Q4 2023 Pentair PLC Earnings Call

Welcome to the Pentair first quarter 'twenty twenty-three earnings conference call.

Participants will be in listen only mode should you need assistance. Please take the only 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 then one on your telephone keypad to withdraw your question. Please press Star then two please.

Please note this event is being recorded.

I would now like to turn the conference over to Shelly Hubbard, Vice President Investor Relations. Please go ahead.

Shelly Hubbard: Thank you drew and welcome to Pentair fourth quarter 'twenty twenty-three earnings conference call.

Shelly Hubbard: On the call with me are John Doyle, our President and Chief Executive Officer, and Bob Fishman, Chief Financial Officer on today's call. We will provide details on our fourth quarter and full year performance as outlined in this morning's press release.

Shelly Hubbard: On the Pentair 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.

Shelly Hubbard: 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 of these items and events have on the financial result.

Shelly Hubbard: Before we begin let me remind you that during our presentation today, we will make forward looking statements, which are predictions projections or other statements about future events.

Shelly Hubbard: MS 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.

We advise listeners to carefully review the risk factors in our most recent Form 10-Q and Form 10-K.

Shelly Hubbard: Following our prepared remarks, we will open the call up for questions. Please note that we will limit your questions to two after which we ask you to then reenter the queue in order to allow everyone an opportunity to ask questions.

Shelly Hubbard: Similar to previous quarters in 2023, we have included slides four through seven did our earnings slide deck, which provide a brief overview of pentair as well as our investment thesis.

Shelly Hubbard: I will now turn the call over to John.

John Walsh: Thank you Shelly and good morning, everyone.

John: Our record performance in 2023 demonstrates the power of our balanced water portfolio and our focused growth strategy post the separation of event.

John: We completed year, one with our three segment structure flow water solutions and pool.

John: And we finished our first full year with Manitowoc ice.

John: Our flow segment, which moves water, where it's needed and removes water, where it's not wanted along with our water solutions segment, which improves water both posted a record year for sales and our west.

John: And our pool segmental, which enables people to enjoy water delivered record rof's despite significant volume headwinds.

I'm extremely proud of our approximately 10500 global employees for their solid execution in a challenging macro economic environment.

As we enter 2024, we are leveraging our balanced portfolio for continued growth and profitability with expectations for new records of financial performance.

John: Additionally, we look forward to sharing more about our strategy and three year outlook at our Investor day on March six.

John: Now, let's begin with our executive summary, Q4 2023 on slide eight.

John: We finished Q4 with record performance in our fourth quarter post the separation of inbound in 2018, specifically record segment income in our west marking the seventh consecutive quarter of our west expansion. This is important to note with strong comparables in Q4 2022.

John: In the fourth quarter sales were down 2%, which included slightly better than expected pool performance segment income increased 8% and our west expanded by 190 basis points.

John: Adjusted EPS was <unk> 87.

John: Up 6% and we generated 97 million of free cash flow in the quarter.

John: Let's move to slide nine titled Executive summary, full year 'twenty three.

John: 2023 was a record year for segment income or loss and adjusted EPS post the event separation as previously mentioned despite sales ending the year flat.

John: In full year 'twenty three we delivered sales of $4 1 billion record segment income of $855 million up 11%.

John: Record annual <unk> of 28%, expanding 220 basis points and record adjusted EPS of $3.75.

John: Hello, and water solutions set new sales records in 2023, and we delivered significant margin expansion across all three segments setting a new annual record our west for each transformation and solid execution across all three segments continued to drive operational efficiencies throughout the year.

John: Lastly, we generated significant free cash flow of $550 million and increased our dividend for the 48th consecutive year further solidifying our status as a dividend aristocrat.

John: Let's turn to slide 10, titled balanced water portfolio.

John: We're helping the world sustainably move improve enjoy water through our three segments each with over $1 billion in sales in 2023, and together, creating a balanced water portfolio. Our strategy is working and we have been delivering on the expectations that we've shared with you.

John: I will now pass the call over to Bob who will discuss our performance and financial results in more detail.

John: Bob.

Thank you John and good morning, everyone, let's start on slide 11, titled Q4, 2023 Pentair performance.

Robert P. Fishman: I will also be discussing our full year performance on slide 12.

Robert P. Fishman: We delivered another strong quarter of earnings and significant margin expansion, despite sales being down 2% year over year.

Robert P. Fishman: Volume continued to improve sequentially with substantial progress in Q4 as compared to Q2 and Q3.

Robert P. Fishman: Driven primarily by improvement in pool volume.

Robert P. Fishman: Sales for Q4 were down, 2%, which was slightly better than we guided.

Robert P. Fishman: Core sales across all three segments were down slightly as compared to last year's record Q4, when our lead times began to improve from a recovery in global supply chain.

Robert P. Fishman: Billing us to ship more backlog orders.

Robert P. Fishman: As we move into 'twenty 'twenty, four we expect to see a more normalized operating environment.

Robert P. Fishman: Fourth quarter segment income increased 8% to $198 million and return on sales expanded 190 basis points year over year to 21%.

Robert P. Fishman: This improvement was driven primarily by our transformation initiatives.

Robert P. Fishman: Adjusted EPS of <unk>, 87 was up 6% versus the prior year.

For the full year sales were flat at $4 $1 billion with core sales down 5% driven by growth in flow and water solutions solutions.

Which were offset by lower pool of volumes.

Segment income grew 11% and return on sales expanded 220 basis points to a record 28%.

Robert P. Fishman: All three segments significantly expanded margins and set new records.

Robert P. Fishman: Adjusted EPS increased to a record $3.75.

Robert P. Fishman: Yeah.

Robert P. Fishman: Turning to slide 13 labelled flow at a glance you can see the impressive five year financial performance.

Robert P. Fishman: Sales rose over 4% compounded annually and margin expanded 300 basis points since 2019.

Robert P. Fishman: In 2023 flow continues to reach new records in sales and Ross.

We have also provided our sales view by region channel and solution, reflecting 2023 sales and the diversified nature of the business.

We have eight iconic brands.

Robert P. Fishman: Some over 100 years old.

Robert P. Fishman: And we ranked first in quality technical support and customer service.

Robert P. Fishman: Please turn to slide 14 labeled Q4 2023 flow performance.

Robert P. Fishman: In addition to the fourth quarter performance for flow I will also be referencing the full year performance on slide 15.

Robert P. Fishman: Note that we have recently renamed our industrial and flow technologies segment to flow.

Robert P. Fishman: In Q4.

Robert P. Fishman: Flow grew sales, 1% in the quarter to $379 million a record fourth quarter industrial.

Robert P. Fishman: <unk> solutions was up 9% and commercial was up 2%.

Robert P. Fishman: With residential down 7%.

Robert P. Fishman: Segment income was flat and return on sales decreased 20 basis points to 17, 2%.

Robert P. Fishman: Due to a return to more normal seasonality following a record Q4, 2022, and an unfavorable mix from our residential business.

Robert P. Fishman: For the year slow sales increased 5% to $1.58 billion, primarily due to double digit growth in commercial and industrial solutions.

Robert P. Fishman: Residential was down 4%.

Robert P. Fishman: Showing improvements sequentially from Q3.

Robert P. Fishman: Full year segment income grew 17% and return on sales increased 170 basis points to 17, 8%.

Robert P. Fishman: A record margin for flow driven by transformation and price more than offsetting inflation.

Yeah.

Turning to slide 16, titled Water solutions at a glance you can see the strong five year financial record with a compounded annual sales growth rate of 17%.

Robert P. Fishman: And over 400 basis points margin expansion since 2019.

Robert P. Fishman: Our iconic brands include ever pure and Manitowoc ice.

Our residential water solutions products have helped reduce the need for 7 billion single use water bottles in 2023.

Robert P. Fishman: Please turn to slide 17 labeled Q4 2023 water solutions performance.

Robert P. Fishman: In addition to the fourth quarter performance for water solutions I will also be referencing the full year performance on slide 18.

Robert P. Fishman: In Q4 water solutions sales decreased 5% to $270 million following a record Q4 2022.

Robert P. Fishman: Commercial sales were down 4%, primarily due to the timing of projects within our services business.

Robert P. Fishman: Partially offset by growth in Manitowoc ice and filtration.

Robert P. Fishman: In residential Q4 sales were down 6%.

Robert P. Fishman: But reflects significant improvement sequentially from Q3 of this year and which residential sales were down 14%.

Segment income grew 15% to $52 million and return on sales expanded 320 basis points to 19, 1%.

Our new Q4 record.

Robert P. Fishman: Driven primarily by productivity from our transformation initiative and Manitowoc ice.

Robert P. Fishman: For the year water solutions sales grew 19%.

Segment income grew 66% and return on sales increased 590 basis points to 21%, our new full year record.

Robert P. Fishman: Commercial sales increased 54% driven by the acquisition of Manitowoc ice and growth in filtration.

Robert P. Fishman: Manitowoc ice had a record sales here with growth of 23% versus the prior year.

Please turn to slide 19 titled Pool at a glance.

Robert P. Fishman: Looking at the five year financial performance pool was able to grow the top nine significantly and increased margins to a record, 31% or up 320 basis points since 2019.

Robert P. Fishman: Our pool business benefits from a very large installed base with roughly 80% of sales coming from remodel and break and fix.

Yeah.

Robert P. Fishman: Please turn to slide 20 labeled Q4 2023 pool performance.

In addition to the fourth quarter performance for pool I'll also be referencing the full year performance on slide 21.

Robert P. Fishman: In Q4 pool sales declined 2% to $336 million driven by a six point drop in volume, which was partially offset by four points of price.

Robert P. Fishman: Note that volume improved significantly compared to the 28 point decline in pool volume in Q3.

Robert P. Fishman: For the year pool sales were down 18%.

Robert P. Fishman: Segment income decreased 10% and return on sales increased 270 basis points to 31%.

Robert P. Fishman: Driven by price and our transformation initiatives.

Robert P. Fishman: Please turn to slide 22 labeled transformation initiatives.

Robert P. Fishman: Similar to last quarter. We believe this slide provides a good illustration of our transformation initiatives and our ultimate goal of driving margin expansion.

Robert P. Fishman: We had been targeting Ross of approximately 23% by the end of fiscal 2025.

Robert P. Fishman: Expanding margins over 400 basis points as compared to fiscal 2022.

Robert P. Fishman: In 2023, we delivered Ross a 28% as transformation began to read out in Q3 and Q4.

Robert P. Fishman: And we expect to deliver roughly 22% by the end of full year 'twenty, four which we believe puts us on track with our transformation initiatives.

Robert P. Fishman: Please turn to slide 23 labeled transformation runway.

We have kept this slide is a reference to illustrate the staggered nature of each of the four initiatives and the various stages of each.

Robert P. Fishman: We are pleased to note that we believe we are executing well on these initiatives going into 2024.

Robert P. Fishman: Please turn to slide 24 labeled balance sheet and cash flow.

Robert P. Fishman: In Q4, we generated $97 million in free cash flow up nearly 100% year over year, reflecting another strong quarter.

Robert P. Fishman: For the year, our free cash flow was $550 million up nearly 94% year over year.

Robert P. Fishman: Our net debt leverage ratio was two times down from two six times in Q1.

Our total debt was less than $2 billion and the average interest rate was approximately five 2%.

Robert P. Fishman: Our our Oh I see was 14, 3%, which includes the full impact from the Manitowoc ice acquisition.

Robert P. Fishman: With the focus on being good stewards of capital, we continue to target high teens ROIC C.

Robert P. Fishman: We plan to remain disciplined with our capital and continue to focus on debt reduction amid the higher interest rate environment with the potential for share buybacks.

Moving to slide 15, titled Q1, and full year 2020 for Pentair outlook.

Robert P. Fishman: Okay.

Robert P. Fishman: For the full year, we are introducing our adjusted EPS guidance of approximately $4.15 to $4.25, which represents a year over year range of up 11% to up 13%.

Robert P. Fishman: We expect total pentair sales in fiscal 2024 to be up approximately.

Robert P. Fishman: To be approximately $4 $2 billion or up about 2% to 3%.

Robert P. Fishman: We expect flow sales to be up low single digits.

Robert P. Fishman: Reflecting low to mid single digit growth in our commercial and industrial businesses offset slightly by a low single digit decline in residential.

Water solutions sales are expected to be essentially flat.

Robert P. Fishman: <unk> record 2023 performance driven by our commercial water business.

Robert P. Fishman: Commercial sales in full year 'twenty four are expected to be up low single digits and residential to be down low to mid single digits.

Robert P. Fishman: Pool sales are expected to increase approximately 7% and full year 2024, which aligns the historical compound annual growth rates of mid single digits pre pandemic.

Robert P. Fishman: We expect pool sales to increase driven primarily by inventory headwinds in 2023 that we do not expect to repeat in 2024 and some benefit of price.

Robert P. Fishman: We expect this growth to be slightly offset by the uncertainty that still exists regarding the macroeconomic environment.

Operator: Welcome to the Pentair 4th Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode.

Robert P. Fishman: Your interest rates.

Robert P. Fishman: <unk> impact of financing for new and remodeled pools and potential repair deferrals in the aftermarket.

Operator: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad.

Robert P. Fishman: We believe pool remains a highly attractive market for us and we look to deliver strong growth in 2024, while being mindful of macroeconomic dynamics.

Robert P. Fishman: We expect segment income to increase approximately 10% with Ros expansion of roughly 150 basis points.

Operator: To withdraw your question, please press star then 2. Please note, this event is being recorded. I would now like to turn the conference over to Shelley Hubbard, Vice President, Investor Relations. Please go ahead.

Also for the full year, we expect corporate expense of approximately $95 million net interest expense of roughly $100 million.

Robert P. Fishman: And adjusted tax rate of approximately 16, 5%.

Shelley Hubbard: Thank you, Drew, and welcome to Pentair's fourth quarter 2023 earnings conference call. On the call with me are John Stauch, our President and Chief Executive Officer, and Bob Fishman, our Chief Financial Officer. On today's call, we will provide details on our fourth quarter and full year performance as outlined in this morning's press release. On the Pantera 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.

Robert P. Fishman: Which is inclusive of changes in the global tax standards for a total impact to pentair of about seven cents per share.

Robert P. Fishman: And a share count of approximately 166 million to $167 million.

Robert P. Fishman: Lastly, we expect to deliver approximately $1 billion in EBITDA in full year 2024.

A milestone we are very proud of.

Robert P. Fishman: For the first quarter, we expect sales to be down approximately 2% to 3%.

Robert P. Fishman: As a reminder, many of our businesses, we're working down large backlogs in Q1 last year, our supply chain has improved and we were able to ship more backlog orders.

Shelley Hubbard: 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, projections, or other statements about future events. Listeners are cautioned that these statements are subject to certain risks and uncertainty, many of which are difficult to predict and generally beyond the control of Pentair.

Robert P. Fishman: In 2024, we expect more normalized seasonality in our businesses.

Robert P. Fishman: We expect first quarter segment income to be flat to down 3%.

Robert P. Fishman: Primarily due to lower sales.

With corporate expense of approximately $25 million net interest expense of roughly $29 million and adjusted tax rate of approximately 16, 5% and a share count of approximately 167 million.

Shelley Hubbard: 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. Following our prepared remarks, we will open the call up for questions. Please note that we will limit your questions to two, after which we ask you to then re-enter the queue in order to allow everyone an opportunity to ask questions. Similar to previous quarters in 2023, we have included slides 4 through 7 in our earnings slide deck, which provides a brief overview of Pentare, as well as our investment thesis. I will now turn the call over to John. Thank you, Shelley, and good morning, everyone.

Robert P. Fishman: We expect Q1 to drive Ros expansion, both sequentially and year on year.

Robert P. Fishman: We are also introducing adjusted EPS guidance for the first quarter of approximately 88 to 91 cents.

Robert P. Fishman: For the first time since 2020.

Robert P. Fishman: Excuse me, we believe we are seeing a return to a more normalized operating environment globally.

Robert P. Fishman: Thus, we expect to see.

Robert P. Fishman: [noise] analogy resume.

Robert P. Fishman: To historical norms across all three of our segments in 2024.

John L. Stauch: Our record performance in 2023 demonstrates the power of our balanced water portfolio and our focused growth strategy post the separation. We completed year one with our three-segment structure, flow, water solutions, and pool, and we finished our first full year with Mansfawka.

Robert P. Fishman: With transformation driving margin expansion.

Robert P. Fishman: In the in.

Robert P. Fishman: In the first half of 2024.

Robert P. Fishman: We expect adjusted EPS to be slightly less than 50% of our full year adjusted EPS Guide.

Robert P. Fishman: Q1 is expected to be the lowest quarter for sales segment income Ross and adjusted EPS as compared to the remaining three quarters and full year 'twenty four.

John L. Stauch: Our flow segment, which moves water where it's needed and removes water where it's not wanted, along with our water solution segment, which improves water, both posted a record year for sales in our award. And our pool segment, which enables people to enjoy water, delivered a record ROS, despite significant volume. I'm extremely proud of our approximately 10,500 global employees for their solid performance in challenging macroeconomics.

Robert P. Fishman: We have continued to accelerate transformation funnels and remain focused on investing in the long term growth of our company.

Robert P. Fishman: Turning to slide 16, titled 2023 reflection.

Robert P. Fishman: Our business continued to execute well and delivered what we said we would do.

Robert P. Fishman: We drove margins as a result of our balanced water portfolio and transformation initiatives.

John L. Stauch: As we enter 2024, we are leveraging our balanced portfolio for continued growth and profitability, with expectations for new records of financial performance. Additionally, we look forward to sharing more about our strategy and three-year outlook at our Investor Day in March. Now, let's begin with our executive summary, Q4 2023, on slide 8. We finished Q4 with record performance in a fourth quarter post the separation of Invent in 2000, specifically Record Segment Income and ROS, marking the seventh consecutive quarter of ROS expansion.

Robert P. Fishman: Manitowoc ice posted a record year exceeding expectations.

We drove performance accountability across the organization ended the year with an even stronger balance sheet and free cash flow and maintained a disciplined capital allocation strategy.

Robert P. Fishman: We believe we are well positioned going into full year 'twenty four.

Speaker Change: I would now like to turn the call over to the operator for Q&A.

Speaker Change: After which John will have a few closing remarks.

John L. Stauch: This is important to note with strong comparables in Q4 2021. In the fourth quarter, sales were down 2%, which included slightly better than expected, segment income increased 8%, and ROS expanded by 190 basis points. Adjusted EPS was $0.87, up 6%, and we generated $97 million of free cash flow in the quarter.

Speaker Change: Drew please open the line for questions. Thank you.

Speaker Change: We will now begin the question and answer session.

Speaker Change: In the interest of time, we ask that you. Please limit yourself to one question and one follow up.

Speaker Change: To ask a question you'd be press Star then one on your telephone keypad.

Speaker Change: If you are using a speaker phone.

Speaker Change: Can you just pick up your handset before pressing the keys.

John L. Stauch: Let's move to slide nine, Title of Executive Summary, full year, 23. 2023 was a record year for segment income, ROS, and adjusted EPS, post the invention separation, as previously mentioned, despite sales ending the year flat. In full year 23, we delivered sales of $4.1 billion, and a record segment income of $855 million, up 11%.

Speaker Change: She was draw your question.

Speaker Change: Please press Star then two.

Speaker Change: At this time, we will pause momentarily to assemble our roster.

Speaker Change: The first question comes from Brian Lee with Goldman Sachs.

Brian Lee: Please go ahead.

Brian Lee: Hi, Thanks for taking our questions. This is Chris on for Brian.

John L. Stauch: Record annual ROS of 20.8%, expanding 220 bases, and record adjusted EPS of $3.75. Flowing Water Solutions set new sales records in 2023, and we delivered significant margin expansion across all three sectors, setting a new annual record ROS for each. Transformation and solid execution across all three segments continue to drive operational efficiencies throughout.

Chris: First question on margin kudos on the margin execution I'm just just a quick question on the margin expansion trajectory here I'm, sorry, if I did my math correct here.

Chris: Your full year guide imply kind of like 140 basis point expansion why are you <unk> guy imply like 20 basis points at the midpoint I'm. So how should we think about the margin expansion trajectory moving the year and which segments should we see the most margin expansion. Thanks.

John L. Stauch: Lastly, we generated significant free cash flow of $550 million and increased our dividend for the 48th consecutive year, further solidifying our status as a dividend arrestor. Now, let's turn to slide 10, titled Balanced Water Portfolio. We are helping the world sustainably move, improve, and enjoy water through our three segments, each with over $1 billion in sales in 2000, and together creating a balanced water portfolio. Our strategy is working, and we have been delivering on the expectations that we have shared. I will now pass the call over to Bob, who will discuss our performance and financial results in more detail. Bob?

Yeah, Let me just take the first part and I'll hand, it to Bob I, just want to remind everybody that last year's pool inventory correction didn't happen.

Speaker Change: Fully until Q2, so we're up against a one more quarter of pool compare from a Q1 perspective, and if you actually look at the performance exiting Q4 and compare it to our Q1 guide you're you'll see that the continued operating performance is there and the last.

Speaker Change: Point I'll, just make before handing over to Bob is our Q1 EPS guidance is back to our normal seasonality as a percentage of the overall full year. So what you're really seeing is a reflection that we're back to our normal seasonality contribution and therefore the year over year compares are.

Robert P. Fishman: Thank you, John, and good morning, everyone. Let's start on slide 11, titled Q4 2023 Pentair Performance. I will also be discussing our full year performance on slide 12. We delivered another strong quarter of earnings and significant margin expansion despite sales being down 2% year over year. Volume continued to improve sequentially, with substantial progress in Q4 as compared to Q2 and Q3, driven primarily by improvement in pool volume. However, sales for Q4 were down 2%, which was slightly better than we guided. Core sales across all three segments were down slightly as compared to last year's record Q4, when our lead times began to improve from a recovering global supply chain, enabling us to ship more backlog orders. As we move into 2024, we expect to see a more normalized operating environment.

Speaker Change: Harder one last time in Q1.

Robert P. Fishman: Yeah, I would agree with your numbers. So Ross expansion will continue in the first quarter as we drive approximately 150 basis points of Ross expansion for the full year as you'll as you'd expect you know with Q2 being our largest quarter of the Ros expansion will be significant in Q2 and we'll all.

Robert P. Fishman: Also a play out well as we close out the year in Q3 and Q4.

Robert P. Fishman: Yeah.

Speaker Change: Great. Thank you and then my second question is more on pool. So your seven are up 7% year over year. That's about like 90 millions of revenue incremental I think you I believe you talked about like the Destocking was about 150 millions in 'twenty three so I assumed.

Speaker Change: That delta is driven by your cautious around you called out like uncertainty in the macro higher interest rates is that correct and second it's how much visibility do you have on that 7% growth.

Robert P. Fishman: Fourth quarter segment income increased 8% to $198 million, and return on sales expanded 190 basis points year-over-year to 20.1%. This improvement was driven primarily by our transformation initiatives. Adjusted EPS of 87 cents was up 6% versus the prior year.

Speaker Change: And then can you talk about like the early buy activity is that does that does that give you enough confidence to guide seven first time you ever hear growth.

There's two questions with a lot of sub parts, but let me see if I can summarize.

Speaker Change: Summarize it I mean first of all we have given two numbers on the inventory piece, we've given 150 and 120 I just want to remind everybody. It's about a 150 for pentair from the end of Q1 to the end of Q4 2023 on a year over year basis, its actually closer to 120, which as you know that.

Robert P. Fishman: For the full year, sales were flat at $4.1 billion, with core sales down 5%, driven by growth in flow and water solutions, which were offset by lower pool volumes. Segment income grew 11%, and return on sales expanded 220 basis points to a record 20.8%. All three segments significantly expanded margins and set new records.

Speaker Change: If you think about exactly what you're saying if you take our reported sales at the 120, you'll get to the conclusion that our price and volume is down and I think that reflects.

Several factors one is that we.

Speaker Change: Expect new pool builds to decline only modestly, but then we were not so sure what's going to happen with remodel pools, and we're also expecting some level of discretionary purchases in the aftermarket.

Robert P. Fishman: Adjusted EPS increased to a record $3.75. Turning to slide 13, labeled Flow at a Glance, you can see the impressive five-year financial performance. Sales rose over 4%, compounded annually, and margin expanded 300 basis points since 2019. In 2023, Flow continued to reach new records in sales and profits. We have also provided a sales view by region, channel, and solution reflecting 2023 sales and the diversified nature of the business. We have eight iconic brands, some over 100 years old, and we rank first in quality, technical support, and customer service.

Speaker Change: In the first half for sure as people are maybe a little more cautionary depending on where the interest rates are.

Speaker Change: Net net it's still a fundamentally good growth rate for us as we set up the year and we're expecting really good conversion of our west on that contribution.

Speaker Change: The next question comes from Julian Mitchell with Barclays. Please go ahead.

Julian Mitchell: Hi, good morning.

Julian Mitchell: Just wanted to circle back to the sort of you know profit bridge.

Julian Mitchell: The numbers and maybe looking at slide 12, you know to try and understand what's embedded for 2024.

Any help you could give us around the sort of you know that inflation bucket, what you're dialing in you know it was that sort of $1 90 number.

Robert P. Fishman: Please turn to slide 14, labeled Q4 2023 flow performance. In addition to the fourth quarter performance for flow, I will also be referencing the full year performance on slide 15. Note that we have recently renamed our industrial and flow technology segment to flow. In Q4, flow grew sales 1% in the quarter to $379 million, a record fourth quarter. Industrial solutions were up 9% and commercial was up 2%, with residential down 7%. Segment income was flat, and return on sales decreased 20 basis points to 17.2%.

Julian Mitchell: In 'twenty, three and when we look at productivity I'm very good exit rate in terms of.

So 90 million or so tailwind in Q4, how are we thinking about that number for full year 'twenty four as well. Please so yeah inflation and productivity any finer points on the guide assumption.

Speaker Change: Yeah I understand thank you for the question Julien So.

Speaker Change: And so we look at 2002.

Speaker Change: 24 in the context of the the walks.

Speaker Change: Youll, where we're thinking that price will offset inflation, so think roughly two points of price offsetting inflation.

Robert P. Fishman: Due to a return to more normal seasonality following a record Q4 2022 and an unfavorable mix from our residential business. For the year, flow sales increased 5% to $1.58 billion, primarily due to double-digit growth in commercial and industrial solutions. Residential was down 4%, showing improvements sequentially from Q3. Full year segment income grew 17%, and return on sales increased 170 basis points to 17.8%.

Speaker Change: That would mean that in order to grow to the mid point of our guidance, we'll have you know.

Speaker Change: Roughly $40 million of our volume.

Speaker Change: That $40 million as compared to the negative 460 that we saw in 2023. So when we talk about moving to a more normalized environment. We are very pleased that the.

The challenging years are behind us and we can start to grow.

Speaker Change: That's really how you bridge the revenue piece when you move over to segment income the price of call it two points well offset inflation.

Robert P. Fishman: A record margin for flow driven by transformation and price more than offsetting inflation. Turning to slide 16, titled Water Solutions at a Glance, you can see the strong five-year financial record with a compounded annual sales growth rate of 17% and over 400 basis points of margin expansion since 2019. Our iconic brands include Everpure and Manitowoc Ice.

Speaker Change: We will get some drop through call.

Speaker Change: Call. It in the 30% range of that $40 million of income and that leaves you with roughly $75 million of transformation to.

To drive the 150 basis points of Ross expansion.

Speaker Change: That $75 million compares to the 67 million that we did in 2023, but it also includes our us.

Speaker Change: Making investments back into the business. So as we drive innovation in places like commercial water inflow and pool.

Robert P. Fishman: Our residential water solutions products have helped reduce the need for 7 billion single-use water bottles in 2023. Please turn to slide 17, labeled Q4 2023 Water Solutions Performance. In addition to the fourth quarter performance for Water Solutions, I will also be referencing the full year performance on slide 18. In Q4, water solution sales decreased 5% to $270 million following a record Q4 2022.

As we look to drive opportunities to improve.

Speaker Change: And make life easier for our dealers and distributors.

That's all included in that net $75 million number.

And that's the bridge that would take you from the $855 million of income in 2023 to the midpoint guide of around 940.

Speaker Change: I hope that's helpful.

Speaker Change: That's extremely helpful. Thank you and maybe just a quick follow up on the top line.

Robert P. Fishman: Commercial sales were down 4% primarily due to the timing of projects within our services business, partially offset by growth in Manitowoc ice and filtration. In residential, Q4 sales were down 6%, but they reflect significant improvements sequentially from Q3 of this year, when residential sales were down 14%. Segment income grew 15% to $52 million, and return on sales expanded 320 basis points to 19.1%, a new Q4 record. Driven primarily by productivity from our Transformation Initiative and Manitowoc Ice, for the year, water solutions sales grew 19 percent.

Speaker Change: Outlook. So you start out Q1 down a couple of points. The full year is up a couple of points.

Speaker Change: How are you thinking about the sort of rate of improvement in that year on year sales lines through the year or was it just each quarter year. When you get slightly better and is that true across all three segments kind of moving in a synchronized.

Speaker Change: Wave from down slightly to up slightly and eat any clarity on that please.

Speaker Change: Yeah, that's that's really how we do view it we expect growth to return in Q2 again Q2 is historically our largest quarter. We had a big Q2 in 2023, but we still expect growth and then we continue to grow in Q3 and Q4.

Robert P. Fishman: Segment income grew 66%, and return on sales increased 590 basis points to 21%, a new full-year record. Commercial sales increased 54% driven by the acquisition of Manitowoc Ice and growth and filtration. Manitowoc Ice had a record sales year with growth of 23% versus the prior year.

Speaker Change: The next question comes from Nathan Jones with Stifel. Please go ahead.

Nathan Hardie Jones: Good morning, everyone. Good morning.

Nathan Hardie Jones: I'll start with a follow up on the transformation initiatives I think you guys have some pretty good visibility too.

Nathan Hardie Jones: To the savings that you're going to generate over the next more than one used two three maybe four years can.

Robert P. Fishman: Please turn to slide 19, titled Poole at a Glance. Looking at the five-year financial performance, Poole was able to grow the top nine significantly and increase margins to a record 31%, or up 320 basis points since 2019. Our pool business benefits from a very large installed base, with roughly 80% of sales coming from remodel and break and fix. Please turn to slide 20, labeled Q4 2023 Pool Performance. In addition to the fourth quarter performance for Poole, I'll also be referencing the full year performance on slide 21. In Q4, pool sales declined 2% to $336 million, driven by a six-point drop in volume, which was partially offset by four points of price.

Nathan Hardie Jones: Can you talk about the linearity of savings realization there out of transformation.

Kind of when do those savings peak and start to level off just any color you can give us on that longer term outlook.

Speaker Change: Yeah. We're we're pleased with what we're seeing in terms of transfer rate transformation reading out it was $29 million in both Q3 and Q4 of 2023 and as I, just mentioned, where we're looking at a roughly a net $75 million number in 2024.

Speaker Change: When we look at the final we would expect those type of transformation numbers to continue over the next couple of years, we think the funnel supports the various waves, whether it's pricing sourcing the operations or the Org excellence. So we think it's going to create runway for us over.

Robert P. Fishman: Note that volume improved significantly compared to the 28-point decline in pool volume in Q3. For the year, pool sales were down 18%, segment income decreased 10%, and return on sales increased 270 basis points to 31%, driven by Price and our Transformation Initiative. Please turn to slide 22, labeled "Transformation Initiatives." Similar to last quarter, we believe this slide provides a good illustration of our transformation initiatives and our ultimate goal of driving margin expansion. We have been targeting ROS of approximately 23% by the end of fiscal 2025, expanding margins over 400 basis points as compared to fiscal 2022. In 2023, we delivered ROS of 20.8% as transformation began to read out in Q3 and Q4, and we expect to deliver roughly 22% by the end of full year 24, which we believe puts us on track with our transformation initiative. Please turn to slide 23, labeled Transformation Runway.

Speaker Change: The next couple of years for sure.

Speaker Change: And then I guess my follow up on the.

Speaker Change: The water quality business, I think manitowoc bunch them back logged off that it built up during supply chain challenges is it possible to.

Gives me a possible to quantify the tailwind that was there in 2023.

Speaker Change: Maybe it's a bit of a headwind in 2024.

Speaker Change: And then what the underlying expectations off of growth for Manitoba gosh meet in 'twenty four and beyond.

Speaker Change: Yeah, Let me just give some color and then I'll let Bob.

Speaker Change: Close out I mean, I think we enter 2000.

Speaker Change: 24, especially in the Q1 phrase with much more normalized backlog levels. We still grew nicely in Q4, Manitowoc and we expect to grow.

Again in Q1, so I think were at normal levels. Just as a reminder, this business was only taking 60 to 75 days of orders.

Speaker Change: The backlog was more relative to what the near term dynamics, where Nathan not some level of large backlog that wouldn't be used in the future. So you know obviously, we're had a great 2023.

Speaker Change: This business contributed nicely to overall water solutions and overall pentair and we couldn't be more pleased where we are in 2024 is more about getting the filtration synergies lined up along.

Robert P. Fishman: We have kept this slide as a reference to illustrate the staggered nature of each of the four initiatives and the various stages of each. We are pleased to note that we believe we are executing well on these initiatives going into 2024. Please turn to slide 24, labeled balance sheet and cash flow. In Q4, we generated $97 million in free cash flow, up nearly 100% year over year, reflecting another strong quarter. For the year, our free cash flow was $550 million, up nearly 94% year over year. Our net debt leverage ratio was two times, down from 2.6 times in Q1. Our total debt was less than $2 billion, and the average interest rate was approximately 5.2%.

Along with the Manitowoc Ice acquisition you know, there's the same business unit and when we gave the numbers of what we expected this business achieve in the longer term of 25. It was inclusive of those revenue synergies in both the services side and the filtration side. So very pleased where we are and very excited about the contribution will see in 'twenty four and beyond.

Speaker Change: Yeah, I would I would just add that our historically ice has a mid single digit grower when we look back at the CAGR, that's historically what they've grown.

The 23% increase in 2023.

Speaker Change: Included some nice wins in China and.

And working down the backlog.

Speaker Change: So as we look to.

Robert P. Fishman: Our ROIC was 14.3%, which includes the full impact of the Manitowoc Ice Acquisition. With the focus on being good stewards of capital, we continue to target high-teens ROIC. We plan to remain disciplined with our capital and continue to focus on debt reduction amid the higher interest rate environment with the potential for share buyback. Moving to slide 15, titled Q1 and full year 2024, Pentair Outlook. For the full year, we are introducing our adjusted EPS guidance of approximately $4.15 to $4.25, which represents a year-over-year range of up 11% to up 13%. We expect total Pentair sales in fiscal 2024 to be up approximately, to be approximately $4.2 billion or up about 2% to 3%. We expect flow sales to be up low single digits, reflecting low- to mid-single-digit growth in our commercial and industrial businesses, offset slightly by a low single-digit decline in residential. Water solution sales are expected to be essentially flat, compared with record 2023 performance driven by our commercial water business.

Speaker Change: 'twenty 'twenty four we would expect that business to take a little bit of a breather down mid single digits.

Speaker Change: But good news is that the the business unit commercial water will actually grow low single digits. So youre seeing some benefit of filtration business as well as some of the synergies are coming from the ice acquisition, but being captured within services and filtration. So overall.

Could not be more pleased with how <unk> performing and continue to once we get through 2024 be back on that mid single digit type trajectory.

Speaker Change: The next question comes from Mike Halloran with Baird. Please go ahead.

Thanks, everyone morning.

Mike Halloran: Can we just can can we just continue on the water solution side and round out the residential piece easy comps still expecting some pressure I'm guessing the cadence and improves through the year, but any context on that piece would be helpful.

Speaker Change: Yeah, they're easier comps, but it's also.

Speaker Change: The most global of the businesses inside that portfolio.

Speaker Change: Mike. So we're you know, we're balancing off Europe, China, and North America, while the comps are easier in North America, and we do expect some return to growth we're.

Speaker Change: We're not yet seeing the interest rate environment.

Speaker Change: Propel.

New housing starts and we're a lot more movements, which is usually key indicators to drive that business, but you know we're at levels now where we're definitely growing off of these compares in North America, but we're anticipating a little bit more choppy or outcomes in China in Europe in that business. So net net probably slightly down but getting closer to flat.

Robert P. Fishman: Commercial sales in full year 24 are expected to be up low single digits, and residential to be down low to mid single digits. Pool sales are expected to increase approximately 7% in full year 2024, which aligns the historical compound annual growth rates of mid single digits pre-pandemic. We expect pool sales to increase driven primarily by inventory headwinds in 2023 that we do not expect to repeat in 2024 and some benefit of price. However, we expect this growth to be slightly offset by the uncertainty that still exists regarding the macroeconomic environment, higher interest rates, the potential impact of financing for new and remodeled pools, and potential repair deferrals in the aftermarket. We believe Poole remains a highly attractive market for us, and we look to deliver strong growth in 2024 while being mindful of macroeconomic dynamics. We expect segment income to increase approximately 10%, with Ross expansion of roughly 150 basis points.

Speaker Change: No. It makes sense I appreciate that and then a quick clarification on something you said earlier John.

Speaker Change: You know the expectation was for volume and price to be down I'm, assuming you mean that on a net basis.

Speaker Change: And pricing is slightly up in volume. It's a majority of the downside I just wanted to clarify that's correct on the pool.

Speaker Change: In fact, our net price.

Speaker Change: Benefit and a contribution in line with the way that Bob shared it across the total pentair portfolio and the offsets to that would be the volume which would be the market challenges.

Speaker Change: That's what I figured, but I figured I'd clarify I appreciate it everyone. Thank you. Thank you I appreciate it.

The next question comes from Scott Graham with Seaport Research. Please go ahead.

Scott Graham: Hey, good morning, Thank you for taking my question.

Scott Graham: Just on two.

Scott Graham: So the fourth quarter price cost in <unk>.

Robert P. Fishman: Also, for the full year, we expect corporate expenses of approximately $95 million, net interest expense of roughly $100 million, an adjusted tax rate of approximately 16.5%, which is inclusive of changes in the global tax standard, for a total impact on Pentair of about $0.07 per share, and a share count of approximately $166 million to $167 million. Lastly, we expect to deliver approximately $1 billion in EBITDA for the full year 2024, a milestone we are very proud of. For the first quarter, we expect sales to be down approximately 2 to 3 percent.

Scott Graham: You know I'm on the water side I was just kind of wondering what what happened there that looks like there was some slippage.

Scott Graham: And does that reverse you know maybe in the.

Scott Graham: First quarter or second quarter of this year.

Scott Graham: Yeah.

Speaker Change: Yes, so a couple of dynamics there I mean, just as a reminder, price in Q4 does also reflect on some of our early buy.

Speaker Change: So it's not the largest contribution to price in the quarter absent that we were pretty much signaling that we would get closer to price offsetting cost versus having benefited substantially from price being much higher than cost in the first half of the year. So it came in line with expectations and and I think as you head forward as Bob said, we now expect it to be offered.

Speaker Change: Setting.

Speaker Change: Throughout 2024.

Robert P. Fishman: As a reminder, many of our businesses were working down large backlogs in Q1 last year as supply chains improved, and we were able to ship more backlog orders. In 2024, we expect more normalized seasonality in our business. We expect first quarter segment income to be flat to down 3%, primarily due to lower sales, with corporate expense of approximately $25 million, net interest expense of roughly $29 million, an adjusted tax rate of approximately 16.5%, and a share count of approximately $167 million.

Speaker Change: The next question comes from Jeff Hammond with Keybanc Capital Markets, Inc. Please go ahead.

Speaker Change: Yeah.

Jeff Hammond: Hey, good morning, everyone. Good morning, good morning, Pete.

Jeff Hammond: So just on the early buy I think there was some some question on you know kind of how you're going to spread it for Q1, two and just wondering you know if you have more to go in <unk> and then just.

Jeff Hammond: I'm kind of you know, maybe just speak to break fix kind of how you're thinking about that market within within the guide.

Yeah. Our early buy came back to you know more a more normal level and in the fourth quarter, but again as we typically do that that gets spread between Q4 and Q1. So in line with historically, how it's done in fact, the early buy component in terms of shipments in Q4 was probably a.

Robert P. Fishman: We expect Q1 to drive Ross expansion, both sequentially and year on year. We are also introducing adjusted EPS guidance for the first quarter of approximately 88 cents to 91 cents. For the first time since 2020, we believe we are seeing a return to a more normalized operating environment globally.

Jeff Hammond: Little bit less than historically, what we've done.

Jeff Hammond: Yeah.

Jeff Hammond: The break fix Jeff.

Speaker Change: I will concede you know that we probably have what I would call a more cautious outlook I would not call. It conservatism I called more realistic and we just don't know how the interest rate environment is going to affect the consumer.

Robert P. Fishman: Thus, we expect seasonality to resume to historical norms across all three of our segments in 2024, with Transformation Driving Margin Expansion. For the first half of 2024, we expect adjusted EPS to be slightly less than 50% of our full-year adjusted EPS guide. Q1 is expected to be the lowest quarter for sales, segment income, ROS, and adjusted EPS as compared to the remaining three quarters in full year 24. We have continued to accelerate transformation funnels and remain focused on investing in the long-term growth of our company. Turning to slide 16, titled 2023 reflection.

Being more thoughtful on whats discretionary not discretionary scratch not discretionary in the pad clearly, we expect <unk> products like pumps and filters to be replaced as needed to keep the full running with some of your heaters on especially on the high end and or some of your lighting could see some consumer discretion pushed those off a quarter or two.

Speaker Change:

Speaker Change: That's just our outlook I don't say that Thats right I think it's better to take that slanted and maybe air to the fact that if that doesn't happen we're going to see.

Speaker Change: A higher level of growth versus taking a more optimistic view and then having to reset the guide again to the lower end and pool. So I would be very clear I don't know, it's just what we have in our particular view.

Robert P. Fishman: Our business continued to execute well and delivered what we said we would do. We drove margins as a result of our balanced water portfolio and transformation initiatives. Manitowoc Ice posted a record year, exceeding expectations.

The next question comes from Brett Linzey with Mizuho. Please go ahead.

Brett Logan Linzey: Hey, good morning, all.

Brett Logan Linzey: Wanted to come back to the capital allocation priorities. You noted the continued deleveraging path, but also the potential for for share repurchase I guess, what would be the gating factor there to drive that decision and you know what would be the optimal leverage you'd be willing to flex for for repurchases.

Operator: We drove performance accountability across the organization, ended the year with an even stronger balance sheet and free cash flow, and maintained a disciplined capital allocation strategy. We believe we are well positioned going into full year 24. I would now like to turn the call over to the operator for Q&A, after which John will have a few closing remarks. Drew, please open the line for questions. Thank you.

Brett Logan Linzey: Yeah, a bit based into on the assumptions that we gave the 100 million $100 million of interest expense and the share count.

Brett Logan Linzey: We have assumed share buyback resumes to offset dilution.

Brett Logan Linzey: So typically you know Q1 is a negative free cash flow quarter, but we would also start a share buyback later in the year is what's baked into our assumptions currently.

Operator: We will now begin the question and answer session. In the interest of time, we ask that you please limit yourself to one question and one follow-up. To ask a question, you may press star then 1 on your telephone keypad.

Brett Logan Linzey: Again, that's just to offset dilution at the moment.

Brett Logan Linzey: Hum.

Brett Logan Linzey: I think where we're at from a debt to EBITDA as is prudent.

Operator: If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Brian Lee with Goldman Sachs. Please go ahead. Hi, thanks for taking the questions. This is Grace on behalf of Brian.

I think as these particular interest rate levels I think the focus still is on debt reduction and the way we're going to look at incremental buyback or M&A is what long term value does it create a.

Brett Logan Linzey: For the Shareowner, and therefore, which ones are the best course of action.

Brett Logan Linzey: Yeah.

Speaker Change: Got it and then just wanted to circle back on the $75 million of transformation. That's that's planned this year curious how that feathers across the individual segments. As we modeled 24 and is this primarily from the wave one measures and actions taken last year are you doing more on the operational side and in <unk>.

Robert P. Fishman: My first question on margin, kudos on the margin execution. Just a quick question on the margin expansion trajectory here. So if I do the math right here, your 4-year guide implied kind of like 140 basis points of expansion, while your 1Q guide implied like 20 basis points at the midpoint. So how should we think about the margin expansion trajectory over the year, and which segment should we see the most margin expansion? Thanks. Yeah, let me just take the first part. I'll hand it to Bob.

Speaker Change: <unk> thousand 24.

It's for primarily the the wave one on the sourcing side again just.

Just as a reminder, wave one last year looked at electronics motors maintenance repair and operations packaging logistics.

Speaker Change: So we're at the point, where that'll start making its way into the P&L and very early stages of wave two wave.

John L. Stauch: I just want to remind everybody that last year's pool inventory correction didn't happen. So we're up against one more quarter of pool comparisons from a Q1 perspective, and if you actually look at the performance exiting Q4 and compare it to our Q1 guide, you'll see that the continued operating performance is there. And the last point I'll just make before handing over to Bob is that our Q1 EPS guidance is back to our normal seasonality as a percentage of the overall full year. So what you're really seeing is a reflection that we're back to our normal seasonality contribution, and therefore the year-over-year comparison is harder. One last.

Speaker Change: Wave two looked at metals moldings residence Ocean rate and purchased finished goods. So I think we've got a nice cadence there of the wave one reading out in 'twenty.

Speaker Change: 24, and wave two will straddle 'twenty four 'twenty five we'll also start to see some benefits from both the pricing excellence and the operations on the pricing excellence, we've now rolled the strategic playbook out to almost all of the different categories in Gms. So again.

Speaker Change: Good a good cadence there.

Speaker Change: From a transformation perspective, you know Brett we got to leave some information for analyst day to make sure everybody.

Speaker Change: It comes with listens to us and will go a lot more detail as to how we see all of those ways.

Robert P. Fishman: Yeah, I would agree with your numbers. ROS expansion will continue in the first quarter as we drive approximately, you know, 150 basis points of ROS expansion for the full year. As you'll, as you'd expect, with Q2 being our largest quarter, the ROS expansion will be significant in Q2 and will also play out well as we close out the year in Q3 and Q4. Great, thank you. And then my second question is more about pools.

Speaker Change: Working in connected to what the segment expectations will be as well.

Speaker Change: The next question comes from Andrew Krill with Deutsche Bank. Please go ahead.

Andrew Krill: Hey, Thanks, Good morning, everyone I, just want to go back to pricing.

Alright, I know you said about two point for the company, but just wondering do any of those three segments kind of got benefit more or less relative to that 2% and are these pricing increases basically already pushed through or does it require more pricing this year or at some point in the year.

John L. Stauch: So you're up 7% year over year. That's about $90 million of revenue incremental. I think, I believe you talked about the destocking being about $150 million in 23. So I assume that delta is driven by your cautious around, you called out like uncertainty in the macro, and higher interest rates. Is that correct?

Andrew Krill: It doesn't vary greatly across the segments as far as the expectation.

Andrew Krill: And yes, they are all announced and implemented at this stage.

Yeah.

Andrew Krill: The next question comes from Joe Giordano with TD Cowen. Please go ahead.

John L. Stauch: Correct. And second, it's how much visibility do you have on that 7% growth? And can you talk about the early buy activity? Does that give you enough confidence to guide 7% year over year growth? There are two questions with a lot of subparts, but let me see if I can summarize them. First of all, we have given two numbers on the inventory piece. We've given 150 and 120.

Joseph Giordano: Hey, guys good morning.

Joseph Giordano: Yeah.

Joseph Giordano: Hey, so on the mass walk I, you know obviously the growth there.

Joseph Giordano: On the organic basis like it looks a lot different than the water solutions business as a whole can you can you kind of go through it, especially can like buckets of what drove that like how much was just backlog how much was like was priced in manitowoc different versus like the underlying water solutions and three points for the year, how much wood there like revenue synergies.

John L. Stauch: I just want to remind everybody, it's about 150 for Pentair from the end of Q1 to the end of Q4 2023. On a year-over-year basis, it's actually closer to 120, which is, you know, then if you think about exactly what you're saying, you take our reported sales, add the 120, and you'll get to the conclusion that price and volume are down. And I think that reflects, you know, several factors. One is that we expect new pool builds to decline only modestly. But then we are not so sure what's going to happen with the remodeled pools.

Joseph Giordano: The filtration reading out already into 'twenty three just if you could kind of just break those into large buckets for growth yeah, Let's let me simplify it I mean right now we're seeing great traction.

Joseph Giordano: Especially with Manitowoc in and also then the filtration of ever pure.

Joseph Giordano: You know through distributors into key accounts and also working our way through.

Joseph Giordano: Synergies there I just want to mention that our services business had a very large.

Joseph Giordano: <unk> that it worked in 2022, which was for large customer.

John L. Stauch: And we're also expecting some level of discretionary purchases in the aftermarket in the first half, for sure, as people are maybe a little more cautious, depending on where the interest rates are. Net-net, it's still a fundamentally good growth rate for us as we set up the year. And we're expecting really good conversion of our ROS. The next question comes from Julian Mitchell with Barclays. Please go ahead. Hi, good morning.

Joseph Giordano: The install of frozen carbonated beverages, and we ran up against the year over year headwind in that business in Q4, but if you actually look at the filtration and the Manitowoc com.

Joseph Giordano: Contributing nicely and it's just offset slightly by the headwind of the services business.

The next question comes from Andy Kaplowitz with Citigroup. Please go ahead.

Andrew Alec Kaplowitz: Hey, good morning, everyone.

Morning.

Robert P. Fishman: Just wanted to circle back to the sort of, you know, profit bridge numbers and maybe look at slide 12, you know, to try and understand what's embedded for 2024. Any help you could give us around the sort of, you know, that inflation bucket, what you're dialing in, you know, it was that sort of 190 number in 23. And when we look at productivity, very good exit rates in terms of... 30 million or so, tailwind in Q4. How are we thinking about that number for full year 24 as well, please? So yeah, inflation and productivity. Any finer points in the guide aside? Yeah, I understand.

Andrew Alec Kaplowitz: John could you give us a little more color into your industrial Capex exposed businesses within flow I think you had the segment up low single digits for twenty-four industrial businesses look good in Q4. So what are you seeing them flow and then how are you thinking about the commercial businesses there as well yeah.

John: Yeah. So thank you for the question I mean.

John: Had pretty nice steady order rates and steady deliveries.

John: What we do is very very important because we're turning waste into value for a lot of our key customers and we're seeing continued investment in that because it drives productivity for them. It's also a big sustainability play for them. So it's an area. We're doing the right thing for the planet also means a really good value for the customer and so we've seen a steady order view.

John: There and we feel like we're well positioned heading into 2024 on the commercial side are our larger pump business has benefited from.

Robert P. Fishman: Thank you for the question, Julian. As we look at 2024 in the context of the walks, we're thinking that prices will offset inflation. So think roughly two points of price inflation offsetting inflation. That would mean that in order to grow to the midpoint of our guidance, we'll have, you know, roughly $40 million in volume. That $40 million is compared to the negative $460 million that we saw in 2023. So when we talk about moving to a more normalized environment, we are very pleased that the challenging years are behind us, and we can start to grow. That's really how you bridge the revenue piece.

John: Spansion, what I call, mainly infrastructure types of projects and the continued build out in North America related to data centers warehouses et cetera, and we continue to see that trend as we enter 2024 are holding up nicely as well.

John: The next question comes from Deane Dray with RBC capital markets. Please go ahead.

Deane Dray: Thank you and good morning, everyone.

Deane Dray: I just want to follow up there.

Deane Dray: While we're talking about the formerly known as industrial flow technology is there anything you might just be cosmetic, but is there anything to read into the renaming and as flow and just yeah and answering Andy's question. The the point of the business is today.

Deane Dray: Today for pet care is more the focus on residential commercial and the opportunities in pool and it seems less about industrial and data centers and so forth and maybe I'm just reading too much into it but my sense is are you still the natural owner for this business and is there.

Robert P. Fishman: When you move over to segment income, the price of, call it two points, will offset inflation. We'll get some drop through, call it in the 30% range of that $40 million of income. And that leaves you with roughly $75 million of transformation to drive the 150 basis points of Ross expansion. That $75 million compares to the $67 million that we did in 2023.

Potential.

Speaker Change: Potential that you would consider a separation yeah I know I appreciate the question Dean and I will spend a little bit of time on this at the analyst day in March but just to share with you how I'm thinking the relabeling of flow was actually more of a branding exercise we want to have a web presence, where we can tell our story and flow represents 99 nine.

Robert P. Fishman: But it also includes us making investments back into the business. So as we drive innovation in places like commercial water and flow and pool, as we look to drive opportunities to improve and make life easier for our dealers and distributors, that's all included in that net $75 million number. And that's the bridge that would take you from $855 million in income in 2023 to the midpoint guide of around 940. I hope that's helpful. That's extremely helpful.

Speaker Change: 90% of everything we do and the formal industrial flow technologies. We just didn't think worked as a naming nomenclature. So that's all it was a it's also shorter which makes us producing reports easier and that's that's a big deal right, but ultimately Deane the way I think of the company's 1 billion and a half and separations and a membrane tech.

Speaker Change: <unk>, we're about 1 billion and a half of pumps across the enterprise and then even some of our specialty applications like heating and cooling of ice.

Speaker Change: Rising to 800 million, which leaves you a couple of hundred million dollars of lighting and $100 million of.

Robert P. Fishman: Thank you. And maybe just a quick follow up on the top line outlook. So you start out Q1 down a couple of points, and the full year's up a couple of points. How are you thinking about the sort of rate of improvement in that year-on-year sales line over the year? Is it just each quarter, year-on-year, gets slightly better, or is that true across all three segments kind of moving in a synchronized wave from down slightly to up slightly?

Other so when you think of the portfolio, we were not geared to residential other than that's where our dealer bases and that's where our our strength and our presence has been generally accepted around our brands, but as a reminder, we do a couple of hundred million dollars industrial wastewater today.

Speaker Change: It's in the flow side, and we'll continue to build out that capability and technology to continually take advantage of water reuse projects around the world. So.

We are we believe this business naturally fits and we're going to demonstrate that we use those membranes that get that are used for industrial wastewater applications, we're bringing those back into the residential applications and we think it's going to give us a differentiated technology advantage as we do so so really excited about the cross pollination of technology.

Robert P. Fishman: Any clarification on that, please? Yeah, that's really how we do view it. We expect growth to return in Q2. Again, Q2 is historically our largest quarter. We had a big Q2 in 2023, but we still expect growth. And then we will continue to grow in Q3 and Q4. The next question comes from Nathan Jones with CIFL. Please go ahead. Good morning, everyone.

Speaker Change: <unk> and really excited about how the segments are working together, while also maximizing what we think is a revenue opportunities within their individual swim lanes.

The next question comes from Steve Tusa with Jpmorgan. Please go ahead.

Nathan Hardie Jones: Let me start with a follow-up on the transformation initiatives. I think you guys have some pretty good visibility into the savings that you're going to generate over the next more than one year, two, three, maybe four years. Can you talk about the linearity of savings realization there out of transformation?

Steve Tusa: Hey, guys. Good morning, Hey, good morning, Steve.

Steve Tusa: How's it going good how about you.

Steve Tusa: Grinding it out.

The just on this productivity number can you just quantify how much investments here.

Steve Tusa: You throw it in there just roughly a lot I just you know the you know if you thought about $10 million to $20 million of re investment into the areas of sales and marketing innovation Digitization, you know capturing data upstream and bringing that data.

Robert P. Fishman: Kind of when do those savings peak and start to level off? Just any color you can give us on that longer-term outlook. Yeah, we're pleased with what we're seeing in terms of transformation reading out. It was $29 million in both Q3 and Q4 of 2023.

Steve Tusa: To help our dealers be successful and then really just automating the experience between our dealers and.

Robert P. Fishman: And as I just mentioned, we're looking at roughly a net $75 million number in 2024. When we look at the funnel, we would expect those type of transformation numbers to continue over the next couple of years. We think the funnel supports the various waves, whether it's pricing, sourcing, operations, or organizational excellence.

Steve Tusa: Our distributors and US are the two biggest opportunities we have and then we got some excitement around three or four of these innovation projects that we'll talk about further Steve at the analyst day, and and I want to continue to invest in them because I think they could be game changers of long haul. So I'm really pleased with the level of transportation, we're realizing and you know these are good.

Steve Tusa: <unk> that we want to add a little bit of investment back into.

Steve Tusa: You should have thrown AI in their you missed the opportunity but on on on that number. So I guess for me Steve now now it's in the transcript.

Robert P. Fishman: So we think it's going to create runway for us over the next couple of years for sure. And then, I guess, my follow-up on the water quality business. I think Manitowoc burned some backlog that it had built up during supply chain challenges. Is it possible to, excuse me, quantify the tailwind that was there in 2023 that maybe is a bit of a headwind in 2024? and then what the underlying expectations are for growth for Manitoba in 2024 and beyond. Yeah, let me just give some color, and I'll let Bob, you know, close out.

I guess, so I thought that the messaging around productivity was more bullish than you know.

Steve Tusa: I guess, a $90 million gross number if I just add back $20 million.

Steve Tusa: Am I missing something there or is there just like conservatism on the way some of that's coming through I thought the productivity number you were messaging was was higher than that yeah, you know I hate to ever using the word conservatism I think we definitely have a funnel that would suggest we could realize more and certainly the upper end of the range, we would be realizing more so I think right now is.

Steve Tusa: As we sit here and we don't see any definitive.

John L. Stauch: I mean, I think we enter 2000. 24, especially in the Q1 phrase, with much more normalized backlog levels, still grew nicely in Q4, Manitowoc, and we expect to grow again in Q1. So I think we're at normal levels, just as a reminder, this business was only taking 60 to 75 days for orders. You know, so the backlog was more relative to what the nearer-term dynamics were, Nathan, not some level of large backlog that wouldn't be used in the future. So, you know, obviously, we're had a great 2023.

Steve Tusa: Definitive movement in interest rates through the rest of the year, we havent planned on any of this forecast.

Speaker Change: We think were well balanced in the way we're positioning this.

Speaker Change: This concludes our question and answer session I would like to turn the conference back over to John <unk>.

John: President and Chief Executive Officer for any closing remarks.

John: Well. Thank you for joining the call today in closing I want to reiterate some key themes on slide 27, first our balanced water portfolio transformation initiatives continued to drive significant market margin expansion in 2023.

John L. Stauch: This business contributed nicely to overall water solutions and overall Pentair, and we couldn't be more pleased where we are. In 2024, it's more about getting the filtration synergies lined up along with the Manitowoc ice acquisition. You know, they're the same business unit.

John: Second we initiated 2024 guidance with expected growth in sales and profitability, reflecting confidence in our strategy and execution across the company.

John: Third our transformation initiatives have gained momentum in 2023 with expectations to drive further margin expansion in 2024, and finally, we believe our focused growth strategy and solid execution are building a solid foundation for long term growth profitability and shareholder value.

John L. Stauch: And when we gave the numbers of what we expected this business to achieve in the longer term of 2025, it was inclusive of those revenue synergies of both the services side and the filtration side. So, very pleased where we are and very excited about the contribution we'll see in 2025. Yeah, I would just add that, historically, ICE is a mid single-digit grower.

Speaker Change: That does conclude the call.

Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Robert P. Fishman: When we look back at the CAGR, that's historically what they've grown. The 23% increase in 2023 included some nice wins in China and working down the backlog. So as we look to 2024, we would expect that business to take a little bit of a breather, down mid single digits. But the good news is that the business unit commercial water will actually grow low single digits.

Speaker Change: Yeah.

Speaker Change: Yeah.

Speaker Change: [music].

Robert P. Fishman: So you're seeing some benefit from the filtration business, as well as some of the synergies coming from the ICE acquisition but being captured within services and filtration. So overall, I could not be more pleased with how ICE is performing and will continue to, once we get through 2024, be back on that mid-single-digit type trajectory. The next question comes from Mike Halloran with Baird. Please go ahead.

Speaker Change: Yeah.

Speaker Change: Uh huh.

Mike Halloran: Thanks, everyone. Morning. Morning. Can we just continue on the water solution side and round out the residential piece? Easy comps, still expecting some pressure.

Speaker Change: Yeah.

John L. Stauch: I'm guessing the cadencing improves through the year, but any context on that piece would be helpful. Yeah, they're easier comps, but it's also the most global of the businesses inside that portfolio. Mike, so we're balancing, you know, Europe, China, and North America. And while the comps are easier in North America, we do expect some return to growth. We're not yet seeing the interest rate environment.

John L. Stauch: But, you know, we're at levels now where, you know, we're definitely growing off of these comparers in North America, but we're anticipating a little bit more choppier outcomes in China and Europe and that. So net-net, probably slightly down, but getting closer to flat. Yep, that makes sense. I appreciate that. And then a quick clarification on something you said earlier, John. You know, the expectation was for volume and price to be down. I'm assuming you mean that on a net basis, and pricing is slightly up, and volume is the majority of the downside. I just wanted to clarify. That's correct. I'm pulling back to a net price benefit and a contribution in line with the way that Bob shared it across the total Pentair portfolio and the offsets to that. Thank you for watching!

John L. Stauch: Mark, that's what I figured. I figured I'd clarify. I appreciate it, everyone. Thank you. Thank you.

Scott Graham: The next question comes from Scott Graham with Seaport Research. Please go ahead. Hey, good morning. Thank you for taking my question. Just on to quickly, the fourth quarter price cost in on the water side. I was just, you know, kind of wondering what happened there. That looks like there was some slippage.

Robert P. Fishman: And did that reverse, you know, maybe in the first quarter or second quarter of this year? Yeah, so a couple dynamics there. I mean, just as a reminder, pricing Q4 does also reflect some of our early, so it's not the largest contribution to price in the quarter. Absent that, you know, we were pretty much signaling that we would get closer to pricing offsetting costs versus having benefited substantially from price being much higher than cost in the first place, so it came in line with expectations. And I think as you head forward, as Bob said, we now expect it to be offsetting losses throughout 2000. The next question comes from Jeff Hammond with KeyBank Capital Markets Inc. Please go ahead.

Jeff Hammond: Hey, good morning, everyone. Good morning, morning. Hey, so just on the early buy, I think there was some question on, you know, kind of how you're going to spread it for Q1Q. And just wondering, you know, if you have more to go in one queue, and then just, on kind of the, you know, maybe just speak to break fix kind of how you're thinking about that market within within the guide. Early buy came back to more normal levels in the fourth quarter, but again, as we typically do, that gets spread between Q4 and Q1, so it's in line with how it's done historically.

John L. Stauch: In fact, the early buy component in terms of shipment in Q4 was probably a little bit less than historically what we've done. Yeah, and on the break fix, Jeff, I, you know, I will..., http://TheBusinessProfessor.com, I would not call it conservatism; I'd call it more realistic. And we just don't know how the interest rate environment is going to affect the consumer, being more thoughtful about what's discretionary and not discretionary. Scott Graham, Steve Tusa, Andrew Kaplowitz, That's just our outlook. I don't say that that's right or wrong.

John L. Stauch: I think it's better to take that slant and maybe err on the fact that if that doesn't happen, we're going to see a higher level of growth versus taking a more optimistic view and then having to reset the guide again to the lower end. So I would be very clear: I don't know. It's just what we have in our particular situation. The next question comes from Brett Linzey with Mizuho. Please go ahead.

Robert P. Fishman: Hey, good morning all. I wanted to come back to the capital allocation priorities. You noted the continued deleveraging path, but also the potential for share repurchase. I guess what would be the gating factor there to drive that decision, and what would be the optimal leverage you'd be willing to flex for repurchases?

Robert P. Fishman: Yeah, based on the assumptions that we gave that 100 million, $100 million of interest expense and the share count, we have assumed share buyback resumes to offset dilution. So typically, you know, Q1 is a negative free cash flow quarter. But we would also start a share buyback later in the year, which is what's based on our assumptions currently. And again, that's just to offset dilution.

John L. Stauch: I think where we're at from a debt-diva-da is prudent. I think at these particular interest rate levels, I think the focus is still on debt reduction. And the way we're going to look at incremental buybacks, or M&A, is what long-term value does it create for the shareholder, and therefore, which one's the best course of action. Got it. And then just want to circle back on the 75 million transformation that's planned this year. Curious how that feathers across the individual segments as we model 24.

Robert P. Fishman: And is this primarily from the wave one measures and actions taken last year? Are you doing more on the operational side in 2024? It's primarily Wave 1 on the sourcing side. Again, just as a reminder, Wave 1 last year looked at electronics, motors, maintenance, repair, and operations, packaging, and logistics. So we're at the point where that will start making its way into the P&L. And in the very early stages of Wave 2, Wave 2 looked at metals, moldings, resins, ocean rate, and purchased finished goods.

Robert P. Fishman: So I think we've got a nice cadence there of the Wave 1 reading out in 2024, and Wave 2 will straddle 24 and 25. We'll also start to see some benefits from both the pricing excellence and the operations. On the pricing excellence front, we've now rolled the strategic playbook out to almost all of the different categories and GMs. So again, good pace there.

Robert P. Fishman: Thank you, from a transformation perspective. The next question comes from Andrew Krill with Deutsche Bank. Please go ahead.

Andrew Krill: Hey, thanks. Good morning, everyone. I just want to go back to pricing.

Robert P. Fishman: I wonder, I know you said about two points net for the company, but just wondering, do any of the three segments kind of benefit more or less relative to that 2%? And, you know, are these pricing increases basically already put through, or does it require more price, you know, kind of mid-year or at some point in the year? Thanks. It doesn't vary greatly across the segments as far as expectations are concerned.

Joseph Giordano: And yes, they are all announced and the next question comes from Joe Giordano with TD Cowen. Please go ahead. Hey, guys. Good morning. Hey, guys. On the Manitowoc ice, you know, obviously, the growth there on an organic basis looks a lot different than the water solutions business as a whole. Can you kind of go through, especially Cam, like, buckets of what drove that?

John L. Stauch: Like, how much was just backlog? How much was the price in Manitowoc different versus, like, the underlying water solution of, you know, three points for the year? Like, how much were there, like, revenue synergies with the filtration reading out already into 23? Just if you could kind of just break those into large buckets for growth. Yeah, let me simplify it. I mean, right now, we're seeing great traction. I just want to mention that our services business had a very large project that it worked on in 2022, which was for a large customer, the installation of frozen carbonated beverages, and we ran up against a year-over-year headwind in that business in Q4. But if you actually look at the filtration and the Manitowoc, they are contributing nicely, and it's just offset slightly by the headwind.

Andrew Alec Kaplowitz: The next question comes from Andy Kaplowitz with Citigroup. Please go ahead. Good morning everyone. Morning Andy. John, could you give us a little more color on your industrial CapEx exposed businesses with Inflow? I think you have the segment up low single digits for 24.

John L. Stauch: Your industrial businesses look good in Q4. So what are you seeing in Inflow, and then how are you thinking about your commercial businesses there? Yeah, so thank you for the question.

John L. Stauch: I mean, we've had pretty nice steady order rates and steady deliveries. And, you know, what we do is very, very important because we're turning waste into value for a lot of our customers. We're seeing continued investment in that because it drives productivity for them. It's also a big sustainability play for them, so it's an area we're doing the right thing for the plant.

John L. Stauch: It also means really good value for the customer, and so we've seen a steady order flow there, and we feel like we're well-positioned heading into 2024. On the commercial side, our larger pump business has benefited from, you know, expansion of what I call mainly infrastructure types of projects and the continued buildout in North America related to data centers, warehouses, et cetera, and we continue to see that trend. Holdings. Thank you. The next question comes from Deane Dray with RBC Capital Markets. Please go ahead. Thank you. Good morning, everyone.

Deane Dray: Hey, just want to follow up there on while we're talking about the formerly known as industrial flow technology. Is there anything, might just be cosmetic, but is there anything to read into the renaming as flow? And just, you know, in answering Andy's question, the point of the business today for Pentair is more the focus on residential, commercial, and the opportunities in pool. And it seems less about industrial and data centers and so forth. And maybe I'm just reading too much into it, but my sense is, are you still the natural owner of this business? And is there any potential that you'd consider a separation?

John L. Stauch: Yeah, no, I appreciate the question, Deane, and I, you know, we'll spend a little bit of time on this at Analyst Day in March, but just to share with you what I'm thinking. The relabeling of flow was actually more of a branding exercise. You know, we want to have a web presence where we can tell our story, and flow represents 99.99% of everything we do. And the formal industrial flow technologies just didn't work as a naming nomenclature, so that's all it was.

John L. Stauch: It's also shorter, which makes producing reports easier, and that's a big deal, right? But ultimately, Deane, you know, the way I think of the company is that we're a billion and a half apart. And then even some of our specialty applications, like heating and cooling ice, you know, a rise of $800 million, which leaves you a couple hundred million of lighting and a hundred million of, you know, other things. So when you think of the portfolio, we're not geared to residential, other than that's where our dealer base is, and that's where our strength and our presence has been generally accepted around our brands.

John L. Stauch: But as a reminder, we do a couple hundred million dollars in industrial wastewater today, and that's on the flow side, and we'll continue to build out that capability and technology to continually take advantage of water reuse projects around the world. So, you know, we believe this business naturally fits, and we're going to demonstrate that we use those membranes that are used for industrial wastewater applications. We're bringing those back into the residential applications, and we think it's going to give us differentiated technology as we do so. So really excited about the cross-pollination of technologies and really excited about how the segments are working together while also maximizing what we think is a revenue opportunity within their individual The next question comes from Steve Tusa with J.P. Morgan. Please go ahead.

Steve Tusa: Hey guys, good morning. Hey, good morning Steve. How's it going? Good. How about you?

John L. Stauch: Grinding it out, just on this productivity number, can you just quantify how much investment you're throwing in there, just roughly? It's not a lot if you think about 10 to 20 million of reinvestment into the areas of sales and marketing. You know, capturing data upstream and bringing that data to help our dealers be successful, and then really just automating the experience between our dealers. Our distributors and us are the two biggest opportunities we have. And then, you know, we've got some excitement around three or four of these innovation projects that we'll talk about further, Steve, at Analyst Day. And I want to continue to invest in them, because I think they could be game changers in the long term. I'm really pleased with the level of transportation we're realizing, and these are good businesses that we want to add a little bit of investment. You should have thrown AI in there. You missed the opportunity.

Steve Tusa: But on that number, so I guess... But you captured it for me, Steve. Now it's in the transcript, so thank you. I guess, though, I thought that the messaging around productivity was more bullish than, you know, I guess a $90 million gross number if I just add back $20 million. Am I missing something there, or is there just a bit of conservatism in the way some of that's coming through? I thought the productivity number you were messaging was higher than that. Yeah, you know, I hate ever using the word conservatism.

Robert P. Fishman: I think we definitely have a funnel that would suggest... realize more, and certainly at the upper end of the range, we would be realizing more so I think right now as we sit here and we don't see any definitive movement in interest rates for the rest of the year. We haven't planned on any of this forecast. We think we're well balanced. This concludes our question and answer session. I would like to turn the conference back over to John Stauch, President and Chief Executive Officer, for any closing remarks. Well, thank you for joining the call today. In closing, I want to reiterate some key themes on slide 27. First, our Balanced Water Portfolio and Transformation Initiatives continue to drive significant margins.

John L. Stauch: . Second, we initiated 2024 guidance with expected growth in sales and profitability, reflecting confidence in our strategy and execution across. Third, our transformation initiatives have gained momentum in 2023, with expectations to drive further margin expansion in 2040. And finally, we believe our focused growth strategy and solid execution are building a solid foundation for long-term growth, profitability, and shareholder value.

Operator: Drew, that does conclude the call. Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. BF-WATCH TV 2021