trying to catch up I mean, the inventory in the channel is relatively low we have been catching up since last year.
We made.
I think you could see that we probably net sell through demand in Q1, and you know we've got to do our best in Q2, Q3, and Q4 to catch up with the demand in the channel as well as continued rebuild those inventory levels.
Thanks for that and then.
Switching gears for a different part of the more cyclical parts of your business recently seen more headwinds how are you thinking about the recovery curve as you sit here today.
Paired remarks implied that trends are starting to get a little better arent seeing the bigger stuff yet, but at least we're starting to see some progress maybe just some thoughts on that cyclical progression and what level of optimism there is right now.
Yeah, I think the biggest level of optimism we reference as you know, it's nice to see commercial filtration starting to at least move sequentially better.
I think we said.
For this particular full year, it's still not going to catch up to where it was but it is good to see the openings and things starting to drive that commercial filtration space again, so that that was encouraged in the quarter. We saw some sell through better than Q4, and we think that continually sequentially gets better throughout the year as far as industrial and flow.
I think we saw more break and fix and certainly the recovery of some of the break and fix into those spaces, but we also started to see quote activity order activity.
Backlog start to really.
You know move sequentially.
So I think those are definitely where I was referring to encouraging and we weren't ready to call that earlier and I think we're now saying that were sequentially seeing ourselves come off the bottom in the IP side.
Good stuff I appreciate it have a good one.
Thank you.
Your next question is from Steve Tusa with J P. Morgan.
Hey, guys How's it going.
Good.
Congrats on the execution.
Kind of a challenging supply environment I guess.
Just first of all what are you assuming for for price for the year.
We we.
We should see an improvement in price to you know.
Call it 2.5% to 3%.
Earlier in the year, we were probably down in the low twos. So we are seeing a nice nice uptick there.
Okay and when is the timing of that of that increase going in is there kind of a are.
There are a couple of bites at the Apple here or.
You kind of one and done in the spring like what's the what's the timing of the price increases.
Yes.
I'll take the first part I'll have Bob give you a little bit more of the details, but we've increased those prices across the board, where we're going to we're still servicing some.
Backlog on the old pricing that works its way through in Q2. So we don't expect to realize those price increases fully until Q3 and Q4.
Yes, I would agree with that we'll start to see them stay in Q3.
When when when are you putting it through though like when would that guy when we're out with the guys.
For the channel.
We already have put it through C, but we're still.
But we are still servicing the backlog right and the product that we took orders at pre price increases. So we're still servicing that in Q2, Okay and then.
Just on the second half I mean, it kind of looks to me at the midpoint. Like you guys are just kind of flat across the board rate like flat on sales flat on profit and actually margins might kind of be a tick lower year over year.
With that kind of price coming through in the second half.
I would I would think things would be.
A better way that on the margin front or is that is there just a maybe just for the year give us what the kind of price productivity, you expect that to be neutral for the year that kind of price productivity, sorry inflation productivity equation.
Maybe just give us the annual what do you expect there.
Yeah, that'd be Reits inflation.
For the back half for the year, so that the headwind we are facing as continued higher than inflation.
But when you look at what we've done with price and the productivity that we're seeing we will offset the.
Inflationary headwind.
So really what it comes down to as you know if if.
The higher end of our guidance does show some some revenue growth, but the margin expansion is really.
Acted by the strategic growth investments that we're making in the back half.
Got it and then one just last one for you.
I guess this kind of complexion of the second half that youre going to be reasonably flat.
The toughest comps are obviously and in consumer so if your business is flat should we think about.
The IMT businesses being up and consumer being down is that kind of the right profile for second half.
Yeah.
Yeah for for the second half.
Overall again.
If you.
If you take the higher end of guidance, you will see a consumer solutions grow.
And then T.
As we mentioned will will grow in the back half and for the full year, which is good to see.
The question I think we have right now is.
Can we can we drive a better back half and so again not not wanting to get ahead of ourselves we have the.
The natural demand that that continues and in many of our businesses. So at this point.
I think our guidance is very prudent on the topline and the question is can we do better yeah Yep Yep, great. Thanks, a lot guys I appreciate the details.
Thank you Steve.
Your next question is from Josh Huggies Lewinsky with Morgan Stanley.
Hey, Josh focal lynskey happier day.
Happy Earth day, John Thanks.
Thanks for taking the question so.
I guess, maybe just to start off here on the pool front.
No surprise.
You want to talk about kind of what's happening under the surface with whether it's you know kind of replacement versus new or wallet share versus like for like because 50% is a lot of growth I can appreciate that the last year has been kind of a unique environment and comps play into it as well but.
But at the end of the day I don't know if we've seen that much more you know kind of utilization and breakage in theory, the stuff's always kind of out there spending around somewhere yeah, how much of the strength that you're seeing right now kind of speaks to the upsell of the pool pad that you guys have been talking about versus the volume side of the equation.
Yeah. That's a good question, Josh I mean, it's mostly on the upgrades candidly I mean, we've got two things happening we've got.
The sale of homes in warm weather climates have done really well right. So we've seen a change in it.
A big push to get to warm weather climates, and I think people are not traveling as much and using their backyard more as their vacation destination spots. So they become more aware without a doubt and we share. This we've seen a lot better here in penetration that we've ever seen before as people want to extend the season.
And to make sure that their pool water is the temperature that they want.
We've been excited as we've seen the upgrades around the energy efficient lighting, the automation and also the south coronation and self saltwater.
Ability so the maintenance of the pool side as well Josh So it's been a really good situation because the more we made those consumers aware of the more they will be able to expand the offering and we think the more that expands the more people talk about it and I think we believe that's a trend that's going to sustain.
Got it that's helpful. And then maybe question for toss up between between you and Bob on the supply chain element for QQ.
Yeah, it might be a little hard to answer, but if you guys could get infinite supply.
What is that worse like how much is that bottlenecking holding back.
Near term results.
Yes, So I think we'll tag team that one Josh I mean first of all I just want to thank our supply team and we've been doing everything we can to just first and foremost just tried to access.
Material and the raw materials that we need and so I'm, bringing that up because I think we're seeing two things happen I mean, where we're doing everything we kind of get the volume out and you know we're not really spending time on negotiations as much as we're spending time on trying to get the available material, which leads into the inflation issues that Bob referenced earlier and then Bob will give you the art.
Possible here.
Yes, where we started with was you know the.
The 866 that we just did in Q1 and with the backlog we are seeing in the demand. The question as you know what why Couldnt, we see that our top end of our guidance is closer to 830. So we really view it as in that space that the $30 million to $35 million is the art of the possible.
If the.
Supply shortages Werent, there now again, I'll Echo John's comments and congratulate the.
Supply team because two weeks ago that number was double and theyre doing a nice job of improving the allocation that we're getting for those materials. So that's how I view. It that then on top of that is the inflationary headwinds that we're seeing in the in the second quarter.
Got it that's awesome detail I really appreciate the color there guys.
Thanks, Josh.
Your next question is from Rob Wertheimer with Melius research.
Hey, good morning, everybody.
Hey, Rob.
So a lot of things went right in the quarter no managing through this isn't easy I just wanted a little bit more breakdown on water treatment, which you know is growing nicely I don't know if you can characterize where split resident commercial stabilizing Houston I think and just you know whether whether you're on a sustainable path, there and penetration et cetera, just talk about the drivers there. Thank you.
Yeah I appreciate it Rob I may call them.
Thank you I mean, I think you know water treatment has been doing really well and also as residential exposed I would say our rmi flow business has also seen a nice pop in the <unk> side relative to demand and obviously there'd been overshadowed by the strength in pool and the success of pool. So it's great to talk about it Rob I mean, I think we got a several things.
Going on we've we've definitely spent a lot of time, you know upgrading our capability around our products to sell to the independent dealer channel in and people more aware of the water in their home these days and they're doing things to try to make it better either to either for paceway reasons or trying to improve the overall benefits rigor.
Adding their water. So we've got a lot of interest and we've been expanding our portfolio to be more consumer friendly.
We've also through the acquisitions that we purchased.
Through Pelican and range Sop have the direct access to the consumer through the affiliate channel and or building out the services network ourselves. So thank you for noticing that growth, we feel we're making great progress there and we're excited and that's why we're excited about Ken's I mean, we just don't put a services extension on top of our our ability to sell products into the food <unk>.
<unk> space, where we've always had a nice product offering and that allows us to create end to end solutions inclusive of the service and the ability to take care of the customer when the customer needs us to show up so.
Really building out that part of the portfolio and we really like the momentum and we're seeing the fruits of the work.
Great tens as my follow ups. Thank you so much.
Thank you.
Your next question is from Jeff Hammond with Keybanc capital markets.
Hey, Jeff.
So a lot of moving pieces around inflation supply chain investments can you just remind us how youre thinking about incrementals in consumer solutions before and how youre thinking about them now kind of give you know given all of that those moving pieces is it is it same better worse.
It's generally the same Jeff we were comfortable in that 35% drop through which we actually did in Q1 and it might vary a little bit based upon you know the price cost squeeze in and then the only thing thats different in the back half of the year as those accelerated investments as Bob mentioned.
That's it and.
You know that the.
You might ask why is those investments delayed it's not like we did anything differently, we're trying to get those people in place and in the assets that we're asked to digital Iot Smart connected solutions I mean, those are tight labor markets with a with a lot of people.
People chasing the same skill set so it's just been more of a timing issue to put them in and then we're also expanding the markets that we're serving and so that is the investments that we're really talking about in the back half of the year, but think about it is that 35% ish drop through and then it's only muted by any incremental investment that Bob mentioned.
Okay, Great and then it seems like the early buy shifted for the industry come from for Q2 <unk> was that more a function of just the demand environment were in today or do you think this is kind of a new paradigm or a new structure, where you're kind of persists persistently do the early buy a little bit later.
And just to add a $35 million is that just shift into <unk> as you catch up.
Answer the second one is yes.
We're hopeful we catch up throughout the quarter and and if we're not we're expecting that to be early Q3, when we when we get that supply.
Supply chain is as Bob said, the supply chain issues getting better every single day, it's just a matter of heavy muted them or mitigate them enough to be able to solve it by the end of Q2.
As far as the early buy I mean, just remind you I mean this is a seasonable business, it's not necessarily cyclical where.
Where we do the early buying pool, and we're trying to manage our capacity levels. So we're not spiking, our labor and then laying the labor off so we work to trying to fulfill those labor outlets and basically when you got this type of demand there really isn't.
Room for that early buy it because your full out trying to meet the ongoing demand and you're working through that season jobs. So youre right I mean, it feels like it didn't necessarily happen and I would just say that it it didn't shift it just got to the need to sell to the market need.
Okay, great. Thanks.
Thank you.
Your next question comes from Sara boarded ski with Jefferies.
Hi, good morning, So just a follow up on <unk>.
Can you provide us with some more detail.
From the guidance and maybe some color on the sales and margins for business you talked about the service benefit from any other commentary on what you're excited about there.
Yeah, I'll, let I'll, let Bob.
Give you the details I do want to say one more thing.
We've had a partnership with Ken's for some time in Canada is someone we admire and his ability to have worked with this customer set and built intimacy around real needs for foodservice customers and the projects and the services that he provides and he has built this business.
Over his career and we're excited that he's going to come and partner with us and be a part of our team and help us expand this and as I mentioned my prepared remarks, it's not just growing as service levels, which I think we can do it's also about then having the insights as to what other products those customers need and expanding our offering beyond.
Just our water treatment that we sell to those customers. So I'm really excited strategically from a.
For the best deals take the longest to get over the finish line and we're just really happy that he trusted us and he's willing to be part of the pentair family and Bob you want to get to.
Yeah, We mentioned in the press release that we spent about $80 million or will be spending $80 million for cans think of that as about one time sales.
And then from a EPS contribution perspective.
In 2021, its minimally accretive.
We need to invest in.
In the growth platform in that business, we really do believe it's foundational for bigger things in the future. So that's how we're thinking about ken's contribution in 2021.
That's helpful. And then maybe you can just talk.
It sounds like from CMS with service.
Some pretty positive comments from.
From the restaurant space.
Thank you.
Yeah.
The percentage is seen.
Exciting rate and I guess why it keeps reminding us that we're not anywhere near where we were pre pandemic levels, but sequentially as things open up we're seeing things definitely feel better.
And I think sometime in the 2022 timeframe, we expect to be back to where we were.
While restaurants are opening across.
Across the United States that they are a little bit slower to open in Europe.
They have been.
Opening very rapidly in China, what we did.
Not yet seen the hospitality play and Thats. The one that we'd also like to see.
Hotels opening to the levels that they were before but sequentially definitely better and working our way towards hopefully getting back to where we were some time next year.
Perfect. Thanks for the color.
Your next question comes from Joe John.
With Cowen.
Okay.
Hello can you hear me Hey, Jim again, yes.
Yes, we can.
So just wanted to touch on industrial I mean, it's good to see backlog building and you've made I want to changes for that business over the last couple of years do you feel comfortable that throughout all of that share is being maintained.
Like just listening to other companies talk it sounds like a little bit more like spending is coming back. So I know you guys are being cautious here, but just curious how you feel about share maintenance as you transition that business.
Yes, so first of all I'm really proud of Jerome and team for the discipline because as I said many times I mean, we could chase growth here for some of the lower margin projects and Thats not what we wanted to do we want to use our configured to order and specification capability to wind projects that either meet our margin potential.
<unk> provide the aftermarket opportunities that we want to invest and so we're trying to be disciplined and I won't I don't want to say, we're muting, because where we're focused and there's a lot of growth to be had around our core capabilities and skill sets and I think where we have the right to compete and the right to win that's where we're focusing and I think that's going to produce it.
Or set of <unk>.
Business opportunities for us that produced the margin profiles that we desire.
You know we've seen these businesses that are more cyclical in nature come back really strong and then all of a sudden you get all these projects and then your cost to serve.
You know gets higher than your actual quote and that's not what we're doing here.
These are projects that we feel confident with and comfortable with and that they meet our skill sets and that will lead to the profit profitability profile from one.
Yes.
Right.
Last for me just I think some of the deals you've done here, Jim Jim interesting very strategic and make a lot sense for what you guys are trying to accomplish.
Fairly small so when I look at your balance sheet, just curious what's your appetite for larger M&A.
M&A, what's the target environment out there are they're larger.
Are there larger assets out there that kind of neat fit in with your strategic profile right now.
Maybe I mean, I think you know my.
My focus has been and our team's focus has been that we've we've carved out some specifics.
Specific areas that we think we want to grow and we think we got the organic capability to really grow now we always have to trade the make versus buy right are we better off doing it ourselves or read that are buying the capability needed. Sometimes you don't have the channel reach sometimes you don't have the brand or the skill set when we look at our spaces.
There isn't really a large one that we need.
And you know theres not really a large one thats available and so I kind of like the path, we're on and and I'm hopeful that more of these start to accelerate.
And that they add to our capability, but don't distract us from the strategy that we're embarking upon.
So just quick follow on that.
The how.
Are you like getting leverage down.
You know at what point do we think about more aggressive buybacks just to kind of go from a capital allocation standpoint.
I mean, I think we're really pleased with the cash flow generation progress. We've made I think Bob mentioned in his prepared remarks, we had a couple.
We have a bond maturing and we had a little bit of cash flow need and we usually utilized cash in Q1, but given where we sit right now I think we're committed to the buyback that we said we would this year and I think that still gives us capacity to do any strategic bolt on deals that become available in the near term.
Thanks, guys.
Thank you.
Your next question is from Deane Dray with RBC capital markets.
Thank you and good morning, everyone.
Jim I think.
Hey, we'd love to get an update on the pool App soft launch that you talked about last quarter, what's been the receptors right. How many installations and is it really pulling through the products that at a rate that you were expecting.
Yeah. So I mean, just to just to clarify I mean, we've always had our pool screen not screen logic App. That's been out there and we are pleased with the progress on the pool side and it's.
Where we've launched that that new App was on the water treatment side and yeah. We've got a couple of new exciting products, we got under sake easy flow and we've got the salt sensor that we've launched and we feel good about those and the collectability.
Growing pains, yes, right servicing a new customer and we've got a tweak so I think the soft launch I would describe as successful, but now we've got a little bit of work to do to make it to the ultimate product that the consumer desires.
Good to hear and then how about the new product introductions expectations for the year. I think you had talked about a number of our new Iot products any updates there on launches and any impact on 2021.
Yes, Deane and I appreciate it.
I'm really excited about one in pool and this might be where you were were focused we we launched a sidestream filtration product in a soft launch basis. So we're seeing amazing results as far as the clarity of the pool water by putting what was the CPT X flow membranes on the side of irregular.
Pool filter application and Thats smart filter capability that we have in the soft launch applications has really demonstrated superior results. So that's that one I'm really excited because that's a category that we haven't really seen new product introductions and pool for some period of time.
And then on the day.
For the consumer solutions side, it's really about connecting to that App that we mentioned around the <unk> product launches the technologies and then the most exciting when we have is this acquisition Roche John that we purchased in and more of a countertop Peel you unit that'll be launched either later this year early next year.
Great and how about any sneak preview on format topics for the upcoming analyst day.
Well, we're going to make you wait because we want you there on June 10th.
I think I think you can expect that we're going to talk about the fact that we think we have great well positioned businesses.
I want to talk a little bit about the strategic growth investments were making dean and why why do we feel good about these investments.
Show you a little bit of the progress along the way I'm going to give you. Some insights on how I think the transformation office that we're leading in how that transformation can create value and help fund this organic growth and then I'm probably going to share with you that we've got a strong balance sheet as previously highlighted here.
Give some indications of how do we use that balance sheet to create incremental value as well. So that's probably we're going to talk about and of course, no investor day would be.
Fulsome without Doctor, Phil sharing you with sneak previews of where we're going to bring the technology of Pentair and why we're excited about the longer term technology investments.
Looking forward to it thank you.
Thank you.
Your next question is from Bryan Blair with Oppenheimer.
Good morning, guys, great start to the year Hey, Brian.
Alright.
I was hoping that you could.
Parse it out for the core decline in commercial water treatment in the quarter and give us a sense of how.
The monthly sales cadence progressed through Q1.
Yeah.
Yeah.
From a box you had that exact I mean, we were still down single digits.
In Q1, and the commercial water treatment.
I think we're expecting to be.
Inching.
Hopefully I mean, we've got an easier compare in Q2 candidly I mean, just to remind you that the Q1 impact last year was muted as far as Covid and then this is our first year over year comparison in Q2 as were commercial.
Filtration took a deep steep decline so youre going to see a pretty nice growth rate.
For them in Q2, but it's nowhere near where the 2019 levels, where we're getting better off for the Q1 run rate.
Okay, and just to level set on.
Pro forma scale for commercial water treatment.
As demand continues to normalize and you get back to pre pandemic.
Core volume.
And then layering in.
Is that $2 75, plus at that point.
Regarding when you say $2 75, you're talking about the actual.
Commercial water treatment piece, yes, commercial water, yeah net revenue at that point.
I mean, that's I'd say, that's directionally correct, yes.
Okay excellent. Thank you. Thank you.
Your next question comes from Julian Mitchell with Barclays.
Yes.
Hi, good morning.
Maybe I just wanted to circle back to the investment spend you've mentioned it a bunch of times and you gave some good color about some of the areas those funds would be.
Towards the perhaps maybe just help me understand the scale of the investment spending in the second half.
Or is it just the sort of.
Oh billing function to sort of solve for that incremental margin that you are looking for.
That's what I wanted to sort of better understand whether that.
Deferral of investments spend.
Is that pushing much into next year as well or do you think the catch up this year. It gets you to the right level medium term.
Yes, So let me let me tell you, where we are where we're spending it and strategically why so so in pool, it's really around how do we.
Be a destination site through our pool brands on the pad to bring you into pentair help you understand what's available and then connect you to our channel. So there is no desire to work around our channel we want to go directly through our dealers and our distributors to continue service you, but we want you to come and learn.
Learn what's available to you to help pull demand in that and that's where the investment has been going in pool as well as making sure that we've got a consumer services mindset around.
Both services that you might need as well as making sure theres someone to answer the phone or chat with you. Upon your particular challenges and then connecting it with the dealer to solve that for you.
We have been steadily seeing more consumer inquiries into our our service network than we've traditionally seen the dealer network. So we've had to augment that and build that up and water treatment. It's about accelerating our residential services offering building, our brand and again being more effortless to do business with which you should read into is digitally.
<unk> transacting.
That's where those investments have been and then on the Iot side as we mentioned before we believe we've got a nice biogas upgrading capability and sustainable gas and we want to shift the investments to North America, where it's traditionally been on the European side.
And we think that we're got a nice run rate ahead of us to grow that sustainable gas offering over the next several years. So that's where the investments are focused and then obviously one of those categories. We just filled in with the acquisition of Ken's, which was a buy in.
Investment platform instead of trying to do it on their own.
And as far as the actual dollars Bob Yes, yes, just to help you quantify that on our last call we talked about that spend being roughly 1% of revenue we spent a little bit of that in the first quarter, but as John mentioned it does ramp as we head towards the back of the year, So think about a little bit more in Q2, but the majority.
That spend in Q3 and Q4.
I see and then at that point Youre at the right level sort of medium term or does it go up again next year.
I think at that level, we would expect to see that more flattened.
From a year over year standpoint, because then then we've jumpstarted. These programs got the right people in and then we're more of a percentage of sales basis.
Thank you and then just one quick follow up.
If I look at sort of across the multi industry group.
Colfax, another company announcing a sort of a separation into two pieces.
<unk> recently.
Just wanted your latest thoughts on the portfolio overlaps between the two divisions.
Or is it more of the view that the synergies of that now that you're sort of three years as a standalone company and when you sort of look around the public peers like Haywood and so forth.
There is kind of obvious value creation from any kind of separation anyway.
I understand the question that we get asked that all the time, but here's the way I look at it we move and we help you move enjoy and improve your water and move side.
The $1 billion on the Iot side that directly correlates.
With that phrase and very important I mean, it's hard to produce any water application without moving the water through some type of pumping application and we like our portfolio. There we have an opportunity improve it focus it and really expand the margins, which I'm uncomfortable of its enrollment team is working on and then and then we've got a really nice set of industrial assets and there is some <unk>.
Cross utilization the membranes that we talked about on the industrial side or the membranes that are servicing this pool filter that I mentioned and also hopefully will be the foundation for our cell free software that we will introduce a water treatment in the next several years so.
I think there is across a lot more cross synergies I think with the <unk> side, it's about focusing it returning to.
To historical levels, and making sure that we're disciplined with where we grow and how we grow.
That's good for here. Thank you.
<unk>.
Jim.
Your next question is from Scott Graham with Rosenblatt Securities.
Hey, Good morning, John Bob Jim Nice quarter, Hey, Scott Hi, Scott. Thank you.
I wanted to maybe square for.
My mind, what Youre seeing maybe more specifically on price cost I apologize for beating this up.
Raw materials prices increased throughout the first quarter. So what we see in the first quarter for inflation of 240 basis points.
I'm, just thinking that that number probably.
It goes up from here.
And you're seeing to Steves question pricing, plus two and a half to free for the year.
The emphasis on the second half.
And are you seeing that price cash.
N offset raw materials inflation or are you, saying that you need maybe a little bit of help from productivity.
We need price and productivity both to offset inflation for the full year. That's what we said and in Q2 as you imagine when you're catching up and the channels. We are most of your orders error free.
New price levels, and that's what we're still fulfilling and.
In the materials supply has risen pretty rapidly here from a cost perspective.
Everything is sold in Q3 and beyond carries a new price selling price with it and therefore, we see more of a positive contribution in Q3 and Q4, then we see the headwind in Q2.
Yes understood that.
Also the productivity jumped in the quarter and I'm wondering is that the G&A initiatives is there something more than that and can sustain at that level.
It's really a combination of a number of things I mean, our opex spending.
From Q1 of the prior year.
Had not come down and so where we're benefiting from the efficiencies that we drove in the last half of <unk>.
Last year end and into this year.
We're also driving.
A lot more volume and the team is doing a really good job.
Leverage, but also a number for the issues from last year round.
Expedites and inefficiencies as we ramped.
Production lines.
We're much better at driving that extra production. So it's really across the board that's driving that productivity benefit in Q1.
Got it last question from me.
With the.
Large competitors I P O.
How do you think that changes things and the Mark is obviously, they now have more resources than they can get more resources on top of that what are you thinking about you know he would going forward.
Competitive.
Okay.
Think there have always been a formidable competitor and I think to your point. They they may be a more formidable competitor I think the way I look at it Scott as it works its way through the way, we think about our transformation and we have to treat our pool business as if it was independent of business Thats got to compete every single day with the agility and the flexibility.
Against the set of competitors, we cant slow it down so we're really working with our pool leadership team and Mario is doing this in consumer solutions to make sure. They have what they need to continue to stay in front and so we welcome. The challenge I think it's going to make us better and you you want strong competition because that that generally makes you a better a better.
Our company and I ultimately think this will this will certainly put a particular, but and we'll start moving forward at a faster rate.
I appreciate the responses thank.
Thank you.
Your next question is from Nathan Jones with Stifel.
Yeah, Hey, good morning, this is Adam Farley on for Nathan.
Hi, Adam.
Hey, going back to the capacity.
Labour management within pool.
Is this is there any permanent capacity additions or is it mainly just running additional shifts.
Does the pool business acquire require any additional investment to increase capacity.
Oh.
It's a combination again of things we've added a second shifts. We've also increased the number of production lines for example in heaters.
Investments that we made last year so.
To satisfy demand certainly for the current year, we're in good shape.
Two.
Going forward.
As we look out a couple of years that there would be some investment required.
Okay, and then shifting over to <unk>.
T.
Within the industrial business.
I think you called out some strength in short cycle book could you brought some color on what specific end markets are seeing some improvement.
Yes, I mean, I think simply put our industrial more capital intensive businesses.
That need that capital investment to spur the demand. So it is it really more on the industrial side are seeing us a pop and then we're seeing some some movement in the infrastructure side on our.
In the commercial.
And industrial side of our flow business those would be the two areas that we're encouraged by the trends.
Alright, thanks for taking my questions.
Thank you.
Thank you there are no additional questions at this time I would like to turn it back over to Jonathan for closing remarks.
Thank you Stephanie and thank you for joining US today, we believe pentair is in the right space for the future. We believe we have great well positioned businesses.
Celebrating investments and focused higher growth strategic priorities. This includes our leading pool business and our growing water treatment business transformation is important to us and we believe that our focus on our transformation efforts will drive higher levels of accountability and performance transformation should help us better allocate our resources as well as drive longer term margin expansion.
Our balance sheet remains quite strong and we believe this provides an additional lever of value creation. Thank you for your continued interest and we look forward to sharing more of our story at our Investor Day on June 10th Stephanie you can conclude the call.
Thank you. This concludes today's conference call you May now disconnect speakers. Please hold the line.