Q1 2023 Pentair plc Earnings Call
Welcome to the Pentair first quarter 'twenty to 'twenty three earnings conference call, all participants will be in listen only mode.
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I would now like to turn the conference over to Shelly Hubbard, Vice President Investor Relations Shelly. Please go ahead. Thank.
Thank you M Jay and welcome to Pinterest first quarter 2023 earnings Conference call.
On the call with me are John <unk>, our President and Chief Executive Officer, and Bob Fishman Chief Financial Officer on today's call. We will provide details on our first quarter's performance as outlined in this morning's press release.
On the pitch here Investor Relations website, you can find our earnings release and slide deck, which is intended to supplement our prepared remarks during today's call and provide a reconciliation of differences between GAAP and non-GAAP financial measures that we will reference the non-GAAP financial measures provided should not be considered as a substitute for.
Or superior to the measures of financial performance prepared in accordance with GAAP. They are included as additional clarifying items to aid investors in further understanding the company's performance. In addition to the impact these items and events have on the financial results.
Before we begin let me remind you that during our presentation today, we will make forward looking statements which are predictions.
Sections or other statements about future events.
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 Form 10-K and today's release.
Following our prepared remarks, we will open up the call for questions. Please limit your questions to one plus a follow up then reenter the queue in order to allow everyone an opportunity to ask questions.
Before I hand, it over to John I wanted to highlight slides four through six in our earnings slide deck that illustrate our strategic framework pentair at a glance and of Pentair overview.
We believe this information is helpful to understanding who pentair is especially for those new to pentair.
Our strategic framework States, our purpose mission vision and values that drive our performance as a smart sustainable water solutions company.
<unk> at a glance on slide five provides a great snapshot of our company our performance our installed base and our 40 year track record 47 year track record of annual dividend increases, which places us in a small group of companies.
Lastly, the pentair overview on slide six provides our historical sales and Ross performance on a consolidated level and by segment. This information with first disclosed last quarter in the supplemental data section and it's now illustrated on one slide as you can see over the last three years, we have grown sales by a compound annual.
The growth rate of nearly 12% and Ross has expanded by 110 basis points on a consolidated basis I will now turn the call over to John .
Thank you Shelly and good morning, everyone.
Let's begin with our strong Q1 results and the executive summary on slide seven.
We are very pleased with our first quarter performance, which reflected a strong start to our fiscal year as we hope the world sustainably move improve enjoy water lifestyle as a central resource.
Q1 sales rose, 3% to over $1 billion.
Net income increased 23% to $211 million and Ros expanded by 330 basis points to 25%.
Adjusted EPS rose over 7% to 91.
Segment income and Ros each achieved record levels post the <unk> separation in 2018.
I'd like to thank our talented employees for once again delivering for customers, while creating value for shareholders.
Strong results reflect the strength of our diversified water portfolio.
And progress on our transformation initiatives, which drove greater efficiencies across each segment.
For example growth in our industrial and flow technologies, or ISG and water solutions segments more than offset the expected volume declines in school year over year.
We improved our Ros expansion across the enterprise and realized operational efficiencies as our transformation initiatives accelerated.
We are driving these actions at the revenue stream or category level, which not only provides the go to market and customer insights, but also the ownership and accountability to realize savings in other opportunities that we have identified.
Let's move on to slide eight titled Q1 highlights.
Within our IMT segment growth was driven primarily across our commercial industrial and even residential and irrigation verticals.
We are excited about the near and long term growth and margin profile of this segment as our transformation is taking hold.
We are focused on capturing the right projects with improved offerings to drive margin expansion.
We realized benefits in pricing sourcing and operational excellence and we expect more opportunities ahead.
We also had customer wins for our sustainability related technology that reduces water usage and recapture cotwo.
Additionally, we drove aftermarket and replacement revenue and our membranes and pump portfolio.
Their water solutions segment, we are very pleased with our Manitowoc lease acquisition, which complements our commercial water solutions businesses.
Enabling us to provide end to end water solutions for customers from filtration to ice to services. The integration remains on track has progressed well and was accretive to segment margins.
As I mentioned last quarter, we expect 2023 to be a softer year for our pool segment.
During the first quarter unusual U S weather in the west expected higher channel inventory and strong demand in the prior year contributed to declining volume.
Despite the decline in year over year volume will be installed basis continue to grow over the last three years and we believe the pool segment is an attractive market.
As we look forward, we continue to invest in leading innovation, specifically automation, which helps save energy time, and water and enables pool owners control of their pools directly from their smart device.
Today, roughly 50% of installed pools of automated systems.
This is an area, where we see the greatest opportunity as consumers look to maintain control of their pool function at the tip of their fingers.
Good examples of our latest pool innovations are the <unk> three variable speed and float pool pump also known as the <unk> III and the Entellus center pool automation system or <unk>.
<unk> three is the first pump with Wi Fi Bluetooth connectivity for remote control monitoring and over the air or OTA.
It also features built in Iot connectivity, which simplifies installation setup and operation for our dealers.
Market reactions and dealer feedback to the launch of our new flagship <unk> pool pump has been extremely positive and we're pleased overall with the demand we are seeing despite a slower start to the pool season.
We believe our Intel et cetera pool automation system as the most feature rich and expandable pool automation system on the market to easily control, even the most complex and advanced pools.
System is powered by AWS cloud technology for improved stability connectivity scheduling and reliability, our digital automation technology Centralizes control for multiple pool devices. The water features to lights pumps.
In pool lead times have continued to improve enabling us to better serve our customers and deliver our products more quickly.
Moving on to slide nine titled making better essential.
We recently released our 2022 corporate responsibility report on April 18th and we're excited that we have made progress on our strategic social responsibility targets were.
We are focused on advancing a sustainable future through innovation of our products and solutions to create a better world for people and the planet through smart sustainable water solutions.
Turning to slide 10, titled Social responsibility strategic targets.
In 2020 to reduce scope, one and two greenhouse gas emissions by 29% as compared to our 2019 baseline and we decreased our water withdraw which represents a nine 3% reduction compared to 2021.
We also implemented a sustainability scorecard process for all new pentair product development to help us better understand the sustainability impact and opportunity of each new product.
Moving to slide 11, titled positive impacts from our products and solutions.
We are proud of the continued progress we have made in our operations and towards sustainable products and solutions. A few examples include.
<unk>, 37% of our total electricity usage came from renewable sources and 83% of pentair solution support energy efficiency and 71% support water efficiency.
The 11th consecutive year <unk> received the energy Star partner of the year Award from the EPA.
This award recognizes Pentre pool pumps at Manitowoc ice excellence and energy efficiency. In fact, <unk> was the first manufacturer pool equipment to receive this certification for our pool pumps.
Since 2005, our energy Star pool pumps have saved the cumulative $38 9 billion kilowatt hours of energy savings reduced greenhouse gas emissions by nearly 16 million tonnes of Cotwo.
David over $5 billion in operating costs for U S consumers.
Before I turn it over to Bob Let's turn to slide 12, titled CEO summary.
We delivered quality earnings across our diversified portfolio and position the company for sustained value creation.
Our Q1 performance was a strong start to our fiscal year, which reflected sales growth in our west expansion driven by our diverse water portfolio as well as efficiencies from transformation.
Just walk ice has assimilated well it contributed ahead of expectations.
Bob will discuss our second quarter and full year 2023 guidance in more detail. However, I wanted to share with you some of my thoughts on our current outlook.
As we look to the remainder of 2023, we continue to closely monitor macroeconomic developments remain mindful of an uncertain operating environment.
We are implementing risk mitigation strategies, and accelerating transformation funnels as necessary, while focusing on investing in the long term growth of our company.
We've reduced our pool revenue expectations, reflecting both the lower sell through due to economic uncertainty and the previously expected inventory headwinds, while increasing our expected margin expansion, reflecting Q1 performance and confidence in our transformation progress.
We also expect water solutions and Iot performance to continue throughout 2023 is informed by orders backlog and transformation efficiencies.
As a result, we are raising the midpoint of our adjusted EPS guidance to $3 65, reflecting our.
Our strong Q1 performance, while maintaining the high end of our adjusted EPS guidance range at $3 70.
We are confident in our diversified water business model long term strategy and our transformation initiatives, which we anticipate will continue to drive shareholder returns.
We have a long successful track record of generating strong cash flow and being disciplined with capital allocation.
This year marks our 47th consecutive year of dividend increases and longer term, we are targeting getting back to high teens ROIC.
We have the right purpose the right team the right portfolio and the right strategy to win in this market. We believe we have a very solid foundation of our competitive advantages to continue to succeed I will now pass the call over to Bob who will discuss our performance and financial results in more detail Bob.
Thank you John and good morning, everyone.
Let's start on slide 13, titled Q1, 2023 Pentair performance.
We delivered better than expected first quarter sales growth of 3% driven.
Driven by pricing benefits across all three segments and the contribution of our Manitowoc ice acquisition, which were partially offset by volume declines in our residential businesses.
Our higher than expected sales in the quarter were driven by better performance in ISP and water solutions.
Set by slightly lower than expected sales in our pool segment.
Similarly, due to unusual weather in the west.
Core sales declined 3%.
Mainly driven by a 16% decrease in pool.
Third pool grew 23% in last year's Q1, and 48% in Q1 of 2021.
Partially offset by core growth of 11% in <unk> and 2% in water solutions.
Driven by price more than offsetting inflation.
Productivity benefits from our transformation initiatives and accretive margins from our Manitowoc ice acquisition.
As John mentioned, both segment income and Ros in Q1 hit record levels post separation of invent.
We delivered better than expected adjusted EPS of <unk> 91.
Up 7% versus the prior year net.
Net interest and other expense was $33 million and our adjusted tax rate was 15% during the quarter with a share count of $165 8 million.
Our better than expected segment income and adjusted EPS were driven by higher sales price offsetting inflation and better contribution from our transformation initiatives.
Please turn to slide 14, labeled Q1, 2023, industrial and flow technologies performance.
<unk> sales increased 9% in the quarter, which included two points of FX headwinds.
Segment income grew 25% and return on sales expanded 200 basis points to 16, 6%.
Marking the third consecutive quarter of equal to or greater than 200 basis points of improvement.
The strong margin expansion was a result of price offsetting inflation and continued progress on our transformation initiatives.
Sales growth in <unk> was driven across all businesses.
Led by commercial flow and industrial solutions, along with growth in residential flow.
Please turn to slide 15 labeled Q1 2023 water solutions performance.
In Q1 water solution sales increased 32% driven by our Manitowoc ice acquisition and price.
Core sales grew 2%.
The three points of volume decline was primarily due to the continued inventory correction across many product lines and our residential channels.
Segment income grew 136% and return on sales expanded 850 basis points to 19, 3%.
Driven by our ice acquisition as well as efficiencies from our transformation initiatives.
Please turn to slide 616 labeled Q1 2023 pool performance.
In Q1 pool sales declined, 16%, which was slightly below our expectations.
The volume decline of 27 points was primarily due to unusual weather in the Western U S. In the first quarter of this year.
Inventory corrections in this year's Q1, and a strong prior year comparison.
The pricing benefit of 11 points helped partially offset the volume decline and was due to carryover from the prior year.
Slight lower sales year over year return on sales expanded 520 basis points to 31, 9% due to price significantly offsetting inflation rate.
Right sizing to lower volumes and benefits from our transformation initiatives.
Please turn to slide 17 labeled transformation expectations.
We continue to make progress on our transformation with realized successes in Q1 regarding pricing and sourcing which drove margin expansion.
As we shared with you last quarter, we expect to drive Ros expansion of over 400 basis points by year end 2025 as compared to 2022.
As I mentioned last quarter and pricing, we completed wave, one which established a new strategic pricing playbook.
We continue to gain insight into profitability by customer and product category and use this data to better drive our forecast.
We believe pricing remains a big opportunity, we are building capabilities and starting to see benefits materialize.
We are furthest along in our strategic sourcing initiatives.
As I've mentioned previously material costs represent roughly 40% of our revenue.
We have completed wave one negotiations that focused on key categories like electronics motors and drives castings packaging.
<unk> and MRO.
Wave one included roughly 35% of materials spend and identified over 12% and saving opportunities.
We have unlocked value through supplier dedicated resources supply base reduction inventory solutions.
Enhanced supplier executive level relationships and rebate programs.
In Q1 over 120 Pentair Cross functional team members attended workshops to begin the wave one implementation process.
Wave two was launched in Q1 and covers another 35% of materials spend for commodity groups, such as metals plastics and molding purchased finished goods transport transportation and indirect spend such as fleet management and office supplies.
We expect this will create a funnel of savings for 2023 and 2024.
In operations Excellence, we are focused on reducing complexity and driving lean processes across all our operations. We believe this presents longer term opportunities, but not until 2024 and beyond as we build out the funnel.
Lastly, and organizational effectiveness, we are focusing on sales and functional excellence to simplify our organization.
From an organizational standpoint, we believe ample opportunities remain for complexity reduction across the entire portfolio and a realignment of needed skills within our top priorities.
We continued to move transformation from funnel to execution, and we expect more material benefits to contribute to our longer term margin expansion targets.
We continue to believe that our transformation initiatives will be a large value creation opportunity for pentair.
Please turn to slide 18 labeled balance sheet and cash flow.
This slide reflects the closing of the Manitowoc acquisition at the end of July of last year.
We ended the quarter with pro forma leverage at two six times.
Our our ROIC.
It was at 15, 2% and as a reminder, this includes debt from the Manitowoc ice acquisition, but only approximately three quarters of Manitowoc EBITDA contribution.
We recently entered into interest rate swap and color agreements in order to hedge our variable rate debt.
We now expect the mix of variable to fixed debt to be closer to 50 50 by the end of Q2.
We have no significant long term debt maturing for the next few years and almost the majority of our debt is in term loans going out three to five years.
We used $123 million of free cash flow in Q1.
Which reflects typical seasonality and was roughly $25 million better than the prior year.
As a reminder, the second quarter is typically our highest free cash flow quarter of the year and we expect full year free cash flow to be in line with our historical performance of 100% of net income.
We plan to remain disciplined with our capital and continue to focus on debt reduction amid the higher interest rate environment.
Moving to slide 19, titled Q2, and full year 2023 Pentair outlook.
For the full year, we are updating adjusted EPS guidance to approximately $3 60 to $3 70.
Raising the mid point.
Also for the full year, we expect sales to be roughly down 2% to flat.
We expect segment income to increase 7% to 10%.
With corporate expense of approximately $80 million net interest expense of roughly $125 million.
And adjusted tax rate of approximately 15% and a share count of $165 million to $166 million.
For the second quarter, we expect sales to be approximately down 1% to flat versus last year's Q2, as the contribution of Manitowoc ice and our commercial and industrial businesses are expected to help offset expected volume declines from our residential businesses.
We are introducing adjusted EPS guidance of approximately 94 to 96.
Which represents a year over year decrease of approximately 6% to 8% primarily due to lower pool volumes we.
We expect segment income to increase 5% to 7% with corporate expense coming in around $21 million.
Net interest expense of roughly $34 million, an adjusted tax rate of approximately 15% and a share count of $165 million to $166 million.
At the midpoint, we expect total pentair sales to be down approximately 1%.
While the sales midpoint has not changed our sales mix and assumptions have.
We now expect <unk> to perform better than we expected 90 days ago and pool sales to decline from our original expectations due to increased economic uncertainty and lower new pool construction.
Water solutions to be unchanged with sales up mid teens.
And pool sales to be down approximately in the mid teen range as compared to down low double digits previously.
As we have discussed in prior quarters, our pool sales consist of 20% from new pools, 20% from Remodels and 60% from the aftermarket.
Within our current pool guidance, we now expect new pools, and remodels to be down approximately 25% versus previous assumptions are down approximately 20%.
And inventory and aftermarket could be down roughly 20% compared to previous assumptions are down 15% with approximately two thirds of the decline relating to inventory corrections.
We expect price carryover of roughly mid single digits.
In the current year.
And with their pro channel drive leads to approach annul that's our strategy in residential.
Year over year.