Q2 2022 Pentair PLC Earnings Call
Welcome to the Pentair second quarter 2022 earnings conference call, all participants will be in a listen only mode.
If you need assistance. Please they know a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May press Star and then one on your telephone keypad.
To withdraw your question you May press Star two.
Please also note that today's event is being recorded and at this time I'd like to turn the conference call over to Jim Lucas SVP Treasurer S. P N E and Investor Relations. Please go ahead.
Thanks, Jamie and welcome to Pentair second quarter 2022 earnings Conference call. We're glad you can join US 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 second quarter performance as outlined in this morning's press release.
Before we begin let me remind you that during our presentation today, we'll 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 the pentair. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors.
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 Antares website will.
We will be sure to reserve time for questions and answers after our prepared remarks, I would like to request that you limit your questions to one and a follow up 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.
<unk> delivered another strong quarter with sales segment income and adjusted EPS, all up double digits.
We're particularly encouraged with our margin expansion, both sequentially and year over year, that's priced more they've got offset continued inflationary headwinds we all are.
So excited to have received all of the necessary regulatory approvals related to our acquisition of Manitowoc ice and we expect to close the acquisition later this week.
With the significant growth of pool, since 2019, and our water solutions business expected to exceed $1 billion in sales on a pro forma basis, including Manitowoc ice and it would be predominantly a commercial platform will be moving to a three segment reporting segments starting January one 2023.
The three segments will be pool water solutions industrial flow technologies I'll provide more details on the new segment structure shortly.
We're also introducing Q3 guidance of 93 to 95.
Tightening our full year guidance to a range of $3 70 to $3.75 Bob will give more details on guidance later in the call, but we are seeing headwinds from FX translation as well as higher interest expense with the rise in rates over the past several months. We continue to believe we are well positioned in attractive markets transformation as hell.
Strengthen our performance and the addition of Manitowoc ice and our new segment structure positions us to continue delivering for all of our stakeholders.
Please turn to slide number five labeled building a stronger commercial water solutions platform.
We introduced this slide in March when we announced our plans to acquire Manitowoc ice.
Manitowoc ice is an iconic brand and a great business that we expect to help our commercial water solutions business to deliver scaled end to end water filtration and ice solutions for foodservice customers, along with predictive services that identify and address customer issues before they arise.
This combination will transform our current water treatment business, which historically has been roughly two thirds residential and one third commercial focused well.
With Manitowoc ice, we expect water treatment and.
1 billion on a pro forma basis with commercial representing nearly two thirds of the business and improve profitability. In addition to even greater growth prospects.
Please turn to slide six labeled aligning organization for accelerated success.
To further expand on our announced segmentation move. The addition of Manitowoc ice will provide us with an expanded and scaled end to end commercial water solutions platform for important global customers. It will also reshape our water treatment business to be more commercial focused by both revenue and contribution income.
Then our residential business.
In addition, our pool business has nearly doubled in revenue and income since 2018, which further supports a change in our consumer solutions segment structure.
As a result pool and water solutions will each become individual segments and each will be focused on their respective growth and transformation plans in line with our expectations, our existing industrial and flow technologies segment will remain the same.
As a result of this new structure, we have also announced a number of management changes effective January one 2023, when the new structure will take effect.
We believe this new segment structure will help us accelerate our efforts to improve customer service and differentiate our products and drive profitability for our shareholders.
Please turn to slide seven labeled transformation to enhance value creation.
As we have shared over the past several quarters. Our transformation strategy is taking shape, we are creating new tools for our toolbox and each business is identifying their own respective opportunities to transform their business models for future success.
Overall, we are focused on four areas pricing sourcing operations and organizational effectiveness.
The teams have been working hard to build funnels in all four categories and we are gaining significant traction within sourcing.
During the second quarter, we held the supplier show and gathered over 800 attendees representing over 450 suppliers. We have identified additional suppliers as we evaluate the entire supply chain.
This event showcase the diversity of our product offerings and many suppliers, both new and existing have gained a better understanding of how to partner with pentair going forward.
We are well underway in our efforts are evaluating the larger supplier categories, they're looking forward to sharing more on our progress in the future.
We believe transformation is a key value creator for pentair longer term and we look forward to updating you in more detail and sharing our detailed targets and expectations for 2023 and beyond early next year.
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 Q2 2020 to pentair performance.
We delivered second quarter sales growth of 13% with core sales, increasing 12% with strong price contribution.
We were particularly pleased with the top line performance given the tough comparison to last year.
As we indicated last quarter, we expect it to see price outpace inflation, starting in the second quarter and it played out as anticipated.
Consumer solutions delivered core sales growth of 15% against a tough comparison and industrial and flow technologies grew core revenue 7%.
Segment income increased 18% and return on sales was 19, 3%.
Which represented a 70 basis point increase year over year, and a 210 basis point improvement sequentially.
We were pleased to see the strong price contribution more than offset inflation.
But many of our businesses continue to face supply chain inefficiencies.
And we expect this to impact productivity in the near term.
Below the line net interest and other expense was just under $5 million.
Our share count was $165 5 million and the adjusted tax rate was 16%.
Adjusted EPS grew 21% to $1, two and exceeded our guidance for the quarter.
Please turn to slide nine labeled Q2, 2022 consumer solutions performance.
Consumer solutions delivered another strong quarter with sales growing 19% and core sales increasing 15%.
Segment income grew 18% and price more than offset inflation in the quarter.
Core sales grew 20% in the quarter and we continue to see solid momentum as we continue through the 'twenty two pool season.
There is understandably a lot of focus on the pool industry, given the significant growth over the past two years.
The pandemic changed consumer behaviors early on and whether it is moving to warmer climates investing in the overall backyard or the emergence of new traveling like Airbnb consumers are using pools more and more.
The industry is estimated to be roughly 60% serving the installed base.
90% major remodeling and 20% new pool construction.
New pool permits have historically run 10% of single family starts.
And I've been a little ahead of that lately.
But pool dealers remain constrained by labor availability.
Remodeling activity has been strong, but the focus on new pools has kept some of the remodeling activity from occurring.
Adding to healthy backlogs for dealers.
Further pool attrition has been lower as pool owners have a renewed interest in maintaining their pools.
There are roughly $5 4 million pools installed and the average age of the installed base is approaching 20 years.
The near term focus for pool is managing the supply chain keep.
Keeping up with demand and improving the inventory health of all product categories.
While some categories like heaters lighting and clean Earth have improved.
Inventory positions, leading to elevated growth other categories like variable speed pumps automation and standardization still have healthy backlogs given the limited availability of chips that has impacted deliveries.
We continue to believe in the long term prospects for the pool industry and will provide further updates when we report third quarter earnings in October regarding channel inventory levels as the pool season ends in September .
Water treatment grew sales, 19%, which included some contribution from K B I.
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 continue to see a healthy recovery in its end markets, resulting in a healthy double digit sales growth once again.
The overall industry continues to improve and K B I has strengthened and created new relationships for the business.
Please turn to slide 10, labeled Q2, 2022, industrial and flow technologies performance.
Industrial and flow technologies grew sales, 4% in the quarter with core revenue increasing 7%.
Segment income grew 4% and return on sales was flat at 15.7% as supply chain and plant inefficiencies continued.
Residential flow grew sales, 6% as demand in this channel remains solid and backlog return naturally to historic levels as component availability improved.
Price is right out quite well so far this year and capacity constraints in the plants have slowly improved as labor challenges have been addressed.
We expect more normalized seasonality to end the year, but are encouraged at sell through in the channel remains healthy.
Commercial flow sales were down 6% as the timing of shipments impacted the quarter.
Backlog remained healthy and we expect improvements in the supply chain.
Should result in these delayed shipments occurring in the second half.
The business continued to make progress in driving complexity reduction.
Industry solutions saw sales increased 9%.
<unk> continues to be strong and orders were healthy and this longer cycle business, particularly within the sustainable gas solution business.
Although this is a longer cycle business. It was encouraging to see healthy price read out in the quarter.
Please turn to slide 11 labeled balance sheet and cash flow.
The balance sheet ended the second quarter exceptionally strong with leverage at one times and return on invested capital of just under 19%.
Cash flow improved sequentially and was impacted by higher inventory levels and supply chain inefficiencies continued.
This is a combination of opportunistic raw material purchases.
And the products that had been close to being completed while awaiting final components that have been delayed.
[noise] resins drives and electronics continue to be the categories impacted by availability challenges.
We expect inventory levels to come down through the second half.
During the quarter, we completed our financing for the pending Manitowoc ice acquisition.
Given the rise in interest rates that occurred since we announced the transaction in March.
We ended up with 75% of the dead variable to help mitigate some of the higher interest expense that will occur versus our original assumptions.
And to allow us to pay down the variable that as free cash flow is generated.
We repurchased $50 million of shares in the quarter.
Our primary focus for the remainder of the year will be on debt reduction upon the closing of the Manitowoc ice acquisition.
Please turn to slide 12 labeled Q3, and full year 2020 to pentair outlook.
For the third quarter, we are introducing adjusted EPS guidance of 93 to 95 cents.
Which represents a year over year increase of 47%.
We expect total sales to grow 3% to 5%.
Against a tough comparison as we expect seasonality for the business and channel inventory levels begin to normalize.
We expect segment income to increase by 7% with corporate expense coming in around $20 million net interest expense of $6 million to $7 million and adjusted tax rate of 16% and a share count of $165 million to $166 million.
For the full year, we are adjusting our topline guidance to a range of 8% to 10% increase.
Related primarily to a 1% higher FX headwind than previously forecasted.
We expect segment income to increase 9% to 11% as.
As we expect price.
To exceed inflation in the back half of the year offset by manufacturing inefficiencies in the near term given ongoing component and labor availability.
We expect adjusted EPS in a range of $3 70 to $3 75, or an increase of 9% to 10% for the year.
We have reduced the high end of our previous guide by five cents to reflect FX and interest headwinds.
Below the line, we expect corporate expense to be around $80 million net.
Net interest expense of $21 million to $23 million as interest rates have increased and adjusted tax rate of approximately 16% and.
And shares to be around $1 $65 million to $166 million.
We continue to target free cash flow to approximate net income.
We are focused on bringing down inventory levels, despite ongoing supply chain inefficiencies.
Our third quarter and full year guidance does not include the impact of Manitowoc ice, which we expect to close later this week.
For the balance of 2022, we would expect the acquisition to be neutral to earnings.
We had previously communicated that we expect 25 cents of accretion in 2023.
However, we now expect about a 15 cent headwind from higher interest expense as a result of rates rising since we announced the transaction in March and.
And we would now expect approximately 10 cents accretion in 2020 three.
We continue to target 40 cents accretion by 2025.
I would now like to turn the call over to Jamie for Q&A, After which John will have a few closing remarks.
Jamie Please open the line for questions. Thank you.
Ladies and gentlemen at this time, we'll begin the question and answer session.
Once again to join the question queue, you May Press Star and then one so what's your all your questions you May press Star two.
Our first question today comes from Andy Kaplowitz from Citigroup. Please go ahead with your question.
Morning, everyone.
Good morning, John or Bob could you give us some more color into how you're thinking about pool moving forward. I know you said you would give us more of an update in October but I think you did suggest earlier in the year that you expect some inventory correction in the channel and pool later in 'twenty two so given the strength you saw in pool in Q2, but obviously more normalized inventory in the channel.
Do you expect a potential China crushing to be better or worse than your initial expectations and what could that mean for 'twenty three pool demand.
Yeah. Thank you for the question.
From our perspective that the year is playing out very much you know like like we thought it would be when we gave our initial guidance at the beginning of the year.
When we look at the the business. We you know have a comparison to last year, where if if you remember our inflation started accelerating in Q2, Q3, and Q4 of 'twenty, one and and price was still catching up.
When when we looked at the volume and last year's Q3 and Q4.
Really normal seasonality was not in play backlogs were high we were shipping the products that were available to us.
Revenue growth.
It was primarily volume driven.
As we built the guide for this year.
Our view was that price would start to read out quite effectively and price offset inflation in Q1, and then write out really nicely in the second quarter and our view is you know price will continue to exceed inflation in the back half of.
Of the year.
As as we look at the the back half of the year price remains strong for the business.
And channel inventories returned to more normalized levels against tougher comparisons.
So what what what that means is that or guide remains very consistent with what we said at the beginning of the year and it sets us up for a more normalized pool season in 2023.
But maybe I can ask you to elaborate on price versus cost dynamics and supply chain in the sense that commodities have started to come down yeah, you definitely still talked about supply chain inefficiencies, so its place versus costs or supply chain.
Stabilizing was your expectations. Obviously you are in the green in Q2 expectations.
The expectation in the second half is it better or worse than you had kind of the same you know what are you seeing in terms of overall price versus cost.
Yeah, I'll I'll break that into the two pieces, because we look at really inflation in and supply availability in two different pieces.
From an inflation perspective.
Our biggest challenges are really are across you know metals motors drives electrical frayed, including for the old charges and labor.
All of those pieces most are about the same with with commodity prices metals copper steel showing some improvement which would likely read out early next year.
So our view is it inflation gets a little bit better in the back half, but continues to be a challenge.
From a supply availability perspective.
You know he heaters and and lighting cleaners have all improved the challenge remains around variable speed pumps automation standardization.
Really any anything related to availability of chips.
We also continue to have challenges around you know resins drives electronics, so supply availability about the same inflation getting a little bit better in the back half, but it should read out in an improved fashion in 2023.
I appreciate it.
Our next question comes from Joe Giordano from Cowen. Please go ahead with your question.
Hey, Thanks, guys I'm you know when you think about Manitowoc ice in the context of a potential recession and consumer weakening I know you you cut to the accretion Im just like on the interest side, but how do you just think about the the underlying performance of a business like that relative to what you may be you thought when.
When we when we made the announcement.
Yeah, I think we're still very positive about the outlook I mean, one of the things that gives us that confidence has ever pure which is our commercial water solutions business, we've seen that business perform.
Significantly well during cycles I mean, other than Covid and just as a reminder, we're not yet to the hospitality levels globally that we expect.
To get back to and so when that global travel starts to open up those are great markets that have been on pause for a little bit in those spaces. So you know we share some of the same accounts and we have opportunities to penetrate the complementary of accounts and multiple and then we believe that the K B I service piece of it creates that ongoing.
Service annuity around these two products. So now we think it's going to perform well.
And then can you just touch on the leadership changes and like kind of a flip flop from of responsibilities from one segment to another and what what those individuals' bring with.
With a fresh set of eyes suppose to those businesses.
Yeah, I mean, you know listen you know Mario has brought a lot of great leadership capability to pentair and I'm sad by what we're doing here from the standpoint that we're almost a victim of our own success I mean pool as we mentioned has almost doubled since 2018 and along the way we're now competing directly with two standalone pool.
Public companies and that business needs a different level of agility and focus are for it to deliver to the customers expectations and be the premier pool provider you know on the water solutions side, where we're adding a commercial element that that skews us more from a residential into a commercial aspect. So all of the great capability that consumer so.
Bill you know the stronger brand the customer service the connected solutions, the effortless customer experiences all phenomenal progress over the last eight to 10 quarters all of that capability to use but I want to use it closer to the customer so pool needs what it needs to do from from those.
And then what do you need to make sure we're not losing sight of servicing the foodservice customers in water solutions. So throw them used to run pool and so he is coming back to lead that segment and within water solutions. You know Adrian it's been very close to that process through the transformation work and you know the onboarding of Manitowoc and I feel like he's going to bring.
The right capability leadership style and demand as a runner pool business for the last three years is a long term pentair employer and I think he's going to bring a great capability to I S. T. A.
And you know Mario and I talked and I think this is a great opportunity for them to use the skills. They need to take my job somewhere else or go lead is a bigger segment somewhere else. So that's a little bit of color.
Okay.
Thank you. Our next question comes from Mike Halloran from Baird. Please go ahead with your question.
Hey, good morning, everyone.
Just to just a clarification on the on the pool inventory levels from Bob's comments, just want to make sure I understand essentially you're saying you are at normal channel inventory levels for everything.
Really doesn't involve chips or electronics, whereas the pieces like <unk>.
Abel speed Motors standardization things like that those are not at normal levels or below normal levels from a channel inventory perspective is that is that accurate.
I think I think Bob I don't want to put words in your mouth that that's an end of year forecast that statement and we've got a fair amount of volume reduction in in our you know pool Q3, and Q4 year over year that would bring us into what we expect to be normalized levels by the end of the year correct. Yeah. That's that's built into the into the guidance that that that we have so.
You know our our view is that still still catching up on the heaters lighting are still catching up on the variable speed pumps, the standardization and the automation and and you know heaters lighting and cleaners will will be those backlogs will come down in Q3 and Q4.
Okay. So the commentary you made on the guidance piece shows some destocking was primarily related to some of those pieces you just mentioned.
Yeah. So I you know I think.
We had in our guide that we felt like we were going to the original guide and then as Bob said, our current guys equaled our original guide and we always forecasted that we would see those inventory levels start to come down as our lead times started to get better to the channel I mean, historically, we were generally at five days out for any product we've made.
You know clearly when we were trying to catch up in 2020, one that exceeded 180 days in some some aspects those lead times are not yet back in line to the to the products that Bob mentioned anything chip related or Iot related and we expect that will begin to catch those up between Q3, and Q4 and get more normalized as we head into next year.
No no that makes sense and then within the resi slow piece here, maybe just talk about what what's the sequential dynamics look like.
And what kind of dynamics, you're seeing on the stocking destocking piece.
You know kind of where end markets are tracking now versus where the inventory levels there.
Yeah, right racy flow continues to remain strong from a demand perspective are our bigger challenges around supply availability and labor. So you know backlog looks healthy inventory in the channel looks looks healthy and you know in good shape, we just need to to.
Deliver that backlog in Q3 and Q4.
Actually I appreciate it.
Thank you. Our next question. Our next question comes from Brian Lee from Goldman Sachs. Please go ahead with your question.
Hey, guys. Good morning, Thanks for taking the questions.
First one just kind of going back to your comments, Bob around them and I don't want to put words in your mouth, but you sort of suggested normal we'll.
Cool season dynamics in 'twenty three.
Historically is that sort of a framework of low single digit price mid single digit volume or could we expect there still some additional price in 'twenty three that persist from these kind of levels and then maybe Conversely, some some volume headwinds given tougher comps maybe a slower you pull market and just trying to get a frame of reference when you talk.
Looking about sort of the normal if there's a new normal or or sort of the historical metrics.
You would be referencing.
Yeah, it's still it's still very early to give our view of the 2023 pool season, but certainly what we see today suggest more of a normal environment. So we spoke about inventory in the channels at the end of the year being more in line and then that allows us to have some amount of price carry all.
Or from 'twenty to 'twenty, two but more normalized seasonality in the business. So that's our view right now we'll let the AR Q3 in the pool season ends in October and then have a better perspective on our next earnings call.
Alright fair enough and then and I S. T I'm not sure. If you are you.
You provided color on it but this was I guess, the second straight quarter no volume growth in IFC, and maybe just level set us a bit what where are we in the cycle just kind of thoughts on volume growth in this segment moving through the rest of 2022.
Yeah, I just wanted to give some color and then Bob will take.
Take it a little deeper I mean, just a reminder, that an inflow in our Iot side, we struggled with some of the same challenges we're struggling with on the consumer solutions regarding you know variable speed and the availability of those drive. So we are still seeing a shortage of those products and that's where we're having trouble getting the the backlog out as well.
As Bob mentioned some of the labor and some of the premium freight associated with that are lingering around the cost side. So Bob I don't know if you want to provide any more color. There yeah. It's it's really three three different business. So we spoke about residential flow in that business continues to have good demand commercial sales was down the debt.
Primarily due to us needing to improve some supply chain inefficiencies and then the longer cycle industrial solutions business is doing well, let led by sustainable gas. So again, a mix of businesses, but overall you know pleased with the.
With the 7% core growth in I S T.
Okay. Thanks, a lot guys I'll pass it on.
Our next question comes from three or four a disc <unk> from Jefferies. Please go ahead with your question.
Hi, good morning.
So just given the significant cross and pull them out for the last couple of years I know you're not forecasting 2023 today, but if you do see some declines in demand into next year, what kind of levers do you have to keep profitability.
Yeah. We are we have a number of other levers I'll start with transformation the.
The transformation program is really gaining momentum we're seeing some small benefit this year in 'twenty two but a significant final are being built in the transformation and we talked about a 300 basis points improvement for the best the overall pentair business to 2020.
Five so certainly on track to deliver that so it starts with transformation than we we have a number of inefficiencies to be honest in the 22 P&L and we're in the process of looking at those as we build out our our plans for next year, but everything from you know air Freighting product.
To you you know, having or labor and I'm certain manufacturing inefficiencies in our in our factories.
So overall, you know lots of opportunity to expand margins next year through the transformation and being laser focused on the inefficiencies this year.
Okay.
Thank you and then just given the addition of Manitowoc ice in a couple of days could you give us an update on how youre thinking about the contribution to rather than it is for this year and.
And then earnings into 2023.
Yeah. So we have a page in the deck that talks about manitowoc being around $325 million of revenue. If you took 512. So that you can be pretty close to the revenue number and then from an income perspective, you know we've talked about that being a 30% EBITDA margin busy.
And so again, if you took 512, so that you can come up with roughly what the EBITDA would be fault for the business.
Great. Thanks for taking my questions for today.
Yeah.
And our next question comes from Bryan Blair from Oppenheimer. Please go ahead with your question.
Thanks, Good morning, guys.
I was just hoping you could offer a little more detail on underlying trends in commercial water treatment prepared remarks then.
Pretty bullish on a trajectory there just curious if there's any discernible shift in underlying demand as Q2 progressed or what you're seeing in the early part of Q3.
Yeah, I mean, you know it's a it's a steady mid single digit grower normalized and we continue to see it clipping along at that rate.
Thank you know theres always a little bit of headlines on restaurants that are challenged but then you always see or don't hear about the new restaurants that come online and so you know while restaurants might not be able to fill out their capacity levels because of labor constraints. It doesn't mean that they're necessarily using less water.
And that water in most of our restaurants is filtered to a high quality standard. So I mean, where we're seeing good progress there and we're continuing to be bullish on that particular space.
Okay I appreciate the color and just to level set or are there any operational factors that are restricting manitowoc ice accretion this year or lowering the 'twenty 'twenty three outlook. It sounds like it's strictly interest expense just want to make sure that that is the case.
It did yes, just interests of the business is tracking well and and or our our goal is to be focused on our synergies next year. In addition to that.
Got it.
For taking my questions.
Yeah.
Our next question comes from Nathan Jones from Stifel. Please go ahead with your question.
Good morning, everyone.
Alright. Good morning question on the question on the.
Inventory comments you.
You talked about looking to take inventory down in the second half of the year. Despite supply chain challenges is that more related to the seasonality in the business that you were looking to take inventory down or is there you know a move at the moment to structurally reduce inventory that you may have been carrying because of the supply chain challenges.
Both.
I mean, I think you know Bob mentioned that we're gonna have a normal seasonality next year just to be clear regardless of what the the pool outlook is for 2023, we think it'll be back in line with the historical patterns of peak performance in Q2, a little lighter than you.
You know Q1, and Q4 ratio regarding that pattern and that's what we think to happen and what we expect to be add is that we're back to more normalized inventory that we'd reflect no more further significant supply chain issues.
We need to cut more corn.
So we're still short as you've heard from some of our key customers and you know they need those variable speed pumps, they need the sanitizers and when we finish those out and get those to them. They can get to close the pupil pads out and then that brings the inventory back in line.
Okay makes sense and one of them and the transformation you've actually been talking about.
You know the funnel of opportunities for transformation are continuing to build but I noted in a and you put.
In our press release today that there is no expected expenses for transformation in the second half of the year can you just talk about you know how.
D C self funding now or why are they not expenses related to transformation, but you're talking about a building pipeline of opportunity.
Yeah. We we are typically would would not forecast transformation expenses, we do forecast the amortization on intangibles going forward, but we would not.
<unk> forecast that you can expect us to continue at about the same rate as what you saw in Q1 and Q2 in the back half of the year as we spend money on third party consultants to help us drive primarily pricing and sourcing.
Okay.
That makes more sense, thanks for taking my questions.
Our next question comes from Julian Mitchell from Barclays. Please go ahead with your question.
Hi, Matthew Shafer on for Julian Mitchell's team. My first question was for after you guys had good margin expansion year over year in 'twenty, 'twenty, one, but that seems or run out of steam in 2022, what are your expectations for margin expansion in the division for the remainder of the year and then can you just remind us too of the <unk>.
F T complexity reduction initiatives and expected impacts there.
We are pleased with the I F T Ross improvement and in the business, we do expect to finish the year with a.
Return on sales higher than the prior year, you'll remember that last year. They started benefiting from complexity reduction.
In the back half that trend has continued and we continue to have momentum in that business. So overall, we were we were flat for for Q2, but do expect in the back half of the year to see Ros expansion in that business.
In my comments, you know we had a supplier show and you probably heard me talk about all the great opportunity to partner differentially with with supply partners you should read into that a lot of complexity of product both in the form of castings as well as you know semiconductors, and PCB boards and et cetera, and so as we go.
Forward the opportunity to consolidate those designs is a big piece of how we think we're going to drive longer term margins in Iot.
And consumer solutions of course, but we will see it in I F T as well.
Great. Thank you very much on that and then the second half sales growth might be low single digits mid single digits for the company how much of that growth will be from price versus volume or any detail there would be very helpful.
We expect price to continue to be strong at that double digit rate. So we did you know 10% in Q1 and 14% in Q2. So thank you know double digits in the back half.
Is is our assumption.
And then in fact, it continues to be the headwind on a year over year basis, and you can back into the volume, which is a which is a comparison to higher levels in Q3 and Q4 and then also as we mentioned are our views of what the inventory correction will be in the channel due to supply chain catching up.
Great. Thank you guys.
Okay.
Our next question comes from Jeff Hammond from Keybanc Capital markets. Please go ahead with your question.
Hey, good morning, guys.
Good morning, Hey.
Hey, just can you give us there's something like what's your assumption for the volume decline in pool in the second half and then just on the.
Third quarter, Yeah, I think you're saying, 3% to 5% growth what's kind of you know is there much differentiation between the two segments.
Yeah, we we I don't really want to get into all the specific pieces for each of the different segments I would say that overall for the company. We've talked about you know price reading out double digits, you can think about acquisitions, roughly offsetting FX and then.
The rest is volume so think about volume is being down low single digits to mid single digits in the back half.
Yeah.
Okay and then.
Can you can you give us any color on how to think about Manitowoc ice seasonality as it was a pretty.
You know ratable quarter to quarter.
Yeah, pretty pretty pretty flat quarter to quarter.
Okay, and then just last one on transformation. Just you know you guys have been talking about it for a while what what do you think is the timing where you start to you know kind of spike out.
You know kind of the different buckets, and you know cost savings et cetera.
I think early next year in accordance with when we provide the guidance we would expect to give you the transformation expectations and break out some of the components of how we're going to achieve that.
Okay I appreciate it.
Our next question comes from Scott Graham from loops. Please go ahead with your question.
Yeah, Hi, good morning, John Bob Jim Yeah, I wanted to ask you Luke maybe to develop your answer to a previous question I think about one business for July how are things in July in general are there any big change one segment versus another versus the second quarter just maybe.
Whatever you can tell us about July would be helpful.
Off to a good start in July you know a lot of it comes down to the allocation of our key.
Keep product and so we're on track to deliver the quarter based on the start in July .
Got it thank you and forgive me for not having to put.
Pen to paper on that your last answer on DAU.
Dow low to mid single for the second half and volumes, but it is the second quarter pricing is that kind of the peak and then we kind of moderate a little bit because the second half of last year, you start to see the ramp.
That's that's exactly right, it's still double digits, but it starts it starts to moderate.
That's great. Thanks, if I could just squeeze in this last one you've got a pretty healthy incremental margin implied in your third quarter guidance.
Is that mostly a widening of the price cost gap or is there something else.
Our price cost stays about the same in and I think the Q3 Ross is roughly in line with Ah.
With the first half.
Very good thank you.
Yeah.
Okay.
And our next question comes from Rob Wertheimer from Melius Research. Please go ahead with your question.
Hi, good morning, everybody.
Good morning.
So I had two questions. One is simply on gross margin, where you've noted obviously prices catching up and nicely. So to some of the cost increases have you seen is there still 100 or more tailwind as that continues to happen and you revert back to prior gross margin levels. I know that this was a mix some of those issues, though you don't necessarily get margin on pricing. So.
Is there still continued tailwind on gross margin.
Yeah, I'll I'll take the first part and then Bob will give you a little bit more color I'm looking at 19 and I'm looking at my gross margins of 19 and as you recall you know we took a small dip in 'twenty as COVID-19 started unfold than we'd been catching up ever since and so our gross margins are still down from 19 in and we still believe when we look at our transformation savings that were you.
The bat historical point, and then seeking to drive significant gross margin expansion from there. So as we think of pricing as we think of sourcing it's not just about you know getting back.
From back to that level, we want to be back to that level, and then some which would get after the right pricing dynamics that we're seeking in each of our industries as well as I'm getting real sourcing benefits from our supply partners and from as I mentioned earlier, reducing the complexity of our designs you know through our centers of excellence by I don't know if he weren't bring more color.
Yeah, all of our transformation initiatives are focused on sustainable gross margin improvement. So when we talk about 300 basis points of Ross you can basically equate that to 300 basis points minimum of gross margin.
Perfect and then and then from here or is that more pricing catching up or is that more just like reducing all the inefficiencies and I'm doing all the things you're talking about transfer she took to get there.
Yeah, you know I think in our distribution and dealer base businesses, where we're pretty confident having been through these cycles before that you know our customers understand that labor is a big push.
Piece of the price that you know are the the price efforts, we put into place we would expect to be more sustainable levels. When you get them more projected the OEM related businesses. I mean, there is a dynamic where we would expect to see pricing headwinds in those businesses and we'd need to capture more sourcing savings to drive to drive those gross margins as we go forward.
So it is different depending on what business, you're looking at but it's a combination of both of those things.
Perfect and then if I can I mean, theres a lot of questions on really on the consumer obviously is a big big thing that came in the quarter and you have some natural strengthening towards a lot of stability to a lot of backlog a lot of different things I'm curious if you're if you're able to look through all of that and other consumer or.
Or anything else on just what the current mood is what you are seeing any downturn or any inflection on near term purchases.
It would indicate a change in trend and I'll stop there. Thank you.
Yeah, I think it's hard you know to see the immediate reactions I mean, it's it's logical to think that higher interest rates are going to put a pinch on consumer spending and I would say that you know we break those into two categories. What's the discretionary piece and what is the non discretionary piece.
We don't see pool owners in particular on the high end really changing behavior at all.
The house is still continuing to transact some of those or are most of those I should say of cash based and you know there there's still going to seek those pool.
I think where we may or may not see it as we look into 2023 and 24 is on remodeling home remodeling.
Or you know what is a non discretionary purchase of a higher end water softener or water treatment system et cetera, that's where we'd see it we have not seen it yet, but that's where we would expect to see and measure the consumer sentiment regarding our products.
The rest is break and fix and I'd call that non discretionary and you need a pump you need a pump.
Filter replace do you need a filter replaced.
Our next question comes from Damian Karas from UBS. Please go ahead with your question.
Hey, good morning, everyone.
Good morning.
Just have a follow up question on price.
Mentioned, you're expecting up double digits in the second half is that primarily just coming from prior price actions.
And how should we be thinking about you know what your refreshed pricing that usually hits in September .
It is going to be aligned I mean is there some incremental price it it's likely to happen in just you know we're talking to lower relative to it.
You know actions from from the past year or you know given material deflation that we've been seeing recently is it possibly just more of a pause on on kind of the September price refresh.
So to answer your first question the price reading out in the back half of the year is based on all of the price actions that we've taken.
Over the last couple of quarters. So those are those are locked in.
As we think about price you know moving forward in the back half of the year price increases I would expect at this point that there will be some price increases you know labor continues to be high while we are seeing some relief in commodity we continue to see pressure on other pieces of the supply chain. So definitely you know moderate.
But at least at this point, suggesting you know some some small price increase.
Okay. That's helpful.
Bob you talked about the higher interest expense and variable debt could you maybe just give us your updated thinking on capital structure and your capital deployment priorities post the closure of the Manitoba Dear deal.
So from a capital allocation perspective, you know maintaining our investment grade is extremely important to us. So I I typically start with that and in terms of you know paying our dividend we've increased our dividend 46 eight years in a row. That's that's that's important as well.
Near term focus will be on debt reduction as we bring down that that interest cost and then from an M&A perspective, we are entirely focused on the successful integration of Manitowoc ice and driving the synergies that we've discussed previously so from a capital allocation perspective, those those would.
The key priorities.
Got it thanks very much best of luck.
Thank you.
And ladies and gentlemen, with that we'll conclude today's question and answer session I'd like to turn the floor back over to <unk>.
John Stout, President and Chief Executive Officer for any closing remarks.
Thank you for joining us today, it's an exciting time for pentair, we're preparing to make the most of it we.
We expect band Squawk ice and our new segmentation to be accelerators for all of our stakeholders and we look forward to updating you on our progress in the future.
Jamie you can conclude the call. Thank you.
Ladies and gentlemen, with that we'll conclude today's conference call. We thank you for attending today's presentation. You may now disconnect your lines.