Q1 2022 Pentair PLC Earnings Call
Yeah.
Ladies and gentlemen, thank you for standing by and welcome to the <unk> Q1, 2022 .
Prince call.
At this time all participants are in a listen only mode.
At the end of the presentation, there will be a question and answer session.
Your question during the session you will need to press star one on your telephone.
If you require any further assistance please press star zero.
I'll now like to hand, the conference over to Jim Lucas.
Go ahead.
Thanks, Jay and welcome to Pinterest first quarter 2022 earnings Conference call. We're glad you could join US today I'm, Jim Lucas Senior VP, Treasurer, and Investor Relations and with me today is John Stout, our President and Chief Executive Officer, and Bob Fishman Chief Financial Officer on today's call. We will provide details on our first quarter performance as outlined in this morning's press release.
Before we begin let me remind you that 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 Investor Relations section of <unk> 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.
<unk> to one and a follow up to ensure everyone an opportunity to ask their questions I will now turn the call over to John .
Thank you Jim and good morning, everyone. Please turn to slide number four titled Executive summary.
We were pleased to deliver a solid first quarter that exceeded our previously communicated expectations.
Sales expanded 15% in the first quarter, we were encouraged to see price continued to read out positively.
Inflation is unfortunately, not showing any signs of moderating which is why we expect to increase price even further to cover the incremental inflation headwinds.
During the first quarter, we announced the agreement to acquire Manitowoc ice, which I will discuss it a little bit more detail shortly.
We believe this is a great complementary acquisition that will help enhance our strong commercial water solutions business.
Bob will give more details on our guidance later in the call, but we are updating our full year guidance to reflect a little more or top line growth and a full year adjusted EPS range remains unchanged at $3 70 to $3 80.
We are entering our seasonally strongest quarter with continued momentum and we believe that pentair is well positioned for 2022 and beyond please.
Please turn to slide five labeled building a track record of consistent growth.
We believe in our strategy and we are building a track record of consistent growth. Despite the many external global supply chain and inflation challenges that most companies are facing.
Growing the core is our number one priority whether it is sales income growth or margin expansion.
We must deliver in all areas, we are a leader in pool and continue to be well positioned to serve a large growing installed base water treatment is benefiting from consumers focusing on water quality, which benefits both our residential and commercial businesses, we have a sizeable flow business with several strong positions in areas such as water supply water.
Postal fire suppression and flood control our.
Our industrial solutions business continues to focus around its two biggest opportunities.
Membrane filtration and sustainable gas.
I will touch on transformation in a moment, but we believe this is one of the biggest long term opportunities for pentair.
This is not just about unlocking value improving margins rather this is about doing things better and more optimally and positioning pentair for the best possible future.
Our balance sheet has been one of our biggest strengths and we are currently in the process of using it with the announced agreement to acquire Manitowoc ice.
While we have built an improved track record of growth. The past couple of years. We believe there is still a long runway ahead for pentair. Please.
Please turn to slide six labeled transformation to enhance value creation.
Transformation is a word we chose carefully because we are not just focused on taking out costs Tran.
Transformation is about improving the way we do business.
Remind the team consistently that we need to celebrate the successes of what we have been doing.
And the way we have done it but that does not mean these are the right processes going forward.
Transformation comes from our lean methodology, it's about identifying the current state.
Recognizing that you can be much better and therefore, creating the future state vision and then building your transformation plan to achieve it.
We are focused on four transformational areas pricing.
Sourcing.
Operations and distribution and organizational effectiveness.
While 2021 was about planning we are now moving into the execution phase our two biggest opportunities are in pricing and sourcing where we brought in outside partners to help us transform these key processes.
We continue to build funnel and we're seeing momentum build as our outside partners helped train us on how to unlock additional value within our four targeted areas.
We are bringing greater focus and prioritization and we are using data analytics to drive our decision making.
We have seen many of our more complex businesses such as flow made great strides in improving margins and they are now turning to focus on targeted growth opportunities.
Transformation is a key value creator for pentair longer term, we look forward to updating you in more detail and sharing our targets and expectations for 2023 and beyond later in the year. Please.
Please turn to slide seven labeled advancing total water management and building a stronger commercial water solutions platform.
In early March we announced our agreement to acquire Manitowoc ice. We believe it's a great business that will allow us the opportunity to bring to our customers a total water management solution through our commercial water solutions business and expand our offerings.
On a pro forma basis, we expect our commercial water solutions business to be a nearly $700 million business made up of three different growing categories.
Ever pure is a projected 225 million very high margin respected industry brand that allows us to provide our foodservice customers with high quality water for their special.
Specialty needs Manitowoc is a projected $325 million high margin brand that has a proven track record of creating and delivering dependable ice machines.
And <unk> is a projected $125 million lower margin, but significantly important and well known service leader with a reputation for providing one of a kind service preventative maintenance and infrastructure for commercial customers.
Combined these three businesses can offer end to end water filtration and the ice solutions for foodservice customers, along with predictive services that identify and address customer issues before they arise.
Together, we anticipate that we can deliver sustained commercial water solutions double digit revenue growth at mid twenty's margins by providing ice and better cleaner water to people all around the world.
We expect the closing of the Manitowoc transaction to occur in the second or third quarter subject to regulatory approvals.
I would now like to turn the call over to Bob to discuss our performance and our financial results in more detail Bob.
Thank you John .
Please turn to slide eight labeled Q1 2020 to pentair performance.
We delivered first quarter sales growth of 15% with core sales, increasing 12% with strong price contribution.
While inflation continues to accelerate we were pleased to see price offset inflation for the first time in almost a year.
Consumer solutions delivered core sales growth of 17% and industrial and flow technologies grew core revenue 6%.
Segment income increased 5%, while return on sales declined to 180 basis points to 17, 2%.
The principal contributors to the margin decline were the lower margin impact of recent acquisitions.
Supply chain inefficiencies at elevated inflation.
We were encouraged to see return on sales improved sequentially with strong price contribution.
While inflation is showing no signs of moderating and supply chain disruptions remain.
We expect return on sales to show a strong sequential improvement into the second quarter.
Below the line net interest expense was just under $4 million, our share count was $166 5 million and the adjusted tax rate was 16%.
Adjusted EPS grew 5% to 85.
And exceeded our guidance for the quarter.
We made the decision to exit what has been a very small business in Russia.
Exiting the business resulted in a $6 million charge relating to the write off of receivables inventories and other costs related to contracts that we will no longer fulfill.
This was the right thing to do.
And we know that both our sales before and this cost related to our exit were immaterial amounts.
Please turn to slide nine labeled Q1, 2022 consumer solutions performance.
Consumer solutions delivered another strong quarter with sales growing 23% and core sales increasing 17%.
The acquisitions of <unk> and <unk> were positive contributors to the top line.
However, they do operate today at lower margins and this resulted in pressure on return on sales.
Segment income grew 6%.
And price nearly offset inflation in the quarter as we continued to see strong readout in both businesses within consumer solutions.
Paul sales grew 23% in the quarter and we continue to see strong momentum entering the beginning of the pool season.
We commented last quarter that we are seeing channel inventories more in line with historical levels.
And while some categories are still catching up.
The channel is in much better shape entering the season this year than last.
Within pool, we have a relentless focus on creating an even more effortless experience for our customers.
We have recently launched a new order status portal that allows customers to have greater visibility on order status information without making calls.
We have also enhanced our phone system for easier navigation to ensure that dealers and consumers alike receive the proper and advanced resource support when needed.
One of our key Differentiators and cools long term success as the loyalty from our dealers.
We have long focused on industry, leading sales and technical training to enable our dealers to learn the benefits of our products and help facilitate an easier installation process.
We have invested in experienced training centers to allow dealers as well as builders and service companies to have a more intimate learning of our products.
One of our key areas of focus is to enable our customers both distributors and dealers to advance their businesses.
We continue to focus on building our innovation pipeline.
We are launching our new impella flow three pumps to create a more efficient flow management experience.
We are also launching a higher end version of this pump with the many automation system on board to provide the consumer with enhanced control and functionality of their pool.
Overall pool is seeing strong demand from dealers and builders with good visibility through the 2022 season.
We continued to carry a healthy backlog and pool.
This has historically been a short cycle business with lower lead times.
As we continued to increase capacity and hopefully see signs of supply chain inefficiencies easing, we expect backlog to come down through the course of the year.
Water treatment grew sales, 24%, which included some contribution from <unk>.
Residential water treatment continues to be focused on complexity reduction and improving margins.
Sales were up mid single digits for the residential business with positive contribution from both affiliated dealers and components.
Commercial water solutions continued to see a healthy recovery in its end markets, resulting in healthy double digit growth once again.
The addition of KBR has improved and brought into many of our customer relationships.
Core ever pure business has enjoyed a strong rebound in quick service restaurants and convenience stores with.
With improvement starting to come in the hospitality sectors.
As consumers once against are traveling more.
We've been most encouraged with the global nature of the recovery in commercial water solutions.
In addition to our total water management efforts.
This continues to be an important growth vector for us and is contributing a healthy funnel of new opportunities with current and new distributors dealers and customers.
We are also seeing the foodservice industry, particularly quick serve restaurants adapting to new standards and restaurant design and equipment that is generating opportunities for new installations and reconfiguration of existing restaurants.
Please turn to slide 10, labeled Q1, 2022, industrial and flow technologies performance.
Industrial flow technologies grew sales, 4% in the quarter with core revenue increasing 6%.
Segment income grew 4% and return on sales increased.
As all businesses within Iot are making progress on complexity reduction.
Residential flow grew sales, 1%, but this included a headwind from a small product line divestiture in the quarter.
Overall residential flow continued to see strong demand as it enters its seasonally strongest quarter.
The business is being impacted by supply chain inefficiencies and labor shortages.
Which along with strong demand has resulted in strong backlog for this historically shorter cycle business.
Overall, we expect residential flow to have a solid year with price reading out nicely and backlog being worked down and supply chain inefficiencies hopefully begin to ease as the year progresses.
Commercial flow grew sales, 1% as the focus continues to be on complexity reduction and improving margins.
The business has made good progress and SKU reductions driving productivity and beginning to move to more of a configure to order instead of engineered to order business model.
This is resulting in greater efficiency in the plants.
And we have seen several quarters in a row of margin improvement as a result.
Industrial solutions saw sales increased 11% as larger global beer manufacturers are increasing their capex budget and we continue to see strong demand in orders and sales for a sustainable gas business.
The business also benefited from the addition of fleet co.
Overall, the longer cycle industrial solutions business has seen solid improvement in orders and backlog and.
And we expect the top line momentum to continue as the year progresses.
Please turn to slide 11 labeled balance sheet and cash flow.
The balance sheet ended the first quarter in very strong shape.
Our leverage ended the quarter at just over one times and our return on invested capital remained in the high teens.
Free cash flow usage in the quarter was more in line with historical trends and what we experienced at the start of last year when sales were more linear through that quarter.
To start 2000.
Start 2022, we saw a slow start in January .
In part the omicron related absenteeism and many of our factories.
We had a particularly strong last month of the quarter that resulted in higher receivables that we should collect in the second quarter.
In addition, we have been advantageously buying higher than usual levels of key components as.
As we manage through today's supply chain inefficiencies.
For the year, we continue to expect free cash flow to approximate net net income in the second quarter should see traditional strength and free cash flow generation in line with historical trends.
Please turn to slide 12 labeled Q2, and full year 2020 to pentair outlook.
For the second quarter, we are introducing adjusted EPS guidance of 98.
To a $1, one which represents a year over year increase of 17% to 20%.
We expect total sales to grow 11% to 13%, which we believe is a strong show in given the particularly difficult comparison to the same period last year.
We expect segment income to increase 14% to 17% with corporate expense coming in around $20 million.
Net interest expense of $5 million to $6 million and adjusted tax rate of 16% and a share count of $166 five to $167 5 million.
For the full year, we are modestly increasing our top line guidance to a range of 9% to 11%, reflecting a slightly better showing in the first quarter. In addition to further price action anticipated to offset continued higher inflation.
We continue to expect segment income to increase 10% to 13% and adjusted EPS in a range of $3 70 to $3 80.
Or an increase of 9% to 12% for the year.
Below the line, we expect corporate expense to be around $80 million.
Net interest expense of $18 million to $20 million and adjusted tax rate of approximately 16% and shares to be around 167% to $168 million.
Finally, as we stated previously we expect free cash flow to approximate net income.
I'd now like to turn the call over to Jay for Q&A.
After which John will have a few closing remarks.
Jay Please open the line for questions. Thank you.
Thank you and as a reminder, if you would like to ask a question. Please press Star then the number one on your telephone keypad once again Thats star one on your telephone keypad. If you wish to withdraw your question. Please press the pound key. Thank you. Our first question comes from the line of Joe Giordano of Cowen. Your line is open.
Hey, good morning, guys.
Good morning, good morning.
I wanted to just start on IFC actually the volume number there was negative which.
Maybe a little bit surprising so just any any color. There obviously prices are going to read through and it's offsetting that but.
Did that kind of like accelerated to the downside at the end of the quarter.
Did that kind of looking what's the view on volumes there for as you go forward.
From a from a volume perspective. It was it was really within our residential our flow business and what we saw there was just some of the challenges associated with <unk>.
Labor.
Shortages and supply chain challenges that got us off to a slow start in the quarter, what we like within the flow business as the backlog remains strong the demand is there. So from our perspective. It was more of a model matter of battling through some of those challenges.
Then starting to grow more significantly throughout the year.
Okay, Great and then follow up just on the inventory build is that.
<unk>.
Finished product ready to go out or is this like stuff thats still waiting for components that are still hard to get like semi finished inventory that you have.
Really the latter its raw materials is that no advantageously buying products. So that we can meet demand or it's a product that's waiting to be built into finished goods. So.
Is a headwind for us in the first quarter, and we're actively setting targets and managing that.
But it is a reflection of the supply chain challenges that we face.
Okay. Thanks, guys.
Thank you.
Thank you. Your next question comes from the line of Mike Halloran of Baird. Your line is open.
Hey, good morning, gentlemen.
And on the price cost side, obviously, good to see you're catching up and being towards even in the quarter. How are you thinking about that going forward from here, obviously put another price increase and to manage the current inflation or incremental inflation.
As the first quarter peak pain and is that is that how youre thinking about it in the guidance and any thoughts on how that cadence through the year.
From our perspective, you know inflation will continue to stay high I looked at the the inflation amount that was in Q1, roughly $89 million and we're not assuming that gets any better the balance of the year. The good news is that prices reading out and so.
So we should see price cost difference increased throughout the year, which will help our margin expansion story.
We're positive around Youll margins improving from that in the second half versus the first half margins will improve significantly in the second quarter, both sequentially and on a year on year basis. So we start winning the price cost battle rather than just <unk>.
Setting it like we did in the first quarter. So we're encouraged there from our perspective Q1 was very much of an inflection point.
Improved margins.
Versus Q4.
We have had a number of quarters previous to that we're really we're showing margins declining so from our perspective margin expansion continues from here.
With Q1 Havent been the biggest challenge.
Okay.
Thanks for that and then on.
The Manitowoc ice.
You mentioned in the prepared remarks double digit growth expectations.
With the mid 20% margins, maybe you can help on the growth side, just parse out how you're thinking about that.
From a market versus some of these revenue synergy targets that you laid out on the on the acquisition conference call and then.
Kind of a second parts of the question is just thoughts.
On the timing of close and if anything has changed on that side.
Yeah. So I mean, if you take the three.
Categories that we talked about I mean, obviously, we have two of them in our portfolio. Today, we are still waiting to bring the third one in but with Evercore itself has always been a mid to high single digit performer Mike.
Just volume alone and we still don't have the full recognition of the global hospitality markets recovering anywhere near where they were pre COVID-19 and we're still waiting for that to occur and when that occurs we're really confident that we're going to continue to see that expansion on our filtration.
Lines are tbi business has been growing double digits and continues to see that type of opportunity primarily round installation service planned maintenance for key partners domestically and then.
When we took a look at the Manitowoc acquisition and due diligence it has a similar growth profile to ever peer so.
Absent any synergies at all we think these are mid single digit growers and then when you add some of the prospective synergies that we hope to.
Deliver on that and that's how you get to the double digits and then the margins a blend as I set of very high margin product businesses between ice and at every pure being offset by a low margin <unk> service offering.
And then just timing of close and the change there.
Yes, I mean, we were targeting Q2, we've clearly said Q2 Q3, we continue to work through the regulatory processes, it's taken longer than we would expected.
There is a big deal that between.
Two partners on the larger side that they've got to get through and then we've got to get through our so yes. We do think that this is more of a early Q3.
Q2, being the best case.
I appreciate it thank you guys.
Thank you next question comes from the line of beaten Dray of RBC capital markets. Your line is open.
Thank you good morning, everyone.
<unk> morning.
Hey, can we start in pool very impressive growth.
And.
You commented that you'd see normal channel inventory, how about product availability remember a year ago that was an issue.
Any any.
Any issues there with products.
How does the channel look and just degree of confidence about.
Wrong start to the year without an early buy I note and then your degree of confidence of being able to grow in 'twenty two despite tough comps.
I can I can start with that one.
We are seeing channel inventories more in line with historical levels. Some of the categories within that doors are still catching up.
So continuing to be focused really across state.
The product line, but overall and very very good shape, there as we enter what should be.
Very robust pool season in 2022.
Our view is that.
We're in very good shape with the with the backlog and with the demand to.
To continue to grow the pool business.
We have guidance.
Previously we had guidance of mid to high single digits for consumer solutions. We raised our revenue guide so consumer solutions is really trending more towards high single digits with obviously.
Leading the way. So we're we're confident that this will be another strong year of growth.
The pool business.
The underlying factors driving the growth.
More of a a larger installed base due to new pool builds over the last couple of years.
Our focus on the replacement side of the business more people buying second homes more people, putting a pool that underlying demand is there, which which is why we're optimistic.
I would say our guide for the year is realistic.
We expect growth to continue we don't want to get ourselves ahead of ourselves we want to get ahead of ourselves for Q4, we wanted to set ourselves up for a good start to the 2023 season as well. So I think we've got a very balanced forecast and remain very optimistic about the core business.
If I could just add I mean, you followed us for some time I think the products that were most excited by are the automation products and they are the ones that are hardest to get through the supply chain and so we're encouraged by the desires of the consumers to add more automation to their pool pads and we're doing the best we can but we're fighting for chips and and.
Drives like everybody and we want to make sure we got those products to the consumers and satisfying their long term pool automation needs.
Yes, that's great to hear I'll I'll take the.
The specifics on the Intel flow automation, some that you've added I'll take that offline with Jim really interested in hearing about the features and functionality and then just as a follow up question really impressive work on price costs I just wanted to I was I'm intrigued by your comment that Youre.
You're getting additional outside.
Consultants on pricing and we've seen other companies do this and do it successfully.
Value based pricing and so forth, but on the expectation for 'twenty. Two will you start to benefit from that additional like data analytics on pricing and is that baked into your guide. Thanks.
We're working like Crazy Dean.
And let me give you let me give you an inside view here I mean, we price primarily to distribution and distribution prices to dealers and we've done that historically more blind towards the actual consumer and the market is pain and so getting a getting that understanding of what the value to the end customer is regards.
Our products, obviously versus competitor alternatives.
In the market space is very important for us to price effectively and thoughtfully and Thats, what we are spending time doing dean.
So that we can think of the end to end value proposition of our core products and get our fair share of that.
So most of the pricing we've done to date has just been trying to catch up with inflation, what we want to do going forward is to really think of the value that that product provides them price. It effectively we're only working on three categories right. Now we have about 20 product lines that we're focused on so our goal is to accelerate that as quickly as possible. This year, so to make sure that we use.
Lies that analytics into next year's pricing season.
Very helpful. Thank you.
Thank you.
Thank you next question comes from the line of Brian Lee of Goldman Sachs. Your line is open.
Hi, good morning, everyone. Thank you.
Just wanted to go back to just the guidance real quick.
This is miguel on for Brian Lee.
The segment income.
The revenue growth guidance increase, but the segment income growth.
Unchanged.
Based on.
Based on the commentary it seems like price cost is reading out well and seeing a nice inflection from the first quarter, but I think the guidance suggests a bit more pressure on margins for the full year than what was anticipated. Prior does that is that fair.
It's all of that a result of inflation or is there anything else that has kind of become more incrementally more challenging on the cost or the pricing side. Thanks.
Yes, I think Thats a fair assumption.
I think we had a pessimistic view of both inflation heading into our our early guide and it's even worse than that which is where the incremental price comes into play. If we took a look at where that inflation's coming from its primarily the oil based freight and the responses necessary to catching up the global supply chain, because cold, but it's not over.
Sure.
And.
You are familiar with what's going on in China, right now and that means that to get that product in ahead of the season theres going to be some incremental freight costs associated with it and that's what we're working through and obviously, we're working with all kinds of supply chain partners to two to optimize the availability of product, but we have a season and that season is Q2 and Q3.
And we're going to do what's necessary to deliver the product within that season, and it is going to cost us a little bit more to get that product in <unk>.
And given the demand that we feel is there in the.
And markets I think we'll be able to recover that but yes. Your observation is correct.
Thanks, I have a just a quick follow up if I may just wanted to go back on the inventory build.
The materials and the related products there are they related more to I guess, one segment or another like for <unk> just based on the commentary around chips, just any color there would be great.
The increase in inventory is really broad based and really cuts across both consumer solutions and Iot so from our perspective.
No one category, it's really across across our businesses and.
And its motors drives motors drives and drives our chips semiconductors. It's the same products that we've been chasing for last five quarters and it's the same product set the whole entire global supply chain is trying to get their hands on.
Yes.
Yes, if you look at our supply chain challenges, it's resins motors drives electronics on the inflation side, it's great metals electronics motors castings and molding so across the board nothing is getting easier.
Thank you to our supply and ops teams did an incredible job, especially in the month of March after we got off to a slower start because of Covid.
Thanks helpful color I'll pass it on thank you.
<unk>.
Thank you next question comes from the line of Jeff Hammond of Keybanc capital markets. Your line is open hey.
Hey, good morning, guys. Good morning, good morning.
Hey.
Pall Corp release, they talked about kind of five point benefit from an extra day in early by which I assume means.
Contractors are taking product earlier and I'm, just wondering if you're seeing that as well.
Well and kind of how that informs.
The <unk> ramp if that is indeed, taking place.
We're really not not seeing that.
No significant early buy and really nothing outside of what.
What we've done historically so.
Nothing really to add there unless.
We could get some more color.
Jeff I mean, IRR or Q2.
Our forecast assumes that we do better in April than January because we got off that slow start and then we continue to meet that Q2 seasonal ramp in and at the moment, we're very confident about that and that's where the growth is coming from and then I'll remind you most of our dealers are on a pool season. It ends at the end of Q3.
Pool Corp is on a fiscal year end like we are in so that we start to.
Identify and fulfill those pool obligations in Q3, and then we take a look at next year's inventory needs and we partner with our channel to figure out what's needed for 2023. So that's the way we're working through it and as a reminder, we didn't do much early buy at all because of the demand and the backlog and so what we're doing right now is fulfilling sell through demand.
Okay great.
And then just on.
We did our own checks and haven't really been able to find cracks, but we've seen.
Kind of the consumer step back in some areas, obviously youre seeing tons of inflation rates higher.
People seem to be shifting from kind of stay at home to services and I'm just wondering.
As you pull your your channel if youre seeing any kind of early cracks.
The consumer I understand the backlog is abnormally high but just just looking for any evidence that the <unk>.
<unk> changing thanks.
I will.
We use the word cracks because I think right now and dealing with the channel there they're doing everything they can to fulfill their obligations to their customers within this year's pool season, I think if you look at the historical.
Data points interest rates housing starts.
Et cetera, et cetera, I think youre seeing this.
Signs of what could be a tightening.
And a desired tightening from the fed thats going to have a slowdown to the overall residential impacts, Jeff and I'm anticipating that and I think that will play out in 2023, I don't think theres going to be a steep decline, though because we didn't we don't have these housing starts like we did and it was 607 I mean housing starts are still at historical levels.
Right now and they were trying to work through their supply constraints constraints to deliver that and it's not in my view a bubble. It's just ultimately the fulfillment of what's needed to satisfy the movement to the warm weather states. So I think we're in pool and residential water treatment were skewed towards the.
Market and the replacement industry significantly and you know the new housing starts are moderated in the sense that they are about where they were historically, so pulls up a little bit as a percentage of those houses, but they're not up significantly.
Okay. Thanks, Jeff.
Thank you.
Thank you next question comes from the line of Andy Kaplowitz of Citigroup. Your line is open.
Hey, good morning, guys.
Hi, Andy.
So I think one of the reasons why you guys thought that pull demand would hold up sort of responding to last question is that you have this sort of pent up demand for renovation and then eventually sort of more aftermarket demand any more color into how you see that evolving given some of the signs that are out there you know the interest rates as you talked about China.
Any color there would be helpful.
Yeah, I think I'm going to take the first part and I'll have Bob take the second I mean as a reminder.
You know the reason we started disclosing the backlog in <unk>.
Cross the make to stock business and Pentair is just because of the percentage that they became of the overall revenue and the need to do that under the.
SEC guidelines. This is a business historically in pool that candidly started every quarter with no backlog right. So everything has historically been our ability to ship and five days to.
To the end customer through our distribution channel partners, and we would book and fulfill those orders within the same quarter. That's the nature of most of our residential make stock businesses. Because you have a distributor that is also holding inventory. We think we're going to get back there at some point.
Right now we do have more demand than we can fulfill because of supply chain constraints, but we're looking every single day in every single quarter at the sell through rates and then working with our channel partners to get the right product into the right states because state by state all of those needs and all of those requirements are different for the product sets and.
It's a lot of work when you get that pent up demand. So we expect that to moderate meaning that backlog will eventually get to nothing in this in this area and there will be continuing to meet the day to day requirements of our channel the Bob I don't know if you want to add anything.
Other than we look forward to that day, because there are inefficiencies some of the orders in the backlog were put in in July and August and it creates confusion and not not only for the distributors and dealers, but for ourselves in terms of managing.
And efficient.
<unk> so.
Those those days R. R.
We're looking forward to as backlog comes down.
Becomes more current and we drive the business based on orders.
Shorter lead times and then the other component we look at is actually product volume and unit sales. So when you take a look at unit sales over the last two to three years you see a more normal trend than you do when you reflect on the pricing side and the dollars because we're trying to capture all of the inflation. So.
Ultimately I think that we feel like the heater categories. We've said often has caught up and now we have more heaters on the full pad everything else is generally acting as a more normal.
Sell through level based upon the pool demand thats out there.
Thanks for that John and then maybe you can update us to give some more color on your transformation.
It's in the quarter productivity tailwind was a little bit low maybe that's shifting efficiencies in the quarter itself, but I think you are in the execution phase now and 22 on your transformation. So what are you seeing in terms of your ability to improve sort of the major areas you've talked about.
We've already talked about pricing a lot, but so we're seeing operations organizational effectiveness and update on any of this stuff.
Yes, I appreciate the question I mean, I am excited by transformation, obviously on the CEO , who is driving the initiatives. So you would expect me to be excited but I think we got two things going on we got a supply chain and an option sourcing and business unit teams that are working every single day just to meet the current demand.
Everything Youre generally seeing in 2022 is just reflective of trying to offset inflation, that's not strategic right ultimately, what we're doing with transformation and saying how do each of our business units become world class in their spaces and what's needed to become world class and then how do we attack those opportunities. So think of the fact that we source out of.
Ana and Thats become very challenging from a landed cost perspective, but also supply chain issue think about where we need to put our distribution centers to meet daily demand.
Think about <unk>.
Our supply base being a supply base that was probably perfect for 15 years ago, but doesn't reflect what we need today as far as region by region.
Shipments so there's a lot of opportunity in supply and prices I mentioned, but also our geographical complexity has been quite challenged by where we do business and where strategically we should do business and then we also have the opportunity to enable all of that through what I would call digital interfaces as Bob mentioned in his remarks, how do we get more self service.
Customers, how do we solve consumer needs how do we make it easier for you did business with pentair. So transformation is really about transforming and as I said, it's a lean based methodology what is their current state, which our future state vision and then how do we build the appropriate transportation plan by business unit to really be world class in the customers eyes not ours, but.
The customer's eyes.
And all of that we think adds shareowner value significant shareowner value.
We'll be excited to share with you later this year as it relates to 'twenty three and beyond targets.
I appreciate it.
Thank you.
Thank you next question comes from the line of Bryan Blair of Oppenheimer. Your line is open.
Thanks, Good morning, guys.
Good morning, Hi, Brian .
You mentioned your revised sales guide is based on one Q performance in incremental price. If we think about the 9% to 11% range for the full year is the right way to think about that now high single digit maybe pushing 10% price modest deal contribution and flattish volume or is there more nuanced.
That framework.
That is about it.
We're seeing the majority of that growth coming from price with this.
A small contribution from volume.
Okay, That's fair and just to confirm is the outlook still for Ross expansion in both segments for the full year or is there a little more potential variance in the outlook now.
No it would be.
Margin contribution from both segments again think of that as well.
Price cost doing better as the year progresses and then.
Driving through in some of these inefficiencies that are in the supply chain. So while both segments will benefit with with those actions and improve their margins.
Understood. Thanks again.
Thank you next question comes from the line of Nathan Jones of Stifel. Your line is open.
Good morning, This is Adam Farley on for Nathan.
Hi, Adam.
I wanted to follow up on the supply chain questions could you just give some color on.
Is it the supply chain got better worse or stayed about the same through the quarter.
I think you'd have to break that into two categories. One is it January .
And the omicron out I would say it got better.
I think just like we are increasing our capacity on a linear basis linearity Q2 versus Q1 Q1 versus Q4, we're seeing our supply chain.
Accelerate theirs as well so that's the encouraging part the discouraging part in Q1 was we got hit by Covid and I think we're starting off Q2 here with the challenges in China, and Covid and what impacts that could have on the port. So it every quarter. This new challenge, but I think if you. If you took those challenges out it's fair to say that the supply chain is definitely getting.
Better.
I would just add a little bit of color we're off to a nice start here in April .
Thanks for taking my question.
Thank you next question comes from the line of Scott Graham of Loop capital markets. Your line is open.
Yes, hi, good morning, Thanks for taking the question.
John .
In answer answering.
<unk> earlier question.
Things tightening.
Clouds, maybe starting to emerge a little bit on <unk>.
Some of the indicators are certainly made them moving the other direction.
I'm just wondering if your comment about <unk> potentially being a.
Down in 'twenty three.
You were just talking about the market or if you were talking about pentair.
No.
I wasn't talking about either I mean, 2023 is too far to predict I mean, I think we were very clear in our our full.
Full year guidance that we gave in the February timeframe that we expect a little bit of channel correction in inventory correction in the channel towards the end of the year as distributors reset their needs when the supply chain catches up so that's been in our guide is still in our guide and we were expecting that to happen.
If you focus just on the sell through there is no slowing of the sell through right now that we see.
And I want to be clear.
If you go back historically, we're not at high levels of new home builds there's been capacity constraints, even within that space, but higher interest rates are designed to slowdown in consumer spending.
Consumer house purchases and I think it would be foolish not to expect that we will see some.
More flattish or some slight slowdown that being said that is in a very small part of the overall market, which is north American new housing starts the overall aftermarket demand which comes globally across the entire installed base continues to be the opportunity for our residential business and within there we have.
Got growing.
Enthusiasm for water treatment, which is helping us on the installed base itself and we also have the growing enthusiasm for more automated and connected solutions, which has been constrained because we don't have the availability of the electronics to fulfill that so I think there is enough growth legs to continue to go I'm not I mean, we're going to get through Q2 and the rest.
The year, Scott before we talk about 2023, but I in no way shape or form are signaling anything related to pentair or the industry I'm, just saying that I don't think its going to continue to be.
Mid 20% growth in residential and in perpetuity that will settle down yes, but.
We all agree with that thank you for that let me just ask one other question just was a big year for pentair automation product launches and pool sounds like that maybe not the rollout as maybe being slowed by the chain a little bit.
I'm just wondering if you could shed some light on what the reception of the products are with with with distributors out. There is is it really positive are you really excited than just <unk>.
Disappointed that supply chain is slowing you down maybe just give us a little color on that thanks.
Yeah, I mean, I think first of all in Q2, we got a big launch coming on or I have three our new variable speed pump and we're excited by that because it used more modern technology and some of that more monitor technology is much easier to get from Adobe based technology, we had.
Youre right I think when when Youre and dealers are busy they're not always out there trying to sell new technology and as that starts to.
Become more normal what will get people upgrading and selling more of the newer technology, but right now we're moving to all cloud based solutions, we are moving to better platforms and ease of use for customers and the only thing that's constraining that longer term growth as the supply chain Scott.
Got it thank you.
Thank you.
Thank you next question comes from the line of Steve Tusa of Jpmorgan. Your line is open.
Hi, guys good morning, Hey.
Hey can you help me with the a little bit with the bridge.
And just what you do expect on that inflation number for the year.
The one that was $89 million this.
This quarter.
Yes, Steve we think Thats, a pretty good proxy for the rest of the quarters. So we don't see inflation really moderating. So you could take that 90 million multiply it by four and Thats a pretty good indication.
Okay great.
Great that's a while Steve.
I know you.
So is your question, but it's just it's a stunning number again, yeah, sorry, sorry.
I was saying great. Thanks, thanks for the detail.
How do you guys on the back so thanks for the thanks for the detail. It's obviously not great for you guys.
But the.
And then when it comes to kind of reconciling pool's performance I mean their inventories.
Year over year, we're up like 60% or something like that.
How do I reconcile that with with your I know their sales performance is about in line with yours, but how do I kind of reconcile the inventory move with with your sales performance is that is that they are.
What could be the differences there.
Let me start the first part there is always a lag Steve you know that.
Yes.
Build inventory ahead.
We're then fulfilling their sell through and the lag position and I think that lag is even more exasperated now because as I said earlier, a five day lead times have moved into 90 and 120 lead times. So.
And that's a result of the <unk>.
Overall supply chain. So we feel right now on a dollar basis on the sell through versus where the inventory levels are we're about back to historical levels.
I think that will always vary in a season like Q2, where nobody can be.
Caught without the appropriate demand or the inventory to meet the demand and then they will start to moderate or start to get fit.
Fixed in Q3 and Q4 Steve.
Okay, and then just one more question for you.
What is the price you expect.
In the second half or just maybe you could tell us what you expect in the second quarter and then we can obviously back into the second half.
Yeah.
I mean, we think price will be higher in Q2 than Q1, primarily because we're still working through some of the backlog issues in.
In Q1, so that's just on the natural pricing go higher and then we've raised prices even higher than we anticipated this year and so you could expect the price contribution sequentially in Q3, and Q4 to be higher than it will be in Q2.
Got it okay. Thanks, a lot I appreciate it.
Yes.
Thank you next question comes from the line of Julian Mitchell of Barclays. Your line is open.
How's it going guys, it's Matthew Shafer from Julian Mitchell's team on.
I'm curious so the stock's been under pressure any recent management has not stepped up buyback does that just through the deal.
<unk> will management.
First over the next two quarters should prices remain at similar levels.
You should assume we were not allowed to be in the market at all due to the.
Working on the deal and the quiet periods associated with that.
Yes.
Okay great.
And then so the Q.
Q2 guide.
Clients that are over 50% sequential incremental I'm curious how confident you are in that guide and how should we think about Q2 guidance by division.
Yes, Q2 is typically our biggest quarter, we're confident in the guidance.
Okay great.
Thank you next question comes from the line of from <unk>.
Melius Research your line is open.
Yes, hi, thanks for all the answers John just to return to a subject you talked about before obviously new housing severely under built in maybe not that big.
Within the mix, how do you think about normal volatility as consumer on the repair and replacement upgrade side. There's a lot more options you mentioned on automation, there's a lot more attractive offerings, but how do you think about volatility as consumers cycle up and down within that space and then I'll just ask my second one right now any indications from your rest.
Brandt.
Customers on their propensity to spend given the same overriding concerns by consumers. Thank you.
Yes, I mean I think.
I believe that the desires of existing homeowners are to improve their overall experiences within their home and.
As new and newer opportunities come along to do that they do.
The reason the replacement cycle works is once you have a pool for instance, you want to keep it running you don't want to turn it into a pond and youre going to keep the overall <unk>.
Non discretionary maintenance cycle going.
I mean, I think you are more discretionary purchases do I need automation do I needed, an automated pool or not and I think that always varies depending on the abilities of those consumers to spend or to have discretionary income to spend one of the things associated with pool market is it tends to be higher economic wealth individuals'.
And they tend to be in communities that.
Neighbor as something and then that becomes the awareness and then you generally go off and do the same thing.
For water treatment I do think that that one cycles more up and down based upon need.
And the ability to spend because that is a more varied economic group purchasing with water treatment. So we tend to see.
The remodeling replacement of whole home water treatment turn it to be more of a break and fix.
And or to get it working good enough for the time being and then figure. It out later, so I think if we're going to see.
An impact we'll see it a little bit more on the water treatment side now that being said that's more of a 90% to 95% aftermarket.
Replacement business today then.
And then it is what we see in pool.
Okay. That's helpful to understand any thoughts on restaurant spend.
Yeah, I mean, I think we continue to see with the traffic and the demand in that space, we continue to see.
You know things pick up.
I think where I was making my comments earlier I don't think I could give you a global answer on that at the moment thats been consistent because all three regions faced COVID-19 at different times. So when we see North America pick up as we as we have in the U S. Domestically right now there is a little bit of slowing in Europe , and a little bit of slowing in China relative.
Where they are and that Covid journey.
Alright, thanks, guys. Thank.
Thank you.
All right everybody. Thanks.
Go ahead, Okay. There are no further question at this time I would like to turn the call over to John Stout for closing comments.
Thank you and thank you for joining US today, we continue to be inspired about how we are in the business helping to solve some of the biggest environmental challenges of today and we are focused on engaging our employees and stakeholders, while we do it.
Whether through our sustainable gas solutions, and helping to turn waste into value are working to reduce the consumption of single use plastic bottles or increasing energy efficiency through the products, we offer our products and solutions are helping to make the world a better place.
Our work on ESG and social responsibility continues to be on the forefront of how we operate and how we work to make the planet better we're excited to share more about this in our 2021 corporate responsibility report, which we plan to issue by the end of the month.
I'm extremely proud of what we've accomplished in this past year, which is a testament to the commitment and dedication of our pentair employees contributions for our various stakeholders and guidance from our board of directors I look forward to continuing our great momentum on ESG as we continue through 2022, we are pleased with our first quarter start and I am grateful to all.
All of the Pentair employees helped deliver at the first quarter gives us confidence in delivering further growth in 2022, we are building momentum in our transformation processes and combined with our intended closing of Manitowoc ice. This gives us great confidence in our future.
Jay you can conclude the call.
Thank you and thank you for joining US today. This concludes today's conference call. You may now disconnect have a great day.
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