Q2 2021 Pentair PLC Earnings Call
Good day, and thank you for standing by and welcome to the second quarter 2021, 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 of Preston.
The 1 on your telephone please be advised and today's conference is being recorded if you require any further assistance. Please press Star then zero I would now like to hand, the conference over to your Speaker today, Jim Lucas. Please go ahead.
Thanks, Michelle and welcome to Pentair second quarter of 2021 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 of our Chief Financial Officer on today's call. We will provide details on our second quarter performance as outlined in this morning's press release before we begin let me remind you that during our presentation that day.
Forward looking statements.
Listeners are cautioned that these statements are subject to certain risks and uncertainties many of which are difficult to predict and generally beyond the control of the pentair. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors and our most recent form 10-Q and form 10-Q.
And today's release, we will also reference certain non-GAAP measures reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found and the Investor Relations section of Pentair as website.
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.
And then a follow up in order to ensure everyone and opportunity to ask your questions I will now turn the call over to John.
Thank you Jim and good morning, everyone.
Please turn to slide number 4 titled Executive summary.
We were pleased to deliver a strong second quarter with sales up over 30% adjusted EPS.
Yes growth greater than 40% and free cash flow up over $100 million and the first half of the year.
Like to thank our pentair teams for helping deliver these results even in the face of unprecedented material shortages and inflation.
Our orders continue to grow and our backlog ended the quarter at record levels, We believe our order trajectory.
Trajectory gives us increased confidence not only and our ability to keep growing and the second half, but it also gives us comfort that the top line momentum we have built the past several quarters will carryover into next year.
Our transformation work is on track and we have built a strong pipeline of initiatives across the enterprise.
Regarding the current inflationary environment.
We have implemented further price increases and we expect the price cost gap to further narrow in the second half.
Our cash flow remain robust and our balance sheet is and a very solid position.
Have a strong M&A pipeline tied to our strategic growth initiatives and we plan to remain disciplined with our capital allocation.
We.
And third quarter guidance and raising our full year expectations, once again, which Bob will give more detail on later in the call.
Our forecast reflects our expectations of material shortages and inflation and are not going away nor will they improved materially.
We believe we have better visibility than we have had and the last.
And our entered orders and that are proven and focus around manufacturing and sourcing gives us the tools to navigate the current environment.
We are encouraged to see our commercial and industrial business is recovering and our residential businesses remaining seasonally strong and as mentioned earlier our backlog supports continued growth.
Please turn to slide 5 label.
The building a track record of consistent growth.
And our June 10th Investor Day, we introduced several targets for 2022 to 2025, including mid single digit sales growth 300 basis points margin expansion and of 10% plus CAGR for adjusted EPS.
Our 2025 targets were based on our guidance as of June 10th, which we are raising once again following our strong second quarter performance our longer term target provided at Investor day would now be based off of our revised guidance.
We have experienced significant growth since the second half of 2020, and we believe the momentum.
And that we have created will continue into the foreseeable future.
We continue to believe that we have of well positioned portfolio benefiting from many positive secular trends.
And our pool business serves a large installed base water treatment help solve water quality issues for residential and commercial customers and industrial and flow technologies serve some attractive niches like.
Biogas and addition to our large installed base of pumps.
While the consumer businesses are seasonal we do not believe them to be cyclical.
While our focus is on driving the core to create consistent value creation, we are investing and a few strategic growth initiatives to accelerate the top line.
These include getting closer to the consumer.
And pool, expanding water treatment further into services and biogas and carbon capture within industrial and flow technologies.
As we drive transformation more broadly across the entire enterprise, we expect that this will drive both gross expansion and help fund growth initiatives.
Finally, we believe our balance sheet provides.
A great degree of flexibility to drive further upside primarily through M&A tied to our strategic growth initiatives.
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 up.
Thank you John.
Please turn to slide.
It's labeled Q2.2021 pentair performance.
Second quarter sales grew 32% with core sales increasing 28%.
And tumor solutions grew core sales, nearly 40% and industrial and flow technologies delivered core sales growth of 12%.
I'd say the second consecutive quarter of growth.
Segment income was up 40% and return on sales expanded 110 basis points to 18, 6%.
Adjusted EPS increased 42% to 80 <unk>.
Consistent with our guidance for the second quarter.
And did not see price fully offset inflation as we saw higher inflation and we have continued to implement price increases to help offset.
The second half should see price cost start to even out.
But and unprecedented amounts of material and the wage inflation, coupled with robust demand.
Has contributed to the price reading out and a slower pace.
Corporate expense was $26 million and the quarter as we recorded higher levels.
Compensation expense given the performance of our businesses have delivered this year.
Our tax rate was 17.4.
And in the quarter and.
As we now expect the full year tax rate to approximate 16%.
This is due primarily to higher levels of North American income as our residential businesses continued to grow at strong double digit levels.
Please turn to slide 7 labeled Q2.2.
4% 21 consumer solutions performance.
Consumer solutions sales growth was 44%.
And both businesses delivered strong double digit growth.
Segment income increased 48% and return on sales expanded 80 basis points to 24, 9%.
Consumer solutions experienced significant inflation during the first half.
As demand continued to grow.
<unk> experienced sales growth of 50% and the quarter.
While we have seen significant growth 2 quarters in a row to start the year. We believe pool dealers are doing their best to keep up with robust demand.
2000, and the theme of consumers investing and their backyards continued.
The pool team has significantly increased capacity, even in the face of material shortages and inflation.
Backlog remains at record levels and orders have more than doubled.
Even with the record year, we believe the improvement.
And orders and strong backlog gives us improved visibility that growth will continue looking ahead to next year.
The macro trends continued to be favorable and the installed base of pools continues to grow.
Demand for new pools remained strong with many builders reporting backlogs into.
The next year.
We believe consumers remain committed to enhancing their at home quality of life and enjoying of pool is a major part of the experience for many consumers.
In addition to new pool construction after market growth remains strong as consumers have used their pools more.
Water treatment delivered 30.
The 5% sales growth as residential demand remains robust and commercials showed strong signs of post pandemic recovery.
Our residential business grew nearly 20% and our commercial business grew sales by over 40%, excluding the contribution from <unk> and the quarter.
Overall, we believe consumer solutions is well positioned to deliver continued double digit growth and the second half based on strong order and backlog trends.
We expect price to read out further and the second half and close the gap on the higher inflation experienced in the first half.
Please turn to slide.
8 labeled Q2, 2021, industrial and flow technologies performance.
Industrial and flow technologies increased sales, 17% and the quarter and its end markets further recovered and the business continues to execute its strategy.
Net income increased 30% and.
And return on sales expanded 160 basis points to 15, 7%.
Residential flow grew at a double digit rate for the third consecutive quarter.
Orders continue to exceed sales and we expect the seasonal business to end the year well positioned within all of its channels.
Commercial flow increase.
Increased sales of 11% and further built backlog the commercial recovery has gained momentum with orders continuing to improve we expect growth to continue for the smaller part of the segment industrial.
Filtration delivered 14% sales growth as the shorter cycle aftermarket showed further signs of improvement.
Ticket early within food and beverage, we experienced double digit increases and both orders and backlog.
Industrial and flow technologies remains focused on reducing complexity selective growth and margin expansion.
Please turn to slide 9 labeled balance sheet and cash flow.
Free cash.
Continue to be of great story with over $100 million improvement year over year.
We generated $340 million of free cash and the first half.
We have returned $117 million to shareholders through dividends and buybacks and the first half.
We also repaid a $104 million.
Cash flow bond that matured during the quarter and paid approximately $80 million to acquire <unk>.
Although we continue to invest our capital wisely, we ended the quarter at just under 1 times leverage.
We are extremely proud and excited to see our return on invested capital exceed 18%.
And as we look at our cash flow needs going forward, we plan to remain disciplined and our capital allocation approach.
We plan to continue working the M&A pipeline and the buyback at least $150 million of our shares this year.
Please turn to slide 10 labeled Q3, and full year 2021 pentair outlook.
Bob.
We are initiating third quarter and updating our full year 2000, and 'twenty 1 guidance.
For the quarter, we expect sales to grow 16% to 19%.
Segment income to grow 18% to 23% and adjusted EPS to grow of 16% to 21% to a range of range of 81.
85.
Our forecast reflects our expectations that material shortages and inflation are not going away nor will they improved materially.
For the full year, we expect sales to grow 21% to 23% segment income to increase 30% to 34%.
And adjusted EPS to grow 32% to 36% to a range of $3.30 to $3.40.
Embedded in our full year sales guidance is anticipated growth and consumer solutions around 30%.
And with pool of expected to be up nearly 40%.
And water treatment up over 20%.
And as commercial is expected to further recover and <unk> is expected to contribute and the second half.
Also incorporated and the revised guidance is anticipated low double digit growth for industrial and flow technologies.
Below the operating line we.
Corporate expense to be around $80 million, given the higher levels of compensation expense and 2021, given the record performance expected this year.
We expect corporate expense to go back to more normalized level levels next year.
We now expect net interest to be and a range of 50 million.
The $16 million and our tax rate to be around 16%.
We anticipate the share count to average between $167 million and 168 million shares for the full year.
Capital expenditures are expected to be around $60 million, while depreciation and amortization.
<unk> is anticipated 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 over to Michelle for Q&A.
After which John will have a few closing remarks.
Michelle Please open the line for questions. Thank you.
Thank you as a reminder to ask a question you will need the press star 1 on your telephone and we ask that you limit yourself to 1 question and 1 follow up question before re entering the queue to withdraw your question. Please press the pound key.
First question comes from the line of Mike Halloran with Baird. Your line is open. Please go ahead.
Hey, good morning, everyone and thanks for taking.
The questions.
So can you just give some some some context behind the.
Incremental confidence you're seeing and the pool trajectory from here, maybe just how far is the backlog stretching now and maybe a little more detail on some of the commentary of Youre getting from the channel.
Inventory levels and.
And.
And any more context would be great.
Whereas we said in the prepared remarks the.
The backlog is at record levels the.
And at an all time high and remains very strong.
We see pool builds and into next year and beyond.
So the metrics around demand are very strong.
Certainly with.
With what we see now we have confidence that the growth will continue for a variety of reasons everything from.
Second homes being built to people spending more time.
And in their backyards.
And a number of of different products coming out. So believe that that will continue we are confident.
Enter into next year inventories are still catching up so we're.
And I'm working through that to satisfy our distributors.
Dealers.
And then just in that question, how far out of zero backlog, specifically tracking at this point or is it just meeting with what's available and the channel.
Yes. So Mike this is John first of all we look at the pool season is coming to completion at the end of September and.
And then we start the next pool season, when we get to October. So our first goal is to get the backlogs and the inventories related to this pool season out and as Bob mentioned and we feel like we're in a really strong position regarding that and then we've got to work on next year, which we feel is also going to be strong demand.
I think another level of confidence is we've been able.
Peter's and to attract labor and keep labor and our pool factories, which has been what's harder to do 3 to 4 months ago, and we're starting to manage the supply chain.
The uniqueness of that availability of product and be able to demonstrate the agility and the factories to get product out to customers. So those of those of the differences of how we.
Feel.
As far as higher confidence or not and like I think we've always been confident this is a good business and that this is a good demand, but we wanted to make sure we were able to make progress and meeting that demand throughout the year.
And that makes a lot of sense, and then and the other side of the business just maybe some incremental commentary and the recovery cadence.
And as Youre seeing.
And ft.
Sustainability, what customers are saying, how it's tracking versus normal seasonality and any incremental color there would be great.
Yeah, I'll start with that 1 day.
We were very very pleased again to see the <unk> growth.
Turn of the residential piece of the business within flow continues to be strong the.
The recovery and commercial.
As also helped the flow of business and then within the industrial food.
And beverage has been a nice growth area for us so.
It continued to grow to be able to guide to the full year low double digit growth for us is exciting after the the challenging year last year.
And we expect the the momentum to continue as well and and IMT.
And Mike I would just add that we saw our commercial and filtration businesses.
And water treatment and finally get back to levels that they saw in 2019, obviously it was an easy compare in 2020 coming off the dip that we had there but we're encouraged on those trends and we are encouraged as more restaurants and hotels and hospitality opened globally that will continue to see sequential improvement there.
Appreciate.
Thanks, John Thanks, Bob.
Thank you. Thank you.
Thank you and our next question comes from the line of George Giordano with.
Cowen Your line is open. Please go ahead.
Hey, guys good morning.
Good morning, good morning, Pete.
Hey, can you kind of just talk us through regionally how alike.
If you're out of like scale of 1 to 10, how crazy pool has been regionally or certain markets just more out of whack from the from a go forward basis, like I mean and I.
Live in New Jersey, So I know northeast New pool installations is out of you know is probably at levels that have never been seen before but can you kind of scale.
This is and more traditional markets and maybe.
The.
It's more balanced and some of these growth rates might appear and when you normalize for the comps.
Yes, So we had a couple of things going on and this year as you probably know when we had the department of engineering changeover from single speed. The variables, we're already expecting that we're going to see strong growth and that particular product.
The decline and then obviously the acceleration of new pools and remodel pools.
And is really putting a significant demand nationally on that product and that is the same product generally sold and all of the poor regions and then state by state and you've got these disruptions like Texas that has been disruptive for everybody and the fact that all of that aftermarket demand still needs.
Satisfied of of what happened with the freezes and then the rest of the markets I would say that theyre, just accelerated meaning that the rate of new builds or are consistent across those areas.
And then the aftermarket demand replacement cycles or the additive.
And more products and my pad had.
And had been traditionally across the Sun belt States. So right now it's.
I would say the demand is not easing and we're all trying to catch up with that demand and worked through our supply partners to do that.
And then if I can just sneak 1 in and I apologize if I missed it and the very beginning.
But any update on timeline.
Needs to be introductions from some of these like in home point of view systems like with emotion.
Yes.
Our next year product introduction for us as we work to try to get that the.
And the technology up to speed, and then and 1 launch that somewhere around the end of the year and the early part of next year with the soft.
New product and then expect to ramp that up throughout next year.
Great. Thanks, guys.
Thank you.
Thank you and our next question comes from the line of Brian Lee with Goldman Sachs. Your line is open. Please go ahead.
Hey, guys. Good morning, Thanks for taking the questions.
Launch and maybe just a follow up on Joe's question, just any initial views on the new nuclear market for 2022, I know it sounds like from listening to other supply chain players the general expectation for about 110000 or so call. It this year, but wondering if you think that number of grows next.
And then with respect the backlog trends and I know Youre at records, but kind of what sort of visibility can you quantify to any degree you have with builders currently heading into next season.
I think builds will continue to grow I think.
It's capacity constrained generally by labor and product availability beyond just.
And as we have to do the landscaping and those backyards.
So we continue to think that 2022 will be of robust year, there and then additive to that number we always sort of remodels. So the pools that need to also be done. In addition to those new pools and then we were really pleased as the penetration.
Pool at the rate of the products on the pad and more and more awareness of heaters automation and salt based coordinators those types of products of what we really see and the acceleration so.
Yeah.
And I think we want to continue to grow from here and we believe that we have right now are enough visibility to.
<unk> 2022 is the growth year.
Alright fair enough and just as my follow up on the on the price increase you mentioned the latest price increase.
Can you give us some quantification around.
What what that level was when that was implemented or when that's going into effect.
To feel and then what parts of the portfolio of here if I look at your consumer solutions segment and for the back half of it seems like it's too.
And kind of of 20, 25% year on year of growth number for the for the back half year, how much of that is price how much of that is volume and assuming a lot of that is going through that part.
The the portfolio of here thanks, guys.
And what I'll do is just.
Share a little bit of color around.
Price and inflation overall for pentair.
And Q2 price was a 2 point benefit for us and inflation was with quite.
I quote close to 5 points.
As we move into the back half.
Think of inflation and that 5 to 5 and a half point range, so slightly higher.
But think of price reading out at closer to 4 points and.
And the back half.
So we.
And we improve from Q2 and narrow the gap, but it continues to be of challenge and.
The whole material shortages is the challenge for our ops and supply team and we're really appreciative of all of the work that that team has done.
In the second quarter, they really did a nice job, helping us drive that 32% sales growth.
They did have the luxury of more.
Raw material sitting and that opening inventory.
So as we move into Q3 and Q4 the challenge.
And the team is really to deal with the lumpiness of of the material shortages. So.
Every week as interesting as they plan the production schedule and the team is doing.
The remarkable job 2 to achieve the numbers that.
And that we've we've guided to.
And then just a follow.
Slow up on on your price question and we look at the business. We have 3 general business models and of dealer distributor of short cycle businesses, obviously, it's easier to to work with the supply chain and then work with the channel partners to raise price in those areas and they usually get through relatively quickly.
And then we have our more OEM related.
<unk> forces or our larger company programs, which takes time and then we've got the projects that you quote and you're basically dealing with the cost of inflation.
And until you quote that next set of projects.
And that's the other color I'd bring across those 3 business models and.
And it all blends to the numbers.
And that Bob shared with you.
Alright, Thanks, guys for all of the color and pass it on.
Thank you and our next question comes from the line of Jeff Hammond with Keybanc capital markets. Your line is open. Please go ahead.
Hey, good morning, guys.
Good morning.
Hey, so the Incrementals and the quarter were certainly better than I thought and and.
And how you guys guided on the June analyst day, and I think that was the concern. It seems like price is more of a help and the back half, but what kind of surprised you to the to the better you know and the second quarter and how should we think about incrementals and the back half.
Well I think we we got some of the productivity that we were.
Expecting and it read out and we feel like that's generally sustain which was definitely better and then obviously when we get more pool product out the door. It generally drives the higher levels of margins for pentair and we were.
We're able to get capacity levels up and pool and we benefited from that.
Okay and then.
Just on.
I guess the.
View into 2022.
And the strength here and pool, where do you think.
Some pull forwards happening or stuff that.
And maybe isn't repeatable I know I know there's good.
Good demand trends on new and remodel, but where have you seen maybe the most you know kind of pull forward in terms of consumer attitudes.
Well I think.
I think every single.
The channel partner.
And we have is spending a disproportionate amount of time trying to work with us to get product to the next job. They are doing right on the Newbuild side. So when you see the increase of the Newbuild simultaneously with the demand for aftermarket youre trying to balance those 2 things at the same time.
So I think some of the traditional filter and.
Pump are obvious because every every pool pad needs those and they have to be repositioned to where the jobs are and how do you get the inventory where you need and then some of the more.
Nice to haves and the pool that can be deferred <unk> added later is really where we think the majority of the.
Backlog gets repositioned for next year.
Okay. Thanks, John.
Thank you.
Thank you and our next question comes from the line of Bryan Blair with Oppenheimer. Your line is open. Please go ahead.
Thanks, Good morning, guys.
Good morning.
And I was hoping.
Let me get off of it a little more color on the <unk> integration and head of service network is influencing your commercial water treatment and recovery and prospects going forward.
So for us and all Kpis really.
The exciting acquisition for us that closed in the second quarter.
We now are able to provide of.
Services within the commercial space.
It's a bit of business that we can learn from.
And then leverage to help grow and in that area.
So really strong start.
For us.
And that business and.
Exciting to see the footprint and the opportunity within that area that we really haven't.
<unk> been able to drive into.
That's excellent.
And then I think you said, 40% total growth.
For commercial treatment and the quarter I apologize if I missed it did you slip of the organic figure.
Yeah the.
The.
The growth for the full year and our water treatment.
We gave what was 35%.
And in the slides I think Bob right for Q2 and then.
There's just a modest contribution from <unk> and the quarter.
And then for the year.
And the full year outlook that Bob gave and think of and it goes.
Roughly.
The $2 million of quarter for KBR.
Okay I appreciate that and then.
Yes.
The growth that we gave.
For the.
For the second.
Second quarter excluded the 40% excluded the contribution from from Tbi.
Okay I appreciate the clarification.
So thank you.
With that momentum and John you stated the last couple of quarters that it's unlikely that the commercial demand would recover to 2019 levels.
With the the pace the momentum that you have and the business now does that change and why I actually as I said I think we're.
19 levels now.
So we took a dip last year and now we're recovering to modestly growing versus 2019, we do believe that starts to accelerate from here.
But we need the rest of the world to continue to open.
Primarily the hospitality would be the 1 area that is not yet as robust.
We're at net global travel primarily.
And once that gets going and I think we feel like we're growing off of 19 levels again.
And that's great. Thanks Kim.
Yeah.
Thank you and our next question comes from the line of Nathan Jones with Stifel. Your line is open. Please go ahead.
Good morning, everyone.
Good morning.
And I'm just going to follow up on that on the discussion there on commercial water treatment paying back the 2019 levels I can't imagine that the market is actually back to 2019 levels. So can you talk about where you think you've gained share and these market or you know and what's driving your ability.
And to get back to 2019 levels, where and I can't imagine that the market could possibly be back to that level yet.
And so theres some spaces that we have a higher participation rate in our data and like a quick serve restaurants and and also you know what you've got.
Gas station of service.
And those those are beverage.
Hotspots as you can imagine and.
We are anticipating growth filtering the ice and also filtering the the beverage dispense. So that is a area that has definitely picked up faster than it was in 2019 and.
And the rest of the full service restaurant.
Trance and hospitality and slower to recover but it's still recovering.
Okay. So your mix is more skewed to the stuff that is that does have a market level back to where we benefit from that yes.
And all you faced right.
And then a follow up on that price cost equation, as well and narrowing the gap and the second half pretty big gap, there and the first half.
And the unlikely event that we get kind of stable input prices would you expect to be net price cost positive in 2022 as you make up the deficiencies from 2021.
Don't know yet I mean, we definitely have learned a lot about.
<unk>.
The inflation.
And sourcing inflation is usually easier to protect and see and and I think we've done a relatively good job on that 1 where I think we still been playing catch up this year's labor inflation and the the.
And the amount of the wage increases that have occurred throughout the year Nathan.
We're making sure that we're using best practices as we quote the next.
And in next year's projects ahead of time, and then we're making sure that we keep agility and focus as we think about how to price more effectively on the shorter cycle businesses.
Great. Thanks for taking my questions.
Yep.
Thank you and our next question comes from the line of Ryan Connors with Boeing.
<unk> kind of get your line is open. Please go ahead.
Great. Thanks for taking my questions.
And wanted to and I had a big quick picture question and sort of the aftermarket opportunity you alluded earlier to this idea of their so called nice to haves and our pool pad that maybe arent going in right now because of the supply chain constraints.
Range and so my question is how should we think about the growth and the installed base over a couple of nice years year on new builds and.
And what that does to the structural aftermarket opportunity.
And the next several years 3 to 5 years out I mean is that meaningful that expansion and aftermarket and.
And globally, that's a good thing from the mix perspective can you just give us your thoughts there.
Yeah, I mean, we look at it is every new pool that goes in is additive to the $5.3 million in ground pools that exist today and as people use their pools more and more of the number 1 thing they look to as the water chemistry of their pools and then how do they make it more enjoyable.
<unk> and comfortable as and experience and.
Those things tend to drive higher degrees of automation and consumer awareness and also then leads you to figure out what else you can do to either self manage yourself monitor your pool or control heat and or the other comfort aspects of your pool. So we look at all of this is.
And who is to build out the long term demand and.
And the channel.
Okay and then my other 1 was.
Just wanted to get your reaction and Theres a lot of it and the news about this global minimum tax rate and a lot of movement on sort of tax rates and I know you've got the unique jurisdiction.
As of corporate so any any thoughts there on.
And how that could impact pentair or not from a tax rate standpoint, depending on.
And how that plays out.
We're in the process of assessing what the the impact.
And what the.
Still too early to really give a.
Perspective, but.
From.
Our early view here is that.
And would be some upward drift and the tax rate, but not net not significant.
Lee.
Higher at this point and then.
Certainly better than a number of our competitors.
Okay fair enough. Thanks for your time.
Thank you and our next question comes from the line of Andy Kaplowitz with.
Citigroup. Your line is open. Please go ahead.
Hey, good morning, guys and.
Good morning.
John You mentioned you were excited about how much smart automation and heaters and really new pool pad products in general are adding adding to remodel and aftermarket growth can you give us a little more color into how much these new upgrade.
Pool pattern of our may be more secular have you invested enough in your sales and product capability to take advantage of this trend and what do they tell you about the longer term growth potential and pool, how much do you think they could contribute to the longer term growth.
It's a great question I mean, you know we've been stocking of the industry's been stuck and we'd been with it somewhere around.
It's mark.
Modestly and the double digits of automation.
And I think just with the recent trends and more and mesh networks and getting Wi Fi and in the backyard and of more dependable basis, it creates more opportunities for more.
More automation.
You really need awareness and you need people to use the <unk>.
And I'll just care to really drive that behavioral change and that's what we're most encouraged by and there's also a better technology.
Great price points that we're participating into to manage and monitor water chemistry, and then to begin to determine whats necessary to balance of those those water areas.
And that's where I'm really Super excited we also saw and we.
We share this openly that as people use their pools more of the heater matters and that was always a nice to have on the pad and the older builds and as the most people remodel and now they are putting those heaters in most of the spa and for the pool.
<unk>.
And we've seen the trends and lighting earlier, we saw the trends working around some of the variable.
And the pump penetration, we're now starting to see that extend to the other capabilities around the pool. So.
I think it's a few points of of overall pad penetration for the industry over the.
The next several years and that encourages us and excites us.
And John I might have missed this in the prepared remarks, but at your analyst.
Speed day, you had mentioned that you are right in the middle of the 12 weeks friend to come up with ideas and the form more of the basis of the transformative plan that you laid out of the day in terms of margin improvement and so maybe you can update us on sort of what sort of what sort of ideas of come out of that any sort of interesting observations you would make.
So.
And my official report out as this Thursday with the executive team and I'm looking forward to.
And that set of brainstorming actions, we've engaged a lot of people. So that we've got of voice from.
The broader organization, it's required patients of my part and not jump and kind of know what the answers are so I'm not going to jump ahead.
Analysts and.
But I have seen the funnel and I've seen the list of ideas and I would say that it's more sizable than I originally thought and now it's about how do we put the programs around it to action them and to think about sequencing them to derive the value from them, but really really encouraged right now and on the participation.
Ahead of that and the organization and the ideas that are starting to surface.
Yes.
And I've, probably been a little less patient and then John So I would I would confirm that the.
And the pipeline of opportunities is very robust.
A lot of complexity reduction initiatives.
And there is.
Huge opportunities.
To drive margin expansion and to really help.
And with those analyst day numbers, we said in the prepared remarks that even with the higher guide this year.
Go ahead, and and add onto this year, the 300 basis points of margin expansion.
This patient into the future with revenue.
Our revenue will grow at that mid single digit plus plus number that we shared at analyst day, So transformation will be a big part.
The us achieving achieving those results and embedded and all of this is ease of doing business with pentair. So the.
And much much.
The better situation for our distributors and dealers as well.
I appreciate it guys.
Thank you and our next question comes from the line of Josh Puck Lynskey with Morgan Stanley. Your line is open. Please go ahead.
Hey, good morning, guys.
Hi, Josh.
John just on some of the inventory commentary out there and the.
And distribution or any kind of dealer channel.
Any sense for what that's like kind of on a I guess of normalized basis, maybe absolute levels versus 2019 I think.
Days on hand are probably pretty low just given how.
Strong the growth pacing, but if we were the sort of dial that back a little bit or normalize that wood inventory sort of b and the right Zip code or would they still be kind of low on an absolute basis.
Josh without getting too specific.
They are lower than we should be and our customers and channel partners are asking us every single day to pick up the pace and get them more equipment, alright thats less.
The way I would say it.
And it's exhausting to the plant teams to keep up the demand and.
The sell throughs you can.
Articulate from.
Sure.
Other People's releases and you'll see that we're trying to do what we kind of catch up with it.
Got it Thats helpful.
And then just touching on the last question that I think got asked on.
Some of the other.
Quasi discretionary stuff you mentioned heaters.
How much were those up relative to.
The the pool business I would imagine a lot of that is more kind of first fit then.
And then necessarily the replacement of an existing heater or is that is that fair.
Yeah, I mentioned it because we saw that really go into the back half of last year and in a broader way if you recall.
Call.
And so now when we think about Anniversarying. The back half we are still growing on top of those levels, which which gives us encouragement that these arent necessarily 1 and done but we're seeing long term penetration of these product lines.
Got it appreciate the thought.
Thank you.
And the rest of the thank you and our next question comes from the line of Scott Graham with Rosenblatt. Your line is open. Please go ahead.
Good morning.
John Bob and Jim and I have some.
Questions a couple of questions about.
The price cost and I was wondering Bob.
Would you be willing to sort.
The split out the labor piece of the inflation.
And you saw in the quarter.
Okay.
Roughly speaking.
2 thirds of material 1 third of labor.
And and maybe.
Help us maybe understand a little bit on the labor side, so you're talking about increases too.
The compensation pool for your current employees to routine and because.
Sure.
The business unit heads are.
And we're going to lose people. So you kind of got it and get more aggressive there are these new employee adds could you.
The little color on that if you don't mind.
Yes, I think it's both I mean, when you look at having to add to your labor base. You you are confronted with what are the real.
Real market dynamics to add and then you have to go back and you have to make sure that you're the existing loyal and employees are paid at least that if not more so it creates a dual impact.
1 trying to get the new people and then making sure that your current employee base and well taken care of.
Thank you for that.
You're saying on the productivity, particularly ft.
Is that the beginning of some of the.
Reduction and complexity the $10 million is there a piece of that and there yes.
Yes, there is a big piece of that and there.
And I think we're really encouraged with their efforts around that and we think.
That that is that's why Bob also mentioned the transformation and I think we learned from certain categories that have done. This we've seen how it reads out and better efficiencies on sourcing and also.
The less complexity for customers. So, we're really encouraged and that trend and we expect to bring that across the enterprise and a faster way.
Okay. Thank you last question and this is.
The question you might not be able to answer but.
Just going to shoot anyway the.
And the prices of assets or.
Pretty inflated speaking of and.
And we have <unk>.
T, which is the business that needs to.
And we need to do some fixed and improve the margins there, but it looks like particularly as of Thursday, you're going to have a very clear path to do that and as an acquisition and announced in the space you know and I say in the space, you know and sort of the multis area.
Just in the last couple of days, where it fetched.
About 17 times, EBITDA, which is your multiple and I'm just assuming that the pool multiple is higher than the eye of T multiple embedded within your valuation.
Is there any thinking around you know I F T spinning that off at some point down.
I mean, particularly with asset prices, where they are now.
Yes, Scott I mean, the way I look at it is I think we have a really good IFC business that continues to demonstrate progress towards these goals I mean, I'm really encouraged by the way, it's growing double digit core growth this quarter and starting to build out the order pipeline and I'm also.
The large the about its focus its complexity reduction and its commitment to the margin expansion now I'm going to get through the transformation work and I and I believe that this business has significant margin expansion in front of us So I believe the the.
Of course of action is that it's going to create value for pentair, whilst part of our portfolio and that is the big important part of our portfolio.
And so and correct.
And you both.
Thank you and our next question comes from the line of Rob. Please on the IR with wireless research. Your line is open. Please go ahead.
Thank you and good morning, everybody.
So mark touched on this a couple of times the corporate water treatments.
Cyclical right.
The rebound.
And as less impact.
The impact from changes in distribution changes and residential and commercial.
Is that correct and some of the work youre doing underlying really kind of.
Allows us to call some of that growth mark structural them the much rebound the rehab and then just maybe just kind of reiterate of course.
The timeline of the impact from what we're doing the thank.
Thank you.
Yes, so just within water treatment and to remind you of roughly $800 million pro forma business. We of residential we have commercial and the residential has been fairly strong.
A little lumpy through COVID-19 with the ability to get and people's houses or not and as far.
Or is what we're trying to do there, but now to the point, where I think we've got steady state growth.
If you recall when commercial happen there was generally of closure of most restaurants and hospitality and that's the and offices where people drink water and that was a huge setback for our business last Q2 and that has slowly been recovering as.
As people return to.
More of the normal of the way it used to be pre COVID-19, but we're not yet back globally to where we expect it to be.
I think our our addition of of <unk> gives us the ability to add services components on top of products, which strategically is what we think our customers want.
We're very encouraged about the the early signs there so.
I think we're starting to return and I think we're now and what I would say every part of that portfolio growing versus being more residential led as it wasn't the last several quarters.
Okay.
Thank you and our next question comes from the line of Julian Mitchell with Barclays. Your line is open. Please go ahead.
Hey, Good morning, this is Josh on for Julien.
Hey.
Hey.
Just on free cash flow has been very strong year to date under normal seasonality, you think kind of second half free cash flow.
And what does that kind of 50 or 60% of the full year free cash should.
Should we expect as normal seasonality to occur this year and maybe if you could just walk us through the moving pieces there for the balance of the year.
Yes balance of the year of free cash flow remained strong.
It's really helping US is we will get.
So a couple of fast start at the beginning of each quarter of the linearity.
<unk> is a is very strong so I expect and another strong free cash flow year following last year and.
Yeah I'll continues to will continue to drive it over 100% of of net income.
Great and then maybe 1 more on IFC and or you guys have talked about the significant margin expansion opportunities there and how should we think about inorganic opportunities. There can you just remind us kind of what end markets and products you might look to increase your exposure to within that segment.
Yes, so we hinted at analyst day.
We really right now like the carbon capture.
Capture and the.
And also the sustainable gas parts of that portfolio and we feel like we've got a fairly.
Good position, there and we would love to continue to scale and and also be.
Able to provide the regional partners the the solutions they need.
We are at the heart of everything we do of membrane.
And focused company, so we like to look and into filtration and have opportunities to expand our filtration capabilities as well and as a reminder, even though we use some of these.
Technologies and the consumer solutions, the initiate those applications and <unk> and we cross pollinate those across both segments. So those of the 2 areas that I would say.
And are definitely areas of focus and the IP portfolio.
Great. Thanks, guys.
Thank you.
Thank you and our next question comes from the line of Deane Dray with RBC Capital Management. Your line is open. Please go ahead.
Hi, This is the hiller on for Dean.
Well, hi, Tyler on for Dana.
And sorry, if I missed this but could you discuss some of the supply chain issues that you guys are seeing obviously, you mentioned product availability and some of the prepared remarks, but are you seeing other other supply chain issues like port congestion or anything there.
Yes, yes, and yes, I mean everything.
And that you are hearing we're experiencing and some type of inconsistent way right and so we'd say that even though we've had availability of most of the supply we need it's very inconsistent and its predictability of when and how it's coming which has forced tremendous agility and our factories to rearrange and the lean way, where we put the.
The the labor efforts and sometimes we're producing 75% of of product and then coming back and finishing 25% of later to give you. An example.
So that's why we're very complimentary of our teams as Bob said, because it's required all kinds of different skills to be able to move forward.
The main challenges to us are the chips would.
And would be drives we've made motors.
And those those would be the areas that are and high demand for the products that we serve.
Great. Thank you for that and could you guys provide just kind of any updates on some of your new kind of Iot product set of launch recently.
Or planning on market.
So we're.
And we're excited by that and I think first of all really excited about the momentum we're building in <unk> and a lot of their Iot enabled.
Services.
The ability, we've we've launched a <unk>.
And the consumer solutions side that allow you to connect to our pentair home App and we continue to add.
Product.
Capability to give you a better consumer experience. So I'd say most of those have been soft launched in 2021, and we'll expect to accelerate in 2022 and beyond and then I have to beg of plug because I.
No Dean would be very interested and this tyler is the.
And we feel like we're really making some progress.
Some smarter filtration technology for pool, as well and we're excited as we mentioned the analyst day about the.
And the progress on that technology, and making pools clearer and more visible and.
Using the utilizing less chemicals to achieve the same outcomes.
Great. Thank you very much.
Thank you.
Thank you and I'm showing no further questions and I would like to turn the conference back over to you John Scout for any further remarks.
Thank you Michelle and thank you for joining us today, 2021, and experiencing a phenomenal year of growth and we believe the future continues to be bright for pentair. We believe we have strong business.
Business platforms that are industry leaders and their designated spaces. We are in spaces that are growing faster than the overall global markets and are propelled by attractive secular trends and we have carved out exciting strategic growth priorities and which we have already begun to demonstrate performance.
Further our transformation journey is designed to unlock value to allow us to grow faster.
And then the industries that we participate in and helped us to expand margins rapidly by 2025, and finally, our balance sheet is strong and we believe we will continue to get stronger supporting incremental value creation of above and beyond what our base businesses can do on their own with tuck in M&A and Michele you can conclude the call.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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And.
Yes.