Q3 2021 Pentair PLC Earnings Call
Good day and thank you for standing by welcome to the Q3 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 to press star one on your <unk>.
Telephone 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.
Thank you Stephanie and welcome to Pentair third quarter of 2021 earnings Conference call. We're glad you could join US I'm, Jim Lucas Senior Vice President Treasurer, and Investor Relations and with me today is John <unk>, President and Chief Executive Officer, and Bob Fishman Chief Financial Officer on today's call. We will provide details on our third quarter performance as outlined in this morning's press.
Please before we begin let me remind you that during our presentation today, we will make 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 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 in our most recent Form 10-Q and Form 10-K 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 in the basket inflation protection Patricks 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 I wanted to follow up in order to ensure that everyone has an opportunity to ask their questions I will now turn the call over to John.
Thank you Jim and good morning, everyone.
Let's turn to slide number four titled Executive summary.
I'd like to thank start by taking our pentair teams for delivering an outstanding third quarter in the face of unprecedented material shortages and inflation.
We were pleased to once again deliver strong double digit sales and EPS gains.
While it is easy to focus on the supply chain and inflation challenges that we all currently face and it is also important to appreciate how strong 2021 has been for pentair.
Year to date, we have delivered 25% sales growth nearly 40% segment income growth, we've expanded margins 170 basis points and grown EPS, 40%.
We have said that we view our business is more seasonal than cyclical and a robust backlogs give us further confidence in our ability to continue our strong momentum in Q4 and into 2022.
In addition to the strong sales and earnings growth, we have generated over 500 million of free cash flow. This year and our balance sheet is strong we ended the quarter under one times Levered and I am, especially proud of our 19% ROIC.
We have completed two acquisitions this year that further advance our strategy, we acquired <unk> earlier this year that added commercial services capabilities to our growing water treatment business.
We recently completed the <unk> acquisition that brings strong aftermarket filtration products not only to our flagship pool business, but also to our industrial filtration business.
Given the strong third quarter performance, we are tightening our full year guidance range, which Bob will give additional color on shortly.
There remains a lot of uncertainty as we end the year, given the ongoing material shortages logistical challenges and inflation.
In fact, we experienced more inflation in the third quarter of 2021 than we did in the full year of 2020.
We have gone out with multiple price increases across most of our businesses. This year. There was a lag from when price increases are announced and one we recognize them, particularly given our strong sales and backlog growth this year.
The good news. However is we should have strong pricing tailwind entering next year.
This has been a great year and we believe we have a lot more runway ahead to become an even stronger company.
Please turn to slide five label building a track record of consistent growth.
We believe our strong performance over the past several quarters reinforces that we are in the right spaces for the future.
Our portfolio of industry, leading products and our services help consumers move improve and enjoy their water. In addition to a growing industrial filtration business focused on faster growing niches such as sustainable gas.
We are building a track record of consistent growth.
Our residential businesses have enjoyed robust growth and we believe theres more to come or commercial and industrial businesses had been recovering back to 2019 levels and backlogs had been building in these longer cycle businesses.
We're making great progress in building out our strategic growth initiatives as I mentioned previously we have completed two acquisitions this year that furthered our pool and our water treatment strategies.
We're also driving transformation to both unlock value and to fund growth.
Well some of our businesses are further along the journey, we have identified a strong funnel of opportunities to help us become more productive better serve our customers and drive growth and margin expansion.
Our balance sheet as another lever available that offers great flexibility to invest in our core return cash to shareowners and to fund strategic acquisitions.
2021, it's been a great year for Pentair, and we believe there's a lot more yet to come I would now like to turn the call over to Bob to discuss our performance and our financial results in more detail after which I'll provide an update on our overall strategic position Bob.
Thank you John.
Please turn to slide six labeled Q3 2021 pentair performance.
Third quarter sales grew 21% with core sales, increasing 18% and.
Tumor solutions grew core sales, 26% and industrial and flow technologies delivered core sales growth of 8%.
Segment income was up 28% and return on sales expanded 90 basis points to 18, 5%.
Adjusted EPS increased 27% to 89 cents.
Inflation continues to be a significant headwind.
We saw price nearly offset it in the third quarter.
Corporate expense was $17 million in the quarter and our tax rate was 16% in the quarter.
Overall, the third quarter was another solid performance across the enterprise as our teams continue to deliver in the face of material shortages logistical challenges and inflation.
Please turn to slide seven labeled Q3, 2021 consumer solutions performance.
Consumer solutions sales growth was 30% as both businesses continue to perform at record levels.
Net income increased 27% while return on sales contracted as price did not fully keep up with the significant inflation headwind.
While we have implemented additional price increases a record backlogs and strong double digit growth create a lag from when the price new prices read out.
We believe this creates a tailwind on price entering next year.
But inflation does not appear to be moderating.
All experienced sales growth of 32% in the quarter and was up 5% sequentially.
Demand in the industry remains strong even as the full fiscal year ends and activity begins to moderate.
In fact dealers are booked well into the third quarter of next year, which we anticipate will result in another strong pool season next year.
Mortgage rates continued increases in home equity and.
The ongoing trend of suburban migration are all contributing to robust demand for the industry.
We continue to see strong demand for our variable speed pumps as new efficiency regulations drive transition from single speed pumps.
Majority of our mix has shifted to variable speed.
2021 has been a good year for new products, including our Intel a bright HD light and higher energy efficient heaters we.
We expect next year to be another strong year, including advancements in filtration and continued expansion of connected products.
Demand for new pools remained strong with many builders reporting backlogs into the latter half of next year.
Our record backlog and favorable demographic trends give us increased confidence and momentum as we look to next year.
Water treatment delivered 28% sales growth as residential demand remains robust and commercial showed strong signs of post pandemic recovery.
We saw our direct to consumer business, improving leads and closings in several new markets and we continue to evolve our business model.
We've made great progress and rebranding the business and are also building out our service capabilities.
The commercial recovery continued and the integration of <unk> is going well we.
We had a total water management went in the quarter that was a great example of taking a product sale and adding installation and services with an existing <unk> customer.
While our restaurant foot traffic is still not back to 2019 levels average ticket prices are up and the result is continued improvement in orders and backlog for what has historically been a shorter cycle business.
While consumer solutions has felt the biggest impact from inflation and material shortages in the short term we have successfully implemented multiple price increases that are yet to fully read out and strong backlog levels point to anticipated continued growth for this segment.
Please turn to slide eight labeled Q3, 2021, industrial and flow technologies performance.
Industrial and flow technologies increased sales, 8% in the quarter, while segment income grew 23% and return on sales expanded 180 basis points to 14, 8%.
Residential flow grew at a double digit rate for the fourth consecutive quarter.
This growth was accomplished even in the face of supply chain constraints, there are not showing signs of mitigating.
Our customers have continued to experience strong sell through which gives us confidence that we will continue to grow.
Rice is also beginning to read out further and should be a tailwind entering next year.
Commercial flow increased sales, 6% in the quarter.
Focusing commercial flow continues to be on complexity reduction better price realization and building out the aftermarket business given the large installed base.
Industrial filtration delivered 8% sales growth led once again by recovery in the short term by a shorter cycle business, our food and beverage.
We continue to see strong orders and our sustainable gas business had strong backlog growth and a growing order funnel, where we experienced an improvement in our win rate.
<unk> is building momentum on return on sales expansion and our transformation initiatives, coupled with price realization, improving we believe should drive more improvement going forward.
Please turn to slide nine labeled balance sheet and cash flow.
Free cash flow continues to be a great story as we have generated over $500 million year to date.
We have returned $200 million to shareholders through dividends and share repurchase during 2021.
Our balance sheet ended the quarter exceptionally strong.
With leverage remaining under one times.
Turn on invested capital ended the quarter at 19% a number we are particularly proud of.
We had a higher than average amount of cash on hand at the end of the quarter as we awaited the completion of the <unk> acquisition, which occurred last week.
Our balance sheet gives us a great deal of flexibility to invest in our strategic growth initiatives, both organically and through strategic acquisitions like <unk> <unk> <unk> co.
Please turn to slide 10 labeled Q4, and full year 2021 pentair outlook.
We are initiating fourth quarter and updating our full year 2021 guidance.
For the fourth quarter, we expect sales to grow 15% to 19%.
Segment income to grow 16% to 24% and adjusted EPS to grow 16% to 24% to a range of 81 to 87 cents or.
Our forecast reflects ongoing material availability headwinds and higher inflation.
For the full year, we expect sales to grow 22% to 23%.
<unk> income increased 32% to 34% and adjusted EPS to grow 34% to 36% to a range of $3 34 to $3 40.
In addition to supply chain and logistics challenges, we would also remind investors that the fourth quarter historically incurs a seasonal slowdown for many of our residential businesses as the weather turns less favorable for outdoor activity. In addition to fewer work days around the holidays.
Below the operating line, we continue to expect corporate expense to be around $80 million. We now expect net interest could be around $15 million and our tax rate assumption remains at around 16%.
We anticipate the share count to be around $167 5 million, both for the quarter and the full year.
Capital expenditures are expected to be around $60 million, while depreciation and amortization is anticipated to be about $80 million.
We continue to target free cash flow to be greater than 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.
Stephanie Please open the line for questions. Thank you.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad that star. One. Your first question comes from the line of Andrew Kaplowitz with Citi.
Hi, This is a time buchbinder on for Andy Good morning.
Good morning, good morning.
So inflation and I ended up T. Here's a imbalanced with pricing in the quarter should price cost for the segment inflect positively in Q4, and what is their expectation for price cost positive in consumer solutions.
Okay.
And as we said in the prepared remarks price is reading out nicely.
And both of our segments. Unfortunately inflation continues to be a headwind as we look.
Look at the fourth quarter.
I think that you know consumer solutions, there is probably the bigger impact of the of the margin challenge with a bigger backlog and the fact that.
Prices reading out a little bit more slowly in that business I think we'll continue to see a challenge margin at.
At least in the fourth quarter for <unk>, they have some really nice productivity improvements and so.
Margins should continue to do.
To improve even though inflation continues to be a challenge.
The other point I would make is.
And you saw a little of this in the quarter. Despite <unk> being a very strategic acquisition. It is a services business services businesses don't have the large margin profile and so it's not going to have the same margin profile as consumer solutions. So it is slightly dilutive to margins, but as we.
We bring pico in as well, even though it's a really.
Highly valuable asset and one that we think is going to have great runway in the aftermarket side. It will also have a lower margin profile than consumer solutions. Today. So both of those will be a slight drag on the margins, but on both their various strategic tuck ins that we think add significant value over the long time.
That's helpful. Thank you and you called out improving capacity and pool is supporting results in this quarter as well as in Q2, where would you say capacity utilization stands now relative to its potential within your existing pool footprint.
It's hard to answer that I mean, I think we're no we're not the capacity challenge right. Our factories have capacity to meet the demand we are still working through the supply chain and as.
As we mentioned in Bob's remarks, I mean, the supply chain is.
Usually volatile right now even when we can get supply we have to worry about ports, we have to worry about freight we have to worry about transfer transportation. So we've got a real lumpiness as far as what's coming in each day and we're doing the best we can and the teams are I'm really proud of the team's agility to move forward and deliver again, a really solid quarter in the wake of challenge.
Fly chain areas. So cant answer the capacity issue, but we have plenty of capacity left within our buildings.
Thank you I'll pass it along.
Your next question comes from the line of Joe Giordano with Cowen.
Hey, guys good morning.
Good morning.
So sorry, I joined a couple of minutes late so I apologize if you covered this but.
In our checks that we're doing with the pool sector. It seems like pricing and next year's comfortably in the double digits I think I saw you guys plus eight or so in consumer.
Do you expect that to kind of like be a lagging indicator you see that kind of going up with whats currently in the market.
Yeah, I think we you know obviously too early to guide on 2022, right now, but given where we are with inflation and you know as I said.
More inflation than in Q3 than all of last year combined and you know, even though we plan for a doubling of inflation where in the quadrupling in quintuple a range, which is startling right and so I do think with the supply chain logistics, we shouldn't anticipate that inflation continues to grow into next year and therefore, we would continue to price to.
<unk> to hopefully offset that inflation and so yes I think.
The ranges that you're suggesting are more of the probable direction.
If I could sneak in one more just on on pool.
If you were to categorize your business I know, we talked about like new builds versus retrofits versus just your traditional kind of break and fix like how would you categorize the growth that youre seeing now does anything like in any one of those seem like just way off of what you would expect or is it kind of balanced across those three verticals there.
Thanks, guys.
Thank you.
Your next question is from Mike Halloran with Baird.
And gentlemen.
So on the call.
Comments that Bob made about some seasonal slowing which is normal going into the fourth quarter.
Just digging on that a little bit is the thought that you could get pretty normal sequential is across your business units going into the fourth quarter or is there some sense of any weakening or strengthening demand in any of the two area any of the areas you sell into or are there areas, where the supply chain might be a greater headwind going.
In the fourth quarter than maybe what you would've saw in the third quarter.
The guide for Q4 from our perspective.
You'd always is roughly flat sequentially as kind of how how we think about it.
We.
We have a little bit of challenges in terms of the seasonality of some of the residential businesses, but to be honest. The backlog is so healthy going into the fourth quarter.
It's really about.
The supply chain and.
The material challenges that we face so the business continues to be very healthy from a demand and backlog perspective, we are seeing some seasonality in the fourth quarter about residential but it really does come down to the supply chain.
So in other words, there's nothing wonky that you're assuming in guidance versus normal seasonality.
Nothing no no.
Okay.
And then follow up balance sheets in great in a great spot sub one times levered.
So twofold, one could you just talked about actually a pipeline I just spent a couple of good deals. So far this year and then secondarily what would the calculus be to increase the rate of share buyback at this point.
Yes, Mike It's John I think without a doubt you mentioned I think the funnel is healthy and there's a lot of M&A activity.
While we're not going to necessarily accomplish everything I think we want to be active and we want to be focused on our STI activities. So that's where we're at right now.
In fact, those the pricing gets too lofty or they're not the right deals for us I think we'd lean back into utilizing the cash on the share buyback side.
In addition to our normalized targets that we published is $1 50 a year.
I appreciate it. Thank you. Thank you.
Your next question is from Brian Lee with Goldman Sachs.
Hey, guys. Thanks for taking the questions maybe.
Maybe just a bit of a follow up on the last one the revenue guidance for.
For the year is up $15 million at the midpoint for 2021 I guess first question is does that include fleet go now and if so how much are they adding I think you said $95 million in the press release.
When you announced the deal. So it does seem like something you know, maybe falling out or coming down maybe about $70 million to $80 million.
If we're if we're adding that relative to the original guide.
So maybe about two percentage points can you help reconcile a bit.
What's going on with the guidance there.
Just to clarify.
We have just a complete goes roughly $20 million of contribution in Q4, so it's relatively modest.
A full year basis.
We think that's closer to 100, but we're not going to have it this whole quarter and it's.
It's about two thirds pool and its about one third industrial filtration, but that's where I would share with you what that contribution is.
As Bob said, we don't think we see the supply chain ramping up between Q3 and Q4, while there is still a strong demand. We don't think it's prudent to anticipate that we would ship more in Q4, given that theres holiday seasons that are also.
Clamoring for the same ports in the same trade routes that we're trying to get to so we're doing the best we can to sequentially improve every single quarter and I think we made great progress from last year into Q1 to Q2 to Q3 and now what we're suggesting is it's wise to think that were flattish and our ability to get product out the door from Q4 to Q.
Three.
The seasonality of the businesses, which is normal as more of our service businesses the businesses that go into People's homes to.
To treat water treatment and those businesses are seasonal not too many people look to do that over the holiday season, and as Bob mentioned, that's why we usually see a Q3 to Q4 dip in those particular offerings. So normal seasonality with the belief that we're not going to raise our expectations beyond what we delivered in Q3.
Okay Fair enough and then I know you don't want to.
Get into 2022 guidance and quantifying the pricing here, but can.
Can you maybe give us a sense of what.
Recent or anticipated price actions on in terms of timing.
And then even into early next year and then when you think those start to really read out as you as you say thank you guys.
As we've mentioned in the prepared remarks, we have had multiple price increases this year two to offset the inflation will continue to follow that process into next year, where as inflation trends higher we would pass along the price of.
Of that headwind.
Yeah.
Alright, thanks, guys.
Thank you.
Your next question comes from the line of sorry, Barra ski with Jefferies.
Good morning, Thanks for taking my question.
Could you just talk to what you're seeing from an early order program and how youre thinking about those deliveries in the fourth quarter versus the first quarter any commentary on what you're seeing in the channel from an inventory perspective.
Yeah, we don't expect a significant early order program in the fourth quarter, there there might be pockets, but at this point nowhere near.
Why is that it's been historically.
I think part of that is with the with the significant backlog we have it's not prudent to think about adding more to it. So we worked with our channel partners around.
Certain stocking areas differently than we worked with our channel partners around where they are already had significant demands on us and we're just trying to meet those demands.
That's the that's the point that.
I want to make sure that we emphasize that that program is usually a level load the factories and there's no need to do that since we're trying to be full out on the supply chain right now.
Thanks that helpful.
<unk> had strong sales in the corner and talked a lot about the supply chain headwinds could you quantify any lost sales that occurred in the third quarter that you expected to occur in the fourth quarter, that's that'd be pushed out to 2022.
I would suggest that you know the the incremental backlog over last year.
You know that we've now reported would be the gap that we're trying to get through right. I mean, we have typical backlog businesses and then we have more book and ship businesses and in the book and ship businesses, which is primarily the residential were not able to get everything out that our customers want every quarter and so we start the quarter off and in our.
Backlog situations continue to add orders to it ship as much as we can and then we were still having those rich backlogs, which are a combination of demand and the inability of the supply chain to meet that demand.
Great. Thanks for taking my questions. Thank.
Thank you.
Your next question comes from the line of Bryan Blair with Oppenheimer.
Thanks, Good morning, yes.
Good morning, good morning.
It's a sort of follow up on Joe's question I guess to ask more directly is there anything that you can see today or are there any meaningful watch items that would prevent pool from posting solid growth again next year.
No.
Alright.
I expected it.
Uh huh.
No no no.
No. That's that's what I wanted to hear.
And it looks like pleat Tobey.
Centrally paid for by your second half cash flow. So that's a pretty good setup.
Is there.
Anything you can offer them.
2022.
Base case outlook.
Right relative to the $95 million rof's level.
Anything else that would help us to gauge you know a reasonable accretion range for year one.
Yeah.
Again, we were not in a position today to provide the 'twenty guidance, but what we do have a number of tailwind in place we talked about the strong backlog.
Entering the year.
We've also is as you would expect with the supply chain challenges, having a number of inefficiencies this year and that'll help the P&L and then probably most importantly.
The transformation initiatives.
Initiative that we talked about should be a tailwind as well for 2022.
Yeah, and just on <unk>, specifically, which you asked just think about a roughly $100 million of revenue give or take in a rounding thing about roughly 20%.
And a little bit of interest headwind given the fact that most of that is cash and you can get yourself into what you think.
Accretion might be obviously will be doing some integration work, which will offset that slightly but that gives you a general direction of that asset.
Okay I appreciate the detail thanks again.
Your next question is from Jeff Hammond with Keybanc capital.
Hey, good morning, guys.
Good morning.
I noticed that both businesses you've got productivity was in the Green and I'm just wondering what's driving that just given all of the.
Cross currents some headwinds on supply chain that would be.
Yes eating into that.
Operating leverage I mean, these are some pretty significant growth rates, Jeff when you leverage your fixed cost factories.
Generally what's been.
A very productive.
Variable labor and fixed cost labor and the factories, that's where we're getting that productivity from.
Yes.
Okay and then just on you know a lot of questions on kind of price into next year and I think you guys mentioned, how substantial that carryover is.
Is the thought that that price cost.
Dynamic it looks like it's a little bit negative.
<unk> maybe into <unk>, but.
Is there a point, where you start to see that flip positive or where should we continue to think about this trend of those being pretty close.
The trend into 'twenty two.
Yes, Jeff I think it's fair to say that when you take a look at the rate that we're exiting at from an inflation standpoint that that creates and inflation headwind into Q1, right and leveling off in Q2, and Q3, and that's where we got to get the incremental price to try to mitigate that so full year next year I think we would feel like we're in a position to.
Offset it there might be some lumpiness by quarter.
Some tail winds and some headwinds.
And that's what we're working through.
Okay, and if you announced your Gen one person crews magnitude.
No not yet.
Okay, we'll stay tuned for that thanks.
Your next question is from Nathan Jones with Stifel.
Good morning, everyone.
Good morning.
Kind of a Texas, a little bit from the gross margin side.
The real inflation started ratings during the third quarter gross margins in the first half were a little bit AGA study speaks about 34 and a half in <unk>.
Do you expect to be able to get those gross margins back to that kind of 36% range. When you the offset all of the inflation increases with price assuming inflation stuffs going up at some point here or will that be a just some of the math of adding the same number to the top or bottom that it'll keep you below that 36%.
At level that we saw in the first half.
No that that is our goal is to get back to that is as quickly as we can and certainly doing.
Doing better from a pricing and inflation.
Perspective is important but also the transformation is a key part of our margin expansion story.
And Nathan I would like to use the <unk>.
Opportunity to share that a little bit I have desires to have before in front of that gross margin as we as we exit the transformation period that we talked about an Moe.
Are the levers that we're pulling we believe that pricing is a big initiative and we're leaning into that with outside help.
Looking at our value adds in looking at end to end cost and trying to think about even our partners cost and how we help mitigate some of the expense and you can read into that logistics and freight costs are pretty sizable not just for us but for our partners. So how do we get after that with price second one sourcing.
How do we lean in on sourcing and really look at global supply chains on a total landed cost basis and make sure we're making the best choices and SKU rationalization is a big enabler there as well.
Third one is the manufacturing and distribution footprint I think the distribution one gives us a big opportunity and a fourth one is the organizational enablement and thats really about making sure that as we find new channels, New Adjacencies, we're getting.
Productivity from the old way of doing things to fund the new way that we want to do things and so those are the four big pillars of transformation. We've made a lot of progress and we hope to create tailwind to the 2022 from those initiatives.
I was actually going to ask about the transformation initiatives next I know you know when you announced these things back in June that ways that period of planning that needed to be go to be gone through.
In order to finalize what exactly you needed to do can you talk about where you are in that process and when you should really start to see the benefits from these things.
Yeah really rich funnel.
And I'm really proud of the way the teams drove the the brain storming the ideation around what we could do and should do and ultimately the opportunity is significant and I want to make sure we reset those targets against those new gross margin levels that you mentioned, because we have gone slightly backwards here, which means we have more than.
We have to go get.
And then we also have to look at it pre inflation.
Currently in the inflation environment and post inflation to make sure that these are really contributing to the end state of pentair. So really pleased with the progress and the team and as I mentioned, we expect it to start contributing in 2022.
Great. Thanks for taking my questions.
Your next question is from Ryan Connors with Boeing in scatter.
Spending and Scattergood is the name of our firm. Thank you.
So I don't want to jump across the valley prematurely here, but obviously.
We've seen what a difference a year can make so kind of a big picture structural question around price costs, you've gotten a lot of price to pass all this stuff through so, let's just say hypothetically.
The fed does tap the brakes early next year inflation pretty quickly comes down some of your raws go down your freight goes down how should we think about price in that scenario do you keep a lot of that price in that scenario and realize the margin upside.
At least for a while or on how long could that be or do you think that the competitive dynamics in that kind of a scenario would dictate that the price is given back pretty quickly and I know the answer might differ by business, but just interested in your perspective on it from that kind of point of view.
Yeah, I mean, the way I look at it is if you think of that decision tree.
Take that scenario or do you take the scenario, where the inflation continues to go forward.
I'm going to choose the one where inflation continues to grow because if that happens and were out in front because we've been trying to catch up on price all year long, but if we can get out in front of it than the worst case scenario is that we start to turn back pricing to our channel too.
Basically reflect the lower inflation rate that we have that that's an easier mitigation strategy than trying to get new price.
In a in an area where people are anticipating the inflationary pressures to subside so.
I think that's the scenario planning that we're going through which is why we are not ready to share 2022, with yet, but I'm going to lean towards that we think inflation and supply chain challenges continue.
And the worst case scenario as we dial back from there.
Okay, but then in terms of the different businesses, I mean, which would be the ones where.
It's based on the competitive dynamics do you think you could hold price and wood, which which are the ones, where you think it would be a little more competitive and to give back would be would it be quicker.
Well I mean, we've always said that we've got three general business models at Pentair.
Our manufacturing build the stock make to stock that goes to dealer distributors are the most responsive to inflationary pressures and price increases normally this year is literally unique in the sense that we've had these large backlogs and it's hard we're not going to go back and reprice backlog right. So there's a little timing delay related to that backlog. The other business model we have.
Is project based and you've got to predict where your price increases need to be to reflect the inflationary pressures that are out there six to nine months in advance and that.
That's always the hardest to get right.
Especially in these environments and then the third one would be more OEM or larger customer base.
Business models, where.
Again, you're in a process of negotiation and and before those price increases go in you got to get both sides to agree on what that.
It looks like it is.
Those are the three basic premise.
Premises and so obviously that makes the stock a little little easier most normal times with project you have to be more careful in the Oems just a negotiation of of ensuring that everybody got the best productivity in the cycle.
Got it no that's really helpful perspective, thanks for your time.
Your next question is from Rob Wertheimer with Melius research.
Hi, good morning, everybody.
Thanks for the informative responses and I'm, sorry for one more on price cost, but its obviously a hot topic and I'm just curious on a couple of things is the volatility and variability in the supply chain getting more predictable I mean can you get your hands around what the the you know the end points might be on where it is or is it still kind of unpredictable in the next year.
Have you changed the way you price you just mentioned not replenishing the backlog, which I understand have you changed the way you are.
The way the cadence or anything else about the way you do pricing for a more inflationary environment.
The the headlight into the business.
On material challenges and inflation continued to it.
It really be a challenge I would say you know getting the material and that we need to to drive the.
<unk>.
The demand that we're seeing is as much a challenge in Q4 as it as it was in Q3.
Inflation continues to trend higher and maybe a little bit more visibility on that but.
You know not a whole lot better in Q4 than Q3.
I think this has taken our entire skill set which is one of the reasons I went outside help on this.
When you think you've got the raw materials side, right, which I think we've got closer to more accurate throughout the year. The surprises have been more on the freight and logistics cost of the availability and you know oils continue to be volatile right now and then there is actually the cost of the routes and so that's been that's been a little trickier to get.
Right and then.
When you get into these ranges.
Retraining everybody that these are the appropriate coverage ranges.
Because these are not ranges and price increases that we have historically sought so it's it's been it's been a journey and in a lot of learnings.
We're getting better at it and I'm really proud of the way the teams are leaning in.
Okay. That's helpful. Thank you and then just for clarification when you're looking at you know.
<unk> sold through into dealers are taking orders and the <unk> et cetera, and one assumes volume is up next year, then right I guess, maybe that's partly ability what you can deliver and then price ought to be up mid to high singles, sorry, if that's going to far and I'll stop there.
Just going a little too far.
I think.
We're not ready yet to commit to anything next year other than we do believe that demand is relatively strong.
Do believe that inflation is going to continue and we do believe we've got to put price increases out there too to cover inflation and not just the raw materials I mentioned, but covering the freight.
Covering the raw material and also cover anticipated wage inflation as well. So that's the work we're going through right now and we want to get as close to accurate as possible.
Thank you.
Your next question is from Julian Mitchell with Barclays.
Hey, Good morning, guys. This is Trish Gorman on for Julian So a lot of questions on farm price cost maybe looking at the other side to fund productivity I know you guys have made.
<unk> made some investments here and you've got the transformation savings coming.
And it sets up nicely in Q3, so just wondering how we should think about this kind of moving forward as this Q3 rate sustainable or does it step up further from here.
As John mentioned, a lot of the productivity improvements that we've seen in Q3, and we will see in Q4 related to the operating leverage.
As 2022 plays out it's really.
Seeing some of the benefits around the pricing the sourcing manufacturing and distribution efficiencies.
And the organization.
As John described it so that those would continue to be that the levers as we move into 2022.
Okay, Great and then just at the Investor Day, you guys had talked about some higher investment spending to support the strategic growth initiatives. I was wondering if you can give us an update on kind of how that that spending has trended to date and what we should expect for that in 2022.
Yes.
We continue to invest in these throughout 2021 and as we lean into 2022, I think it's fair to assume that.
As I mentioned in the organizational enablement side that we would expect that some of the traditional ways that we did things would be the funding mechanism for the new ways that we need to do things. So I don't see it stepping up significantly from here and I think we have to find a way to self fund it as we look into next year and into 2023.
Great. That's very helpful. Thanks, guys.
Thank you.
Your next question is from Deane Dray with RBC capital markets.
Hi, This is Tyler Boyd on for Deane Dray could you guys just give us a quick update on some of the new Iot product launches and how those have gone and more specifically specifically the app launching in pool.
Yeah, Okay. So.
We're excited I think first of all we've got 12 connected solutions out there in the market today, and we're starting to see the ramping up of the downloads of our applications and use of those those products.
They cross all of our residential streams from.
Also including iron I flow or small pump lines in and as well as our water treatment in our pool applications. So I think one of the one of the bright spots I've I've seen this year is that we continue to see the automation penetration in pool.
In addition to.
The upgrades that we saw across the pad both for new <unk> builds and in the aftermarket side, sometimes in the busy seasons, you don't see people also upgrading to those solutions and so that was that was <unk>.
Positive and we start to make progress on our Iot related.
No.
Valves for water treatment and also our pressure.
Treatment and in our small pump so really good progress and I think we're getting good feedback on that capability in the usage from our channel and we're excited about the momentum really building and not to mention that we've also got the brew assist in on the large.
F&B side within <unk>, we're making great momentum as well as building out a services model for our partners regarding the filtration of the year.
Very cool and then just getting back to the supply chain.
I know you've mentioned resins and motors have been kind of in short supply in the past is there more of thats been added to that list and or where.
Where does that stand.
Yes, we would say that we would add freight and some of the challenges that we mentioned.
Adding to the inflation headwind.
But youre right that the resins the electronics.
Those type of products continue to be a higher.
Higher inflation.
Chips are what we're all seeking rate as products become smarter and you mentioned it with the Iot initiatives. So we're not the only company, putting an Iot enabled initiatives everybody needs chips that goes in our case goes into drives or electronics, which then go into it becomes sub components into the assemblies that were trying to produce.
So thats, where the catch up in the supply chain really is.
Great. Thank you.
Thank you.
Your next question is from Josh broker Lewinsky with Morgan Stanley.
Hey, good morning, guys.
Morning.
John You mentioned something in your opening remarks.
The deal is being booked through <unk> of next year I was just wondering if you can unpack that a little bit more.
Yes.
Mostly replacement oriented business.
An awful lot of lead time like does not just on new pool, construction or something maybe a bit more discretionary like what what should we actually like read into that.
Okay.
But those were yes. Those were my prepared remarks, so I will take the take the lead on this particular question the dealers booked into Q.
Q3 of next year includes you know both the new and remodeled pool, so seeing strong demand.
In those two areas.
Josh similar to the construction industry, the constraint is really labor and or material availability for the larger builds or remodels right. So that is a longer lead time item than even our equipment.
Those demands on the channel are out there the channel's trying to meet the demands and we're trying to then meet the equipment demands of those remodels and new builds.
Got it and then would you still say you know kind of the majority of the strength Youre seeing today is on kind of sweeping the pool pad and like the broader upgrade versus the kind of one for one replacement like how would you characterize you know even growth in the quarter. If you wanted to break that down.
The level of detail you guys, yes.
Yes, I think it's a good way to look at it Josh I mean, I think traditionally we would look at the new pool builds is getting.
Opportunity to expand due to whole pad and that's why we enjoy that new build remodels, we have that same opportunity right to talk to the consumers and share with them the possibilities and upgrade that pool pad and then we always had the break and fix and you don't get this type of growth from just break and fix so the predominance of the.
Incremental demand over what we've historically seen call it mid to high single digits is likely.
Penetration into their into the aftermarket pool pads or into the new.
Pool pads.
From us adding.
Adding out to the pad.
Got it that's helpful. Yeah, it's break and fix bobs out there too much with the Winches banging on pool pumps in Florida.
I appreciate it that's good color thanks, guys. Thank.
Thank you.
Yeah.
Your next question is from Patrick Baumann with JP Morgan.
Oh, Hi, good morning, everyone. Thanks for taking my questions.
Just had a.
Yes.
I think so pricing consumer was up high single digit in the quarter.
I think people have asked this every which way, but I just want to.
Ask one more time I can that accelerate next year given kind of.
What youre seeing is things exit the year and does it need to accelerate to offset kind of what you're seeing cost inflation.
Yeah, I think the way to think about it is.
When you look at it year over year, you have to add what it also increased the previous year and so.
When we think about.
Adding to the price increases next year I mean, it's important to realize how inflation is compounded.
From 2020 in 'twenty, one and then how much more will be added as we go into 2022. So obviously when you look at it year over year, it's a piece, but when you go back and look at the start of this which for us was.
Q2 2020.
We've seen significant demand and that demand has turned into supply pressures and then we've seen the corresponding inflation across the.
Freight and all the other components here, so I mean, I'm not going to give an exact answer because I know you everybody's asked me in every single way, but we got a price appropriately to cover the anticipated inflation that we see coming to us in 2022, but we don't yet have that number and when we do we'll share it but we're going to price appropriately.
Okay and can you talk about maybe the.
The competitive landscape in pumps around the variable speed transition.
We've seen Hayward pitching this midrange product of compliant pumps, that's like lower priced than they are variable speed, but it is compliant with the new regs and youre, hoping to gain some share with it just curious if you have any thoughts on that and if you're hearing any customer interest on that type of product.
What your response could be if there was.
Yes, there are some small markets or some small regions I should say.
Sure you know.
A non variable speed and we still have a non variable speed line.
Is appropriate to meet the standards around certain horsepower levels and certain output. So you're always going to see a couple of substitutes in the couple of small regions with the truth is most of the energy efficiency standards are driving to a higher level of efficiency and we all got to advance our our products.
As we try to keep up with sustainability goals and less electricity usage, so that's where really where the future is.
Currently there's a few small markets are small small regions, where substitute could be appropriate.
Got it okay. Thank you and then last one really quick if I could fit one more in.
Could you size for us kind of the percentage of your business that is like I guess.
It's infrastructure related where you might see some benefit from stimulus if it's if it's.
Move moves forward.
Yeah, I'd say less than a couple of hundred million is what I would say our exposure is.
Where we might see some benefit from some stimulus.
Not a large number for pentair.
Is that is that like the muni pump business or is there something beyond that.
Yes, it's the Muni pump business and then possibly the pumps that connect the muni to the subdivisions.
Got it okay helpful color I really appreciate the time, thanks, guys. Good luck.
<unk>.
Yeah.
There are no additional questions at this time I would like to turn it back over to John for closing remarks.
Thank you everybody for joining us today, we have delivered on commitments in 2021, whether measured by sales income EPS or cash flow and the good news is we believe there is still more to come for pentair.
Becoming a pure play sustainability focused company in 2018, we have been building a track record of consistent growth, while also driving our commitment to creating longer term shareholder value.
We have focused our portfolio and aligned around attractive secular trends and we believe our strategic growth initiatives should contribute to us growing at rates even faster than the markets. We serve are focused on transformation should help us not only unlock additional value, but also fund these growth initiatives our balance sheet provides us a lot of flexibility.
<unk> and our 19% ROIC.
<unk>, our focus on being disciplined with our capital Stephanie you can conclude the call. Thank you.
Thank you. This concludes today's conference call you may now disconnect.