Q3 2022 Pentair PLC Earnings Call
With me today is John <unk>, our President and Chief Executive Officer, and Bob Fishman, Chief Financial Officer on today's call. We provide details on our third 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 Pinterest website.
We will be sure to reserve time for questions and answers after our prepared remarks.
To request that you. Please limit your questions to one and a follow up to ensure everyone an opportunity to ask their questions.
I'll now turn the call over to John .
Thank you Jim and good morning, everyone. Please turn to slide number four titled Executive summary.
We are pleased to announce that our Q3 results were strong considering near term challenges and were in line with our expectations.
Sales growth of 9% and segment income growth of 15% included a partial quarter of our recently completed Manitowoc ice acquisition.
Our west expanded 110 basis points, demonstrating that price and productivity offset in <unk>.
And our adjusted EPS grew 11% 99 cents in Q3, which included incremental debt from our acquisition and rising interest rates.
We are very excited about the addition of ice to our portfolio and the expansion of our commercial water solutions platform and the team in the integration process is off to a fast start.
I will give more detail on our updated full year 2022 guidance later in the call.
We have modestly reduced our full year expectations due primarily to increased FX headwinds and higher interest rates. The year is generally playing out the way we thought it would after our Q2 earnings call.
We are seeing the previously communicated inventory correction and most of our residential channels, which we believe the industry is now addressing our supply chain challenges begin to abate.
Our updated guidance, we now expect that we will have cleared nearly 200 million of channel inventory pool by the end of the year.
We are encouraged that underlying demand is still up year over year as evidenced by dealer and distributor sell through despite the rising interest rates within the U S residential industry.
Speaking a few slides about some preliminary thoughts on 2023, but the main takeaway is that we believe we are well positioned to grow sales they've been income margins and adjusted EPS next year.
Please turn to slide number five legal work.
With everything going on in the market reacting to shorter term challenges I wanted to take a moment to remind you that we believe hanger is well positioned to solve some of the worlds.
Water challenges in a sustainable way today.
Today over 70% Pentair solution port water and energy efficiency through helping to reduce water usage reuse or recovery of water or requiring less energy to operate or operate more efficiently.
With a lot of the ongoing challenges, we believe that our solutions are needed to improve the lives of people and sustain our planet.
Please turn to slide number six labeled purpose.
Our purpose is important to our employees our customers and is growing more important to you our shareholders. We hold ourselves to very high standards and our annual sustainability report has shown progress we believe that further progress not only benefits the planet for customers employees and shareholders as well.
Please turn to slide number seven labeled pentair at Atlanta.
Given how much focus has been on our residential businesses, particularly pool, we wanted to take a step back and remind people of the diversity of the pentair portfolio.
Our mission as a company is to help the world sustainably move improve enjoy water life's most of attach of resource and we do this in residential commercial agricultural and industrial applications.
Pro forma basis with a full year of our Manitowoc ice acquisition and inclusive of our current 2022 guidance U S. Residential sales comprised roughly half of our revenue and the other half comes from our other served industries I will spend the next few slides talking about our three businesses and how they help comprise.
The overall pentair results.
We are on track to generate over $4 billion in sales this year.
We have a strong focus on profitability with our west in the high teens.
75 is an important number for pentair.
75% of our products are replacement inside a large installed base that benefits from over 75000 trade partners.
We believe the large served installed base and relationships with our trade channel partners drive resiliency of revenue create a steady funnel for continued growth as new products and technologies are introduced.
We have a long successful track record of generating cash flow and being disciplined with our capital allocation. In fact, we've increased our dividend for 46 consecutive years and we are especially proud of our high teens are wide C. Demonstrating that we have been good stewards with your invested dollar.
We believe we have a very solid foundation and we know there's still more that we can do.
Please turn to slide eight labeled aligning organization for celebrate their success.
We announced last quarter that effective January one 2023, we'll be splitting our consumer solutions segment into two new segments pool and water solutions.
Industrial flow technologies segment will remain unchanged.
We believe this new segment structure will help us accelerate our efforts to improve customer service differentiate our products and drive profitability for our shareholders.
Please turn to slide number nine labeled pool business.
<unk> is a leading in ground equipment maker with the largest installed base in North America, primarily across the Sunbelt States, who is on track to generate $1 6 billion in sales. This year has return on sales in the high Twenty's and has generated a 10 year revenue CAGR of approximately 10%.
We are a preferred business partner to pool professionals and a trusted source for all these pool.
Our pool business helps people sustainably enjoy water by using less energy and chemicals.
One of the most attractive characteristics of the pool industry in North America, it's serving a large installed base of approximately $5 4 million pools.
The average age of these pools is approaching 25 years, the industry is roughly 60% break and fix 20% major remodeling and 20% new pools.
Over the last two years, there was undoubtedly an increase in demand for products, such as heaters and cleaners that were not as deeply penetrated on the pool pad.
People were moving to warmer climates and buying homes with a pool of wanting to build a cool.
The emergence of Airbnb and verbal cause people rent homes with pools, rather than staying in hotels.
Our industry, leading variable speed pumps based supply chain disruptions that kept us from shipping as many of the industry wants but we are starting to catch up on these shifting their supply chain and crews.
Only about half a ball in ground pools have some form of automation and we believe this is another long term opportunity for pentair, the industry and consumers.
Pool dealers continue to be constrained by the lack of available labor.
Dealers may have been busier with new pools of last few years. This has come at the expense of remodeling activity.
We believe we have strong opportunities to continue to grow in key categories, particularly pumps are new I S. III pump with soft launch this year as we were not able to get enough chips and drives to meet demand. The initial feedback is very positive and we believe this is an opportunity to build on our leading technology position and pool pumps.
We believe the long term outlook for the pool industry remains very positive and we are well positioned to enhance our position as a leader in north American food with it.
Please turn to slide 10 labeled water solutions business.
Our water solutions business has undergone a transformation of its own with our acquisition of Manitowoc ice on a pro forma basis water solutions approaching $1 $2 billion in sales with return on sales of roughly 20%.
The business is approximately two thirds commercial and one third residential.
Similar to pool, our water solutions business sees a large percent mid sales go through distribution, it's huge trusted water treatment specialists.
Our water solutions business improves water by providing great tasting higher quality water nights.
Helping our customers use water more productively.
We have discussed our commercial water solutions business quite a lot. This year given the acquisition of landmark guidance.
We put it together with our ever pure filtration business or Kpis servicing business, we have created a leading platform to provide quality water and ice two our foodservice customers.
Our residential water treatment business consists of components and systems.
Our focus within residential water treatment is reestablishing the core components, while also investing in differentiated point of entry and point of view citizens.
We have a strong position with our core approach trade specialists, we have brands such as flash and rains off that have strong recognition in their respective channels.
Water solutions is already a high margin business, where the focus is on driving growth.
Residential water treatment is focused more on complexity reduction and margin improvement while investing in core channels.
We're excited about the opportunities for the soon to be water solutions segment.
Turning to slide 11 labeled industrial and flow technologies segment.
Industrial flow technologies does not always get the same attention from investors is our other two segments, but it is important to our long term strategy.
As we help the world sustainably move improve enjoy water our flow business helps move water, where you need it when you need it more efficiently.
Well, the industrial solutions business might not be as water focused as the rest of the portfolio. The business is focused on transforming waste into value.
Our flow business in just north of 1 billion sales with healthy margins that are improving.
Professionals represent roughly 80% of sales for flow and we have many highly recognized brands.
Our deep relationships with channel partners are important long term growth driver for it.
It was roughly two thirds residential and one third commercial.
We also serve irrigation and infrastructure on a smaller scale, which helps bring balance to the business with a combination of short cycle products and engineered products that longer cycle.
Flow has seen solid margin improvement this year and we believe this business has a long runway ahead to drive margins even higher.
Our industrial solutions business is roughly 500 million as the technology leader in several niches, including beer membrane filtration and sustainable gas solutions.
Industrial solutions is the one part of our portfolio that is not tied to professional trade channels.
This business provides filtration technology to help solve customers' environmental goals through smart and sustainable solutions.
Similar to flow, we believe theres a lot of opportunity for margin improvement within industrial solutions.
Please turn to slide 12.
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Transformation to enhance value creation.
We continue to believe that transformation will be a large value creation opportunity for pentair.
We are building capabilities and training businesses and new tools to use.
We are furthest along in our sourcing initiatives. We've completed wave one is focused on key categories like electronics motors and drives casting and indirect in fact, we had an early wins in the quarter regarding our MRO spend.
Where we went from over 100 different suppliers down to one.
This allows us to not only save money, but it also reduces complexity across our entire organization. This channel.
As we institutionalize our wave one learnings we believe this will drive future ways as we look at additional categories.
On pricing, we are establishing a foundation for pricing across our different go to market strategies. This includes looking at our dealer and distributor programs to better optimize them.
We are gaining insight into profitability by customer and product category and using this data to better drive our forecast.
Pricing remains a big opportunity and this year, it's been about building capabilities and next year should start to see benefits materialize.
We've made a few small strides in footprint optimization. This year. We believe this presents longer term opportunities, but not until 2024 and beyond as we build out the funnel.
And organizational standpoint, there remains ample opportunities for complexity reduction across the entire portfolio and a realignment of beta skills within our top priorities.
Transformation has moved from bundled to execution and we expect more material benefits to contribute to our longer term margin expansion targets, we'll be providing more detail regarding specific expectations. When we introduce our 2023 guidance.
Let's turn to slide 13 labeled early thoughts on 2023.
Well, we are not yet ready to provide full guidance for 2023, we did want to share. Some early thoughts as we go through our internal planning process.
We expect to grow revenue next year for a few reasons.
We expect the inclusion of band Park ice will contribute significantly.
Second we expect carryover pricing from the actions we've already taken this year.
And third we believe the diversity of our portfolio will be demonstrated and create resiliency.
Some investors feel solely out of our pool business.
But we have many other contributing businesses in our portfolio.
In fact pool has its own diversification with 60% break and fix that we expect will likely continue to grow.
While the smaller exposure to new pool construction may declined double digits and maybe there will also be softness in your modeling, we expect that $5 4 million in ground pools, and the break and fix a portion of the industry will likely grow modestly.
This along with carryover pricing should help limit the anticipated declines from inventory correction early next year.
The remainder of the Pentair portfolio has more exposure to some later cycle business with industrial and flow technologies that offers further diversification.
We also expect to grow into next year.
We expect that Manitowoc ice and pricing carryover will be contributors. We are also taking actions this year to better align our manufacturing costs and overhead with the lower volumes we are experiencing.
We also expect productivity to return to more normalized levels as manufacturing inefficiencies debate with improved supply chain performance.
Transformation is also expected to be a big contributor to income and margin performance next year.
We also expect to see adjusted EPS growth with the accretion from Manitowoc ice overall business performance and benefits from transformation, we expect free cash flow returned to more normalized levels or perhaps even a little better as we expect better inventory performance and supply chain inefficiencies go away and backlogs are reduced.
Overall, we believe we are positioned to grow in 2023, despite the challenges of the softening economy residential inventory and stocking challenges and FX headwinds I would now like to turn the call over to Bob to discuss our performance and our financial results in more detail. Thank you John Please turn to slide.
14 labeled Q3 2020 to pentair performance.
We deliver we delivered second quarter sales growth of 9% with core sales, increasing 4% and strong price contribution offset anticipated volume decline.
Consumer solutions core sales were down 2% is residential channel rebalanced inventory level as our supply chain constraints lesson.
As a result of our lead times are beginning to return to more normal levels.
Industrial and flow technologies reported strong, 14% core sales growth with strength across the entire segment.
Segment income increased 15% and return on sales increased 110 basis points year over year to 19, 6%.
Price once again offset inflation and productivity showed some sign of improvement as manufacturing inefficiencies improved modestly as supply chain constraints ease a little in the quarter.
Below the line net interest and other expense was $18 $6 million with increased debt as we closed our Manitowoc ice acquisition earlier in the quarter.
Our adjusted tax rate was 13% during the quarter as we true up our planning for the year with a new four year right now expect it to be 15%.
Our share count was $165 2 million and adjusted EPS grew 11% to 99 cents and exceeded our guidance for the quarter.
Please turn to slide 15 labeled Q3 2022 consumer solutions performance.
Consumer solutions increased sales, 8% with core sales declining 2% comprised of 16 points of price.
Led by an 18% decline in volume the.
The volume decline was due to tough year over year comparison, and the anticipated inventory correction across many product lines and our residential channel.
Segment income grew 10% and return on sales expanded 30 basis points to 23, 8%.
Our pool business had a 4% decline in sales in many product lines, such as heaters cleaners and lighting experienced a delay in orders at the inventory in the channel took a pause at the end of the season.
We experienced growth in pumps during the quarters.
We're able to get to drive needed to fulfill demand.
As we have been discussing throughout the year, we have been expecting a decline in the second half of this year as lead times for many products at <unk>.
Turning to more normal level, and our channel partners no longer needed to place orders as far in advance.
Further pool is a seasonal business and historically, the fourth and first quarters tend to be at lower level than the second and third quarters.
We believe the underlying demand for pool equipment should continue to be strong.
The average age will be approximately $5 4 million pools installed in the U S approach it 25 years.
About half of these pools and no form of automation, which we believe is also a long term driver of demand and increased content on pool.
We are expecting a slowing in the next few quarters as channel inventories normalize to more historical pattern, which.
Which we expect will likely result in continued volume decline, partially offset by strong pricing.
Water treatment sales grew 34% in the quarter helped in large part by two months of contribution from Manitowoc ice.
Our residential business sales declined low double digits as the channel goes through an inventory correction similar to what is happening in pool.
Consumers continue to be focused on water quality and demand for the product remains strong.
Channel inventory does need routes need to return to more historical levels.
Our commercial business grew organically and benefited from the acquisition of Manitowoc ice.
Both ever pure in K, B I experienced solid demand in the quarter with Evercore experiencing several new total water management contract win.
The integration of Manitowoc ice is off to a good start and we remain very excited about the long term prospects for our commercial water solutions platform.
Please turn to slide 16, labeled Q3, 2022, industrial and flow technologies performance.
That's real and flow technologies grew sales, 10% in the quarter, partially offset by a 5% FX headwind with core sales increasing 14%.
Segment income grew 25% and return on sales expanded an impressive 210 basis points to 16, 9%.
Margin expansion was a result of positive mix improved productivity and strong price contribution.
Our residential flow business sales grew 6% in the quarter.
<unk> continued to read out positively, which helped to offset continued supply chain disruption.
Inventory in the channel is in good shape and our focus remains on working down backlog at supply chain disruptions continue to ease.
Commercial flow sales grew 13% as delayed second quarter shipments occurred.
And underlying demand remained solid.
Businesses made significant gains this year in reducing complexity and has been a big contributor to this segment's margin expansion.
Industrial solutions sales increased 13% as most product lines experienced growth.
Demand for our sustainable gas solutions remains strong and continues to growth in orders and backlog. Our beer business has helped many customers work on productivity solution given the ongoing <unk> shortage that exists.
Overall, industrial and flow technologies delivered a great quarter with sales segment income and margin growth.
Please turn to slide 17 labeled balance sheet and cash flow.
Despite the effects the closing of the Manitowoc ice transaction at the end of July we.
We ended the quarter with pro forma leverage at two six times.
ROIC was at 17%.
Given the rising interest rate environment, we are comfortable being two thirds variable as we were less inclined to lock into higher rates for longer.
We have no long term debt maturing for the next few years and the majority of our debt is in term loans going out three to five years.
Cash flow in the quarter was $72 million and $211 million year to date.
Working capital has been a significant headwind this year, primarily inventory, which is leading to a timing issue on cash flow or.
Our inventories are higher primarily due to inflation buy ahead.
Efficiencies in the supply chain, requiring us to purchase more product.
We believe we are well positioned to drive improvement in free cash flow in the fourth quarter, but we expect to fall short of our target to 100% free cash flow conversion for the full year.
We believe this is a timing issue and expect next year to benefit from working capital improvement as inventory levels come down.
Please turn to slide 18 labeled Q4, and full year 2020 to pentair outlook.
For the fourth quarter, we are introducing adjusted EPS guidance of approximately 79.
Which represents a year over year decrease of 9%.
Expect sales to be roughly flat as the contribution of Manitowoc.
Helps offset growing FX headwind unexpected volume decline is the result of residential channel inventory correction.
We expect segment income to increase 8% with corporate expense coming in around $20 million net.
Net interest expense of roughly $28 million.
And adjusted tax rate of 15% next share count of $165 million to $166 million.
With the third quarter outperformance and our expectations for the fourth quarter. We now expect full year sales to grow approximately 9% for the year. We expect segment income to increase approximately 12% with strong price contribution.
We expect adjusted EPS of roughly $3 65.
We're an increase of 7% for the year.
Below the line, we expect corporate expense to be around $80 million.
Net interest expense of $55 million and adjusted tax rate of approximately 15% and shares to be around $165 million to $166 million.
With the working capital headwinds experienced this year, we now expect free cash flow to be approximately 60% to 70% of net income with free cash flow returning to more normalized levels next year.
I would now like to turn the call over to Andrea for Q&A, After which John will have a few closing remarks.
Andrea Please open the line for questions.
You.
We will now begin the question and answer session.
You May press Star then one on your telephone keypad.
If you're using a speaker phone please pick up your handset before pressing the keys.
And with all your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And our first question will come from Sandy.
<unk> of Citigroup. Please go ahead.
Hey, good morning, everyone.
Good morning, good morning.
John and Bob can you give us more color into your volume expectations are for pool in Q4, and a little more color into how you're thinking about 'twenty three and Paul I know you said that you baked in channel Destocking in pool in the second half of the year, but has the destocking been higher than your expectations and it seems like you have confidence in Bray.
Can fix but you mentioned more uncertainty regarding renovation have you seen a drop off in that backlog at this point.
Yeah, I mean as a reminder, we did start the year, saying that we expected that.
You know the supply chain constraints that were there throughout 2020 and 21 with.
Would likely as they start to abate.
Indentified that theres, probably excess inventory in the channel.
As the year played out in Q2 and after our Q2 conference call I mean, what was happening and you can see it happening in other industries like retail.
We expected that we would see a pullback again in demand and therefore have to burn through inventory in the channel. So I would say, it's playing out generally as expected maybe a little bit higher.
In Q4 with.
With a little bit higher being that the overall demand in the industry has slowed modestly right. So we're not at the high to mid single digit sell through numbers that we were historically and we're starting to see some pullback actually and the overall demand and therefore that that needs to add to the inventory correction.
Got it and then John maybe backing up could you give us some more color into the buckets. You cited that can help you provide the 'twenty three grilles that you seem confident.
No I think in the past you've talked about the Manitowoc ice accretion being around 10 cents you know maybe any sort of color around pricing carryover transformation related tailwind would help and then how much manufacturing inefficiencies impacted you this year.
Yeah, I mean, it's really early for guidance, obviously understand nobody's interest I mean, I think where our confidence level comes by growing in an absolute basis on revenue EPS is that you don't.
Manitowoc Manitowoc is good it should be well over $200 million.
This brings our full year performance to pentair, and that's a fairly high margin business. So we really feel good about the income contribution in their backlog to substantiate that.
We saw in the business model and we're off to a strong start in integration. So I'll start there.
People are worried about pool, but we're nowhere near where we saw an eight or nine.
You know when we saw the correction and so when you think about how pool Corp. On their call, which is a major strength of ours characterizes the industry dynamics and we look at it as 20% of the industry as new 20% is remodel.
And we have the overall break in fixing the service to our pool business.
Usually the way those dynamics work since our dealers are.
Capacity constrained on labor they'll shift their work to either building new pool or remodeling not doing both at the same time and or servicing the pools on a break and fix basis. So we think that that's going to you know even if even if you project down were trends in the industry do you think that's gonna be a modest impact to pentair.
And then ultimately we believe that we have carryover pricing is as a company and then we like the diversity of our portfolio and we're trying to remind everybody that we're not 100% exposed to residential and matter of fact, we are less than 50% exposed to residential and the rest of the rest of our cycles are still in growth mode, They're building orders and pipeline to backlog and we're going to see.
Those contributions in the next year. So that's on the revenue side on the income side you know our manufacturing inefficiencies are really more about we received product late in the quarter from our suppliers and we have the rally and push it out to our customers and some of those inefficiencies come in the form of premium freight in and less.
Then full truckloads on the way out as well as a lot of overtime and extra <unk> extra people required to get that product out the door. So if I had to quantify that I'd say, it's around $50 million and so.
We're going to address all of that and bring those being the costs in line and we feel very confident that you're going to see the our west expand next year, because we're going to get back to our standard productivity levels that we were at prior to the the whole COVID-19 impact.
I appreciate all the color Jim.
Thank you.
The next question comes from Mike Halloran of Baird. Please go ahead.
Good morning, everyone.
So John just to just a clarification on something you were saying there you know you you reference pool Corp's commentary in the prepared remarks talked about the splits there what was that for pentair specific or was that an industry sell out thought process or sell through.
Versus what what you're expecting for your revenue base, if that makes sense.
Yeah. The statistics I gave on a sell through basis, we've been using for a very long period of time.
They're generally.
In line with what I said like they don't change very much.
It's hard to get as specific because our dealers serve all three of the channels you know and as a byproduct we make assumptions based upon who will permit and or what was bought at a pool full well pad versus maybe just a couple of products that feel more like replacement, but our dealers serve all three forms of the industry and most of what we've been selling later.
<unk> feels more pool pad oriented.
And so therefore were.
Convinced that there's more to go on the break and fix and when we talk about break and fix we're talking about putting our dealers out there to help them individual try to automate their cool.
And you know it's hard to push that if you don't have the electronics that produce that product and we feel like we're catching up on that and we feel like we got runway in 'twenty three 'twenty four to really change that penetration rate.
So just to clarify sorry, I just want to make sure I understand so the sell through pieces.
The 20% that's the news was what are you going to get industry headwinds repair replace up a little bit maybe flattish.
In your commentary and then the flexibility.
Remodel side, where we just don't quite have the visibility yet and then the inventory piece would be pentair specific as we get some collection so a little bit worse in those sell through numbers is what the thought process is correct.
Yes.
Okay.
Pretty good debt like we feel like we're pretty pretty pretty good density between what we've already done in Q3, and Q4, but as Bob alluded to in his comments I still think there's more to go in Q1.
Got it got it alright that makes a lot of sense. So then on the commercial side of things, maybe just talk about the trends through the quarter here backlog levels and what the what the customer base is saying essentially kind of get into the confidence level and the sustainability of the solid underlying trends youre seeing on the commercial side.
Yeah I think.
We have the best visibility would be the Manitowoc side, we recently acquired them, but they've got a good visibility because they make a machine and that machine takes a little longer time to make that are ever pure.
Filtration wood and so we still see growth.
Both in volume basis, and in the backlog and order build and then as we can to Iot Mike we're at.
Actually seeing accelerating orders and also building backlog in those businesses is giving us confidence that we're going to see further growth next year and the it side.
Great I appreciate it thank you.
Thank you.
Okay.
The next question comes from Joe Giordano of Cowen. Please go ahead.
Hey, guys good morning.
Good morning, you mentioned since you mentioned pool Corp, like when they talk on their last order their commentary on ending inventories for the fourth quarter had an enormous range.
And is it implied for their inventory purchases for fourth quarter like anywhere from almost minus 30% to minus 8%. So that's a pretty big range and they talked about like.
Pre buy as well, but can you kind of talk about what you're guiding in the fourth quarter somewhat like in the context of that huge framework that they're laying out.
Yes, I can't speak to there is it all Joe between Bob and I will try to answer the best we can.
Sure.
You know, we're only a third probably of our key distributors businesses because they produce a lot of other product for our customers and you know obviously.
Obviously, <unk> is an important customer of ours, but they're not our only customers. So when we look at inventory we look at it broadly across the entire channel four pool equipment that we produce.
But think about pool directionally being about 30% down in volume for Q4.
This is a pretty big number and therefore, a pretty big dent in any inventories in the channel if volume were to be relatively flat absent that right, but we're being honest in the sense that when we look at it we see early buy needs in Q4 that our customers can take advantage of and we believe that in Q1.
One we're going to start to have a better understanding product by product, where the excess inventory in the channel and those also needs to be looked at branch by branch and state by state and therefore, we still think there'll be a little bit further impact in Q1 as people ready themselves for the 2023 pool season, which generally will ramps up in Q2.
<unk>.
Yeah, I would I would just say that you know our goal is to work down as much of the channel inventory. This year, John talked about a 200 million dollar number.
There'll be a little bit to go in Q1.
But I think we're going to end this year much better positioned for 2023, but by working down that channel inventory and pool, that's that's really our goal.
Hey, just to clarify you said you broke up a little did you say John Youre talking to your volumes and pool minus 30, or so in <unk> I, just didnt catch the number.
Correct.
Okay. Thank you guys.
The next question comes from Nathan Jones of Stifel. Please go ahead.
Good morning, everyone.
Good morning.
Yeah.
Very helpful commentary around where the pull inventory is likely to be at the end of the year I think if you put the pieces together on your outlook for the different parts of pool your sell through.
Expectations for the pool business in 'twenty, three looked like that maybe up a little bit maybe down.
And the inventory comes out mostly in 2020, so is that a fair way to characterize it and if the pool sell through happen to be lower next year, how much longer do you think it would take to work through these channel inventory.
Yes.
Well I don't know if you want to try this but I'm not going to comment.
You've got a lot in there I think we've already said that we do believe overall industry dynamics are down next year from a volume perspective for pool. We just don't know how much right. We do believe that builds are going to moderate on the new side.
We don't know where remodels are going to do on their 25 year old pools, we'll see what that steps up and we overall the gas market grows and then we got carryover pricing that helps mitigate it.
So the forecast we have or the thoughts we have as we head into next year is your understanding we'll probably see down sell through for our particular product.
And our inventory corrections are based upon those assumptions.
Bob said were trying to clear as much as possible in Q4.
But we do believe that it is not going to be a perfect solution and we'll see a little bit of run off in Q1. So I can give you right now.
Fair enough.
The commentary today has been pretty bullish on the improvement around supply chain, maybe you can talk a little bit more about where you are on supply chain disruptions remain and what your expectation is for how those play out in 'twenty three.
Yeah, I would I would point to.
Pumps as an example, while we're still catching up on our supply chain there is getting.
Marginally better.
We look at inflation, we expect.
Inflation.
There'll be a headwind in Q4, but to improve from Q3.
So we are seeing.
Some supply chain improvements, we're encouraged by that.
John talked about some of the inefficiencies.
Within the manufacturing process.
Those should lie.
Lessen as we go into 2023 in and be a tailwind for us. So I would say we are seeing that piece of the business improving.
John I think you said about 50 million of administration fees. This year do you think you can get rid of all of that in 'twenty three are there'll still be some of that lingering around.
I think that's a that's a <unk>.
<unk> that we believe we're after and we believe between transformation and catching up on the supply chain.
What we're after.
I would add a third component to that so you know we are adjusting our manufacturing cost for the volumes that we're seeing.
So being right sized going into 2023 from a manufacturing perspective is the thought that the third a lever that we have.
Great. Thanks, very much for taking my questions.
Thank you.
The next question comes from Bryan Blair of Oppenheimer. Please go ahead.
Thank you good morning, guys.
Good morning, Brian .
You'd mentioned, you know ready water treatment down low double digits channel dynamics somewhat similar to pool.
Just curious what your team is contemplating in in terms of fourth quarter sales from Reggie treatments and given current visibility how long you expect channel normalization to take.
Yeah, you know, we're we're taken advantage of.
Strength in other in other places and what we're doing there was refocusing the business.
We were.
Putting product probably closer to the consumer.
Taken advantage of some of the themes and trends that were happening during COVID-19.
We're now repositioning that business to be 100, perfect percent focused in the trade channel.
And we're going through our direct market, which is our range soft affiliated dealers. So what youre seeing there is really business exits Russ.
Doing some 80 20 and walking away from product line revenue and then repositioning the business for success in 2023, So I think you're going to see a similar trend in Q4 than you've seen and then we think we put all that behind us.
Okay understood.
And just to confirm is 10 cents still be the guide from Anatol guys. Just accretion next year and I guess to level set a bit more if we were to exclude that.
The expectation.
Just given current visibility.
That you grow core earnings given all the levers that you've walked through on today's call.
10, scientists still the EPS accretion target for 'twenty three and.
We're really not in a position to give guidance for 2023, others other than to say.
We have the five levers for.
Earnings growth next year, whether it's price carryover Manitowoc.
Manufacturing inefficiencies adjusting for volume or transformation, we feel good about income EPS growth and Ros expansion next year.
Alright, Thanks again.
The next question comes from Brian Lee of Goldman Sachs. Please go ahead.
Hey, everyone. This is miguel on for Brian Lee Thanks for taking the question.
Just to.
It may be a piggy back off of that that that last question I. Appreciate the early thoughts you gave 2023.
Can you maybe give a bit more color on.
Maybe the <unk>.
Mix of.
The contribution on revenue price and volume and on.
Manitowoc ice for 'twenty 'twenty three.
No I mean, the reason we introduced the 2023 early thoughts chart is really to remind people that we're more than just a pool company.
We believe we have a strong diversity of our portfolio that goes well beyond residential.
It seems like and you can tell by the questions remain as we don't get a lot of questions and the other half of the business and we want to remind people that we just cleared an acquisition that is a really healthy contributor to our commercial water pipeline and portfolio.
Way too early.
To be able to give the exact science behind all of the different revenue streams. As we haven't finished our planning process internally and we haven't seen where some of the global economics are going to land. So we're not in a position to do that other than to tell you given those five levers that Bob mentioned, we feel really strong about our ability on an absolute basis to grow revenue and EPS next year.
Okay. Thanks, I appreciate that that's fair enough.
And then switching gears.
My last question.
Recognizing that new pause.
Yes.
Relatively small part of the business, but wanted to make sure I heard correct.
Are you able to provide an early view on.
On new pool construction in 'twenty, three I thought I heard a double digit decline next year from the prepared remarks, but I did I hear that correctly and if not I guess, how are you thinking about.
Our new pool in 'twenty three.
Yeah, I think that's fair.
The only indication we have is as pool permits pulled we generally get a look at what those <unk> are in the main states that we serve in and they would suggest that there's likely to be a double digit decline in actual new pool builds next year and so that's how we are formulating our thought process.
Okay awesome, Thanks, very very helpful I'll pass it on.
Our next question comes from Jeff Hammond of Keybanc capital markets. Please go ahead.
Hey, guys good morning.
Good morning, good morning.
Just.
Maybe just if you can speak to price carryover into 2023, just based on what you've already announced and then just.
You mentioned the transformation savings I know I think early next year you you you're ready to talk more about that but just any kind of early thoughts on how youre thinking about those savings into next year.
Yeah, I mean, I think the best way I can characterize it Jeff and then youre familiar with the industry I mean, 75% or.
It goes through the professional trade channel.
Thank you.
So in most normalized.
Seasons, which we think will be heading into one of 2023, when we put price through we normally are able to maintain those price levels.
Throughout the.
The process.
And so we feel there's a stickiness to announced price increases and implemented price increases that we feel we're going to benefit from.
So I would say that we are moving into next year and in most cases, we we are experiencing labor inflation and we did further our price increases here in Q4.
For the 2023 seasons, so between the incremental price increases, we announced and the ones that we implemented previously in the year. We believe we are starting from a fairly healthy carryover position heading into 2023.
Okay.
And transformation.
I'll give a number when we produced the guide, but we've been working very very hard on these individual streams and will give directional views of what we think we're going to achieve across each of those streams. When we give our guidance for next year.
On the Q4 earnings.
Great.
Okay, Great and then just Manitowoc ice maybe just level set us on yeah, I think that's a fairly stable business, but how you know and you've got pretty good visibility, but just how it's acted and you know maybe past recessions around cyclicality.
Yeah.
If they are.
[noise] of Manitowoc ice has been.
Roughly a 5% grower, but when we look back historically that that's typically what the business does.
There is seasonality associated with it so about 60% of its revenue comes in Q2 and Q3.
With 40% in Q1 and Q4, but overall you know when we looked at the business. It's a.
Pretty solid 5% grower, we talked about revenue synergies that could accelerate that to 10%.
When you add on the ever pure business, the K B I and the cross selling across some of the customers that each of us have.
So again, when we look out over the next couple of years.
We're encouraged by the revenue growth for that business.
And Jeff as you know.
It's highly I mean like I heard your business to benefit a lot from what's in the restaurants and they generally do relatively better.
Downturns, and recessions and they're very focused on cold drink <unk>.
Defense and that market tends to do best with inside those those restaurants stores.
Okay. Thanks, so much guys.
The next question comes from Scott Graham of Loop capital markets. Please go ahead.
Hey, good morning, John Bob Jim.
Hi.
Really two questions could you.
No.
The pool side has been.
Beaten to death, so I'm going to stay away from rescue altogether could you tell us a little bit more about commercial.
And industrial you know sort of order.
For sales cadence as the quarter progressed and I don't mean dollars. Because every thing is seasonal of course and the year over years.
Did you see any kind of falloff at all.
On into October .
Okay.
No I think in our nonresidential businesses, we feel like we continue to see order trends and the funnels.
As you know growing.
As we're working through those particular cycles.
The only place that we've seen.
The year over year headwinds has really been on the residential channel so far.
So that's that.
Where we sit today.
Yeah, I would say.
Because we started disclosing backlog in our Q, what youll see when we file our Q with backlogs are very healthy in.
In the in the IMT business so.
That's an encouraging data point as well.
Okay and so your both of your comments also or.
But particularly your <unk>.
Year over year growth in the commercial side of consumer solutions.
Sure.
As we sit here today, yes.
Okay. Thank you and then.
The longer term goal talked about in the <unk>.
Analysts Investor day last year of getting to.
I think it was 21% margin in 2025.
You got residential that's going to be a little weaker for couple of quarters coming.
With a pool of big chunk of that being higher margin.
Does that.
Enable us to keep.
To the 20.
Netting off against some of the other things you said about supply chain and internal inefficiencies what have you.
Can you still get to that number in 2025.
Yeah, I mean, we would be very.
Very disappointed if we did not we talked to transfer at the Investor day about transformation being our lever to expand 100 basis points, a year and that that excludes manitowoc ice. So when you add manitowoc ice to the mix.
We would be disappointed if we just got the 21% and and I would say that we would get there much sooner than what we had described at our analyst day. Our focus is very much on ross' expansion.
Yes.
That's great. Thank you.
Thank you.
Our next question comes from Julian Mitchell of Barclays. Please go ahead.
Hi, This is Matthew Shafer on for Julian Mitchell.
I was wondering how management is thinking about balancing inventory liquidation with the potential EPS headwind from under producing to normalize inventory here over the next few quarters.
Yeah.
Well I mean, I think our inventory situation because it's such a.
Today is mainly a result of us doing the best we can to get the raw inventory in around the core aspects of it hard to get and we would expect to work that down pretty aggressively here over the next couple of quarters and as Bob mentioned earlier, we'd be in a position to benefit from the cash generation of that inventory.
<unk> serves two purposes to moving down faster or do you think we can buy it cheaper in the in the future. Obviously, we don't want to be sitting on higher cost inventories that were aggressive move for that reason and the second one is the cash.
Mobilization and getting the cash benefit from that inventory.
Okay.
That's helpful and then on IMT.
I was just curious like how management is thinking about the price volume dynamics during Q4 and into 2023 after a pretty strong quarter here in Q3.
We want to continue the momentum that we built over the last couple of quarters and not I mean.
We'd like to accelerate it as what we'd like to do.
Yeah, and we're very focused on the complexity reduction and the transformation will help that that that segment significantly.
Okay, great. Thank you.
Yeah.
Please go ahead.
I'd like to thank everybody for joining us today at Pentair, we're focused on creating a better world for people on the planet through smart sustainable water solutions. We appreciate your interest today and as we continue to focus on helping the world sustainably move improve enjoy water life's most essential resource we remain committed to driving superior shareholder.
The value that we may be the world's most valued sustainable water solutions company for our employees customers and shareholders. Andrea you can conclude the call.
The conference has now concluded. Thank you for attending today's presentation you may now.
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