Q3 2024 Pentair PLC Earnings Call
Speaker Change: i
Speaker Change: Welcome to the Pentair 3rd Quarter 2024 earnings conference call.
Speaker Change: All participants will be in listen only mode. 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 than one on your telephone keypad. To withdraw your question, please press star than two.
Speaker Change: Please limit yourself to two questions, and then you can re-enter the queue. 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, Operator, and welcome to Pentair's third quarter, 2024 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 third quarter performance as outlined in this morning's press release. 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 recognition of differences between gap 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 the financial performance prepared in accordance with GAAP. They are included as additional clarifying items to aid investors in further understanding the company's performance.
Shelly Hubbard: In addition to the impact these items and events have on the financial results.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: We advise listeners to carefully review the risk factors in our most recent form 10Q and form 10K. Following our prepared remarks, we will open up the call for questions. Please limit your questions to two and re-enter the queue, if needed to allow everyone an opportunity to ask questions. As a reminder, you can reference our Pentair Investor overview and investor day presentations on our IR website. Please visit our Pentair Investor Relations website to click and click on events and presentations to find these materials. I will now turn the call over to John .
John Stal: Thank you, Shelly, and good morning, everyone. Let's begin with the executive summary on slide four.
John Stal: We are very pleased with the strong performance of our balanced water portfolio, the success of our transformation initiatives, and solid execution in a dynamic global macroeconomic and geopolitical environment.
John Stal: are resilient strategy across our move, improve, and enjoy water segments with evident and our ability to diversify and mitigate risk as we drive long-term shareholder value.
John Stal: For example, in the third quarter we delivered double-digit adjusted operating income and adjusted EPS growth year of year and triple-digit margin expansion despite slightly lower sales.
John Stal: A just as operating income was up 13% and adjusted EPS was up 16% while our West expanded 310 basis points to 24.1%.
John Stal: Both flow and pool delivered triple-digit margin expansion and pool grew sailed by 7% in Q3.
John Stal: We achieved record-free cash flow so far this year, totaling 629 million. This sets our record post the invention off from Pentair in 2018.
John Stal: We continue to follow a discipline and balance approach to capital locations.
John Stal: and our very proud of our dividend arrest to crack status, marking a 48-year streak of rising dividends.
John Stal: For over 10,000 Pentair employees, I want to thank you for your dedication to deliver for our customers and create value for our shareholders. Your tireless hard work led to another quarter of impressive results. Thank you.
John Stal: I also want to extend my heartfelt sympathies for those affected by the recent hurricanes.
John Stal: I can only imagine how scary and devastating that can be.
John Stal: Moving to guidance, we are raising our full year adjusted EPS guidance to around $4.27. Representing an approximate 14% increase year over year.
John Stal: This is due to our strong performance here today, and confidence in our ongoing ability to operate effectively in the changing environment.
Speaker Change: Bob will provide more details later in the call.
Speaker Change: Let's turn this slide five.
Speaker Change: has noted last quarter when we look at each of our three segments and the verticals within each.
Speaker Change: We have seen areas of great opportunity in some that every main slightly pressure.
Speaker Change: For example, in flow, our commercial vertical reached another new sales record.
Speaker Change: Higher Interest rates in a slow housing market continue to impact a residential vertical, and our industrial vertical has experienced the effects of delayed cat-back spend from customers.
Speaker Change: Within water solutions, our commercial filtration business remains strong, and our Man's Walk Ice Business performed well amidst the normalizing environment in a difficult year-to-year comparison.
Speaker Change: Higher interest rates continue to impact our residential business, and global economic pressures have affected our international business.
Speaker Change: Our first commercial PFAS certified filtration product.
Speaker Change: that was launching Q2 at a solid start. We now have 10 products that meet the new NSF certification standards of 20 parts per trillion.
Speaker Change: Given the increasing focus on water quality and the rising interest in point-use filtration systems, we are enthusiastic about the long-term growth potential of these products.
Speaker Change: Lastly, in Poole, while sales grew year over year for the second consecutive quarter, sustained higher interest rates and a slower housing market continued impact pool demand, predominantly a new and remodel pools. As mentioned last quarter, new in-ground pool builds in 2024 are expected to be near the 60,000 range compared to roughly 17, 2000 in 2023 and 7,8,000 in 2019 for industry data. That said, our aftermarket business continued to perform well in Q3.
Speaker Change: We believe the pool industry is highly appealing with favorable mega trends and unique competitive advantages for Pentair. For instance, with climate change being an important issue, we believe Pentair is in a strong position to meet the growing demand for smart, sustainable products.
Speaker Change: We have led the way by pioneering variable speed pumps that can serve energy and juice costs and we are continuing to innovate with smart, sustainable products.
Speaker Change: and we expect to continue to benefit from a favorable housing migration to the Sunbell State, which represents a large mix of our cool sales.
Speaker Change: Despite the near-term economic challenges that we expect for new and we model fools, remain confident in penters' ability to drive long-term growth and margin expansion.
Speaker Change: In general, we are very pleased with the success and diversification across our move, improve, and enjoy water segments as we believe in enables us to manage risks effectively.
Speaker Change: Let's turn this slide six.
Speaker Change: We made steady progress for their transformation initiatives.
Speaker Change: As mentioned during our March 2020 for investor day, we anticipate that the most substantial productivity savings for us will come from sourcing and operational excellence.
Speaker Change: Today we have successfully completed and integrated a majority of Wave 1 and 2 in sourcing. We are also optimizing a global footprint to better align with our focused and balanced water portfolio.
Speaker Change: We have implemented strategic, value-based pricing across our portfolio, and we have taken action to drive efficiencies across the organization to meet our strategic objectives.
Speaker Change: We've also made progress on 80-20, even though it's still early in the stages.
Speaker Change: Soaring 23, we completed the 80-20 analysis across most of our revenue streams and we trained additional employees, bringing the total to over 1,200.
Speaker Change: We are executing action plans to achieve quick wins such as exiting unprofitable and less profitable revenue quad four while focusing on driving profitable core sales growth in quads one and two. We are greatly motivated by the early insights of 80-20 and the proactive measures our teams are implementing to drive sustainable profitable growth. [inaudible]
Speaker Change: Before I turn it over to Bob, let's turn this slide seven, which highlights our third quarter key takeaways.
Speaker Change: Importantly.
Speaker Change: Transformation continue to drive strong margin expansion, adjusted opportunity and come an earnings growth despite a little benefit from volume growth.
Speaker Change: Early insights into 80-20 are driving further confidence that it can accelerate our transformation initiatives to drive more focused and profitable growth. We increased our full year 2024 adjusted EPS guidance to approximately $4.27, reflecting an approximate 14% increase year of a year driven by solid execution. [inaudible]
Speaker Change: and Strong Year-to-date free cash flow.
Speaker Change: Lastly, we believe we are well positioned to address opportunities from favorable secular trends, which include concerns about access to clean, safe and reliable water, increased awareness of human-made contaminants impacting water composition taste and quality.
Speaker Change: Growing environmental concerns, writing consumers desire to reduce their carbon footprint.
Speaker Change: Haging Commercial Public Municipal Infrastructure.
Speaker Change: Interest in outdoor, healthy living with people gathering at pools for exercise and fun and favorable housing migration in the Sunbell States which represents a large mix of our pool sales.
Speaker Change: Hello and I'll pass the call over to Bob, who will discuss our performance in financial results in more detail. Bob?
Bob Fishmen: Good morning, everyone. Let's start on Slide 8.
Bob Fishmen: We achieved another strong quarter of quality earnings with triple-digit margin expansion and double-digit adjusted income and EPS growth despite lower volume.
Bob Fishmen: Sales out performed her expectations as did margin and adjusted earnings.
Bob Fishmen: In Q3 sales were $993 million down to percent, adjusted operating income increased 13% to $239 million.
Bob Fishmen: Ross expanded 310 basis points to 24.1% driven primarily by transformation.
Bob Fishmen: and Adjusted EPS increased 16% to $1.9.
Bob Fishmen: Core sales were down 1% year over year driven by 8% growth and pool, which was offset by a 7% decline in flow and a 3% decline in water solutions.
Bob Fishmen: In the prior year period, both flow and water solutions were able to ship orders from a larger backlog as a supply chain improved. In 2024, our backlogs returned to more normalized levels.
Speaker Change: Similar to John's earlier comments, our results continue to highlight the power of our balanced water portfolio, the success of our transformation initiatives, and the dedication and hard work of our entire Pentair team globally.
Speaker Change: Please turn to slide nine.
Speaker Change: Blocales declined 7% year over year, compared to a near record quarter last year.
Speaker Change: Residental sales declined 11% as higher interest rates continue to pressure residential and markets.
Speaker Change: Commercial sales rose 3% marking the 9th consecutive quarter of year over year sales growth.
Speaker Change: and Industrial Sales were down 10% driven largely by the late CapEx.
Speaker Change: As we noted last quarter, we were starting to see signs of economic uncertainty causing the delay in projects that we had scheduled for the second half of 2024.
Speaker Change: segment income grew 7% and return on sales expanded 280 basis points to 22.2% marking the first time flows Ross as reached or exceeded 22%.
Speaker Change: The strong margin expansion was a result of continued progress on our transformation initiatives and favorable mix.
Speaker Change: Please turn to slide 10.
Speaker Change: In Q3, water solution sales declined 3% to $290 million, driven by the clients in both commercial and residential.
Speaker Change: We expected our commercial business to be down in 2024 in light of a record prior year which was driven by Manitouac Ice's ability deliver on significant backlog orders and a larger commercial services project rollout.
Speaker Change: Manitwak Ice continued to exceed our expectations by achieving our acquisition business case target two years early in 2023.
Speaker Change: with in-commercial water solutions, filtration sales grew again in Q3.
Speaker Change: segment income to $26% to $64 million.
Speaker Change: and Return On Sales contracted 80 basis points to 22.2% as higher productivity was more than offset by higher inflation and lower value.
Speaker Change: Ross has expanded 820 basis points over the last three years.
Speaker Change: Please turn to slide 11.
Speaker Change: In Q3, pool sales increased 7% to $331 million.
Speaker Change: Segment income was $13 million, up 24% and return on sales increased 470 basis points. The 34% driven by sales growth and transformation.
Speaker Change: Please turn to slide 12.
Speaker Change: We are very pleased with the success of our transformation initiatives.
Speaker Change: We are committed to a goal of 24% return on sales by 2,026 year end, as mentioned that our March 2024 investor day.
Speaker Change: We're off to a fast start after increasing our initial 2024 rock guide of 22% to our current guide of 23%.
Speaker Change: We have achieved $70 million of transformation savings here today.
Speaker Change: on her way to an expected $100 million for the full year.
Speaker Change: These 2,024 savings are part of our aspiration of $260 million of savings by 2,026 year end.
Speaker Change: which in that case would drive a loss of approximately 26%.
Speaker Change: We've turned to slide 13.
Speaker Change: On the left side, the four quadrants illustrate how we are prioritizing our business through the lens of customers and products.
Speaker Change: Those are falling quadrant one, our highest revenue customers and products.
Speaker Change: While those in Quadrant 4 reflect the opportunity to reduce the complexity and cost the serve across our portfolio.
Speaker Change: As we take actions across all four quadrants, we expect 80-20 to accelerate our transformation efforts and drive core sales growth and further margin expansion in the years ahead.
Speaker Change: As John mentioned, we are in the early stages of 80-20 and making good progress.
Speaker Change: Please turn to slide 14.
Speaker Change: In Q3, we deliver strong free cash flow of $234 million, driven by higher net income from continuing operations and significant improvement in working capital.
Speaker Change: Here today we achieved record free cash will of $629 million, post the Invent Separation.
Speaker Change: We also deployed capital through reinvestment to dry future growth, repay variable rate debt, repurchase shares, and pay quarterly dividends.
Speaker Change: Our net debt leverage ratio is now 1.4 times, down from 2.1 times a year ago.
Speaker Change: During the quarter, we repurchased $50 million of shares for a total of $100 million this year. We have an additional $500 million available on our share repurchase program.
Speaker Change: Lastly, our ROIC was over 15%.
Speaker Change: Long-term, we are targeting high teams, ROSA.
Speaker Change: We plan to remain disciplined with our capital and have flexibility to strategically allocate additional capital to areas with the highest shareholder returns.
Speaker Change: Moving to slide 15.
Speaker Change: For the full year we are increasing our adjusted EPS guidance to approximately $4.27 which is up roughly 14% year over year.
Speaker Change: Also, for the full year, we expect sales to be approximately $4 billion, $75 million to $4 billion, $85 million, or roughly flat to down 1% driven by a challenging economy.
Speaker Change: This is unchanged from our previous guidance.
Speaker Change: We expect the just that operating income to increase approximately 11%.
Speaker Change: We continue to drive approximately a hundred million dollars in transformation savings this year.
Speaker Change: For the fourth quarter, we expect sales to be approximately $965 million to $975 million, down approximately 1 to 2%.
Speaker Change: We expect fourth quarter adjusted operating income to increase approximately 13%.
Speaker Change: We're also introducing strong adjusted EPS guidance for the fourth quarter of approximately $1.2, up roughly 17%.
Speaker Change: This guidance reflects continued global macroeconomic challenges and strategic actions to improve our water portfolios, profitability and growth opportunities.
Speaker Change: We're excited about the progress we've made this year on transformation, which has been a significant cultural change for our company.
Speaker Change: We're also very pleased with the early stages of 80-20 and expect a long-term benefits of both transformation and 80-20 to drive long-term shareholder value.
Speaker Change: I'd now like to turn the call over to the operator for Q&A. After which John will have a few closing remarks.
Speaker Change: Operator, please open the line for questions. Thank you.
Speaker Change: 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 one on your telephone keypad. We will begin the question and answer session. In the interest of time, we will begin the question and answer session.
Speaker Change: If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then too. Again, please limit yourself to two questions and then you can re-enter the queue. At this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question comes from Dean Dre with RBC Capital Markets. Please go ahead.
Dean Dre: Thank you. Good morning, everyone. Good morning, Deane. Hey, remember we can start with value-based pricing because this can really be a needle mover for you. Can you give us a sense of how much of this is automated? Can you size the impact? And just to confirm, is this now enterprise-wide the implementation?
Speaker Change: So, thank you for the question, Dean. I think first of all I'd say it is going to be and can be a value mover. But I would say to your second part of that question, we're in the early stages.
Speaker Change: and as a reminder across all these transformation initiatives, it's what prompted me to go back to 80-20, because it's a lot easier to do the value based pricing in Quad-1, and to make sure that you're getting that right on those products that are most desirable to your customers, and they go to your, you know, pretty standard and best customers versus trying to focus your time on Quad-4, 2 and 3, and I think when we started the value based pricing exercise, we were doing it pretty much across all quadrants. [inaudible]
Speaker Change: We have introduced and rolled this out, this playbook to every business. But I think we're farther along in areas like pool and some of the...
Dean Dre: Global Businesses are further behind Dean, so great opportunity in the future for sure.
Speaker Change: Great to hear. And then just can you give some context about there was reference about some delays in CapEx spending by customers were not surprised. Maybe it's related to the election, but can you just tie that together in terms of, you know, demand sentiment, projects getting pushed, etc.? [inaudible]
Speaker Change: Yeah, I mean, this is primarily relates to our flow business and some of the larger projects on, you know, beer membranes and some of our larger beverage customers. And I think that we still feel optimistic that we're going to see those projects come through, but I think the investment profile isn't at the level for our customers that they're comfortable with yet. So I think they're delaying them several quarters. That's really what it really is to deal.
Speaker Change: Great, thank you.
Speaker Change: The next question comes from Andy Kaplowitz with City Group. Please go ahead. Good morning, everyone. Hey, Andy. John , could you talk about what you're seeing in pool after your price increase in early September and how you would assess the channel inventory, had it into 25 in pool. And then obviously you mentioned strong price in pool. Overall, I think in the past you've been a bit concerned regarding prices and inflation, but would you say pricing is holding up well versus inflation at this point?
Speaker Change: Yeah, I'll take the first part all and Bob, chime in here a little as well. I think first of all...
Speaker Change: I think the market and the industry is playing out generally the way we expected it to.
Speaker Change: after we tweaked it slightly after our Q2 earnings.
Speaker Change: You know we're seeing...
Speaker Change: You know, some of the stronger...
Speaker Change: Key states continue to have self-ru and we feel like the inventory is pretty well balanced.
Speaker Change: Um...
Speaker Change: You know, and then I think we're going to see a little bit extra demand coming out of Florida here with the hurricanes.
Speaker Change: and we got to make sure we're ramping up and able to facilitate that as well. On the pricing side, you know, they have, as I mentioned earlier, been further along in the value-based pricing and we also have pretty good mix.
Speaker Change: that we're able to pull the levers on to help optimize the pricing overall, which is really just the overall receipts of the revenue and making sure that our customers and customers customers are buying the higher end solutions. So overall, I think the year's playing out where we wanted it to and we're still very optimistic that next year will be even a better year since we think the overall pool builds are at a lower end and we're going to see a recovery in the market or the aftermarket in the remodeling next year. So we're feeling pretty optimistic about 2025.
Speaker Change: Bob, I don't know if you want to add. Yeah, I just don't, excuse me on price and inflation. I would say we've done a pretty good job of forecasting price and inflation. We had said, you know, roughly two points would read out at the company level. And, you know, that's about what we saw. We saw three points in Q1, one point in Q2, two points in Q3, and then call it, you know, what the two points in Q4. Some of that movement is due to, you know, product mix in the quarter. Some of it is due to the compare versus the previous year, but overall it's been pretty level pricing at that two points. From an inflation perspective, we'd guided to two to three percent of the total cost. And that's roughly how it's playing out as well.
Speaker Change: I know it's early, but can I ask you to follow up on the hurricane impact, like maybe what you've seen in the past. You know, give us some perspective on what it could look like. I assume there's a delayed sort of remodeling impact or something like that that may be impacts next year and any sizing might be helpful.
Speaker Change: First of all, Hurricane is devastating for those involved, so we certainly don't group for weather events, but we're servicing a channel and servicing dealers, and it's all hands on deck to make sure that our customers are being able to serve their customers. So we usually see pumps, which are the main demand product that could be affected, certainly from water damage. And people, if they can, want to get those pools up and running and make sure that they stay clear. So every hurricane is different, there is no playbook and model. Florida is a pretty important pool state for us, and I'm sure we'll see some little bit of demand here that we factored into our guide.
Speaker Change: Appreciate the color.
Speaker Change: The next question comes from Julian Mitchell with Barclays. Please go ahead.
Julian Mitchell: Hi, good morning. Maybe just first off, wanted an update on the productivity savings outlook. I think before you'd guided about 100 million for the year, so maybe 30 million or so left in Q4, you know, just strong run rate entering the new year next year, so maybe help us understand kind of, you know, what sort of productivity we should expect in 25 when you're taking the absolute of 8020 and the base transformation plan, please.
Speaker Change: Yeah, thanks for the question, Julian. Again, we were very pleased with the transformation read out in the third quarter.
Speaker Change: To your point, attracting towards that 100 million of transformation savings this year after doing roughly 70 million last year, which means another 30 million dollars in Q4.
Speaker Change: Overall, back at the March Investor Day, we had talked about driving to an aspirational 26% Ross.
Julian Mitchell: Thanks very much for that color, and maybe just my follow-up would be around the pace of sort of revenue turnaround in water and flow. You know, understanding flow, you've got these project delays and maybe your low visibility on when the project starts to move more freely. And then water, you had the sort of the tough comp in Manate Walk Ice, for example, maybe just help us understand kind of the confidence in either of those seeing a positive sort of sales training. Thank you on you in the next 12 months.
Speaker Change: Yeah, first of all, I think that we're very pleased with the way our commercial revenue streams have held up.
Speaker Change: and you know even though we had some more difficult year over your cops, we're still seeing sequential movement that gives us an encouraging outlook for those businesses.
Speaker Change: We are still 50% exposed across the portfolio to residential, and that's where we've seen, you know, almost six to seven quarters in a row now of year-over-year challenges, and clearly as a company we're rooting for interest rate movements, and hoping that mortgage rates decline, and overall get a little jump start in the residential movement, meaning people are removing houses or people building houses.
Speaker Change: and I always still think that several quarters away, and so we're continuing to work the transformation lovers.
Speaker Change: We are encouraged by the prospects of growth next year.
Speaker Change: and we do see early signs that that will be achievable and is a reminder to add to Bob's transformation, growth will help productivity. So we've been doing a lot of this without the contribution of growth and the transformation. So we can continue these programs and get growth on top. We're pretty encouraged of what we can achieve.
Speaker Change: That's great. Thank you.
Speaker Change: The next question comes from Steve Tusset with JP Morgan. Please go ahead.
Speaker Change: Hi guys, good morning. Morning.
Steve Tusset: Can you just clarify maybe how much of the revenue you know decline in flow and water the non pool stuff was is that is that all market or is that some of this you know 80 20 initiative and then just just on the on the pool pricing. I mean it did accelerate quite a bit here. I think quarter to quarter. What what do you expect for pool pricing heading into the fourth quarter and into next year. Yeah.
Speaker Change: So I'll take the first one, I'll have Bob answer the second one. This is generally what I would say is all market, primarily residential and agriculture.
Speaker Change: Space's Steve. And, you know, we were probably thinking in the second half, we'd see better forms of recovery here, and we just haven't as we adjust in the six plus six, we're not counting on that now. And so, I think they're doing a good job in cost and they're working through this. Obviously, these are easier comparisons as we wrap in the next year. But right now it's pretty much the residential and agriculture markets that are challenged.
Speaker Change: And on pricing for pool to get to the 2% for the total company, pool will be somewhere for the year between two and a half to three percent. And again, they've gone from 4% in Q1 to 1% in Q2 to 4% here in Q3 and then that moderates a little bit in Q4. So that lumpiness, again, attributable to value-based pricing, the mix of the product. Those type of things and the compare versus the prior year. So overall feeling good that you know, two and a half to three percent price reading out for pool this year after such large increases in the previous years.
Speaker Change: Great, thanks a lot. Thank you.
Speaker Change: The next question comes from Brian Blair with OpenHimer. Please go ahead.
Speaker Change: Thank you for joining us.
Speaker Change: Good morning.
Speaker Change: To the level set on transformation, Bobby mentioned the 160 million remaining 80, 80, or they're about in terms of the 2025, 26 outlook. Is it fair to say that you're pacing ahead of the initial plan and perhaps there's as much as you've been referencing the 26% and the 260 contribution toward that as aspirational that. That's, uh...
Speaker Change: You know, you're perhaps going to see, you know, run away above that in terms of transformation savings and, you know, even higher roster getting done.
Speaker Change: You'll certainly, that's our goal, I mean, again, we're looking to return to growth and drive transformation.
Speaker Change: the two 60s that we gave that back at Analyst Day.
Speaker Change: You know, got off to a faster start with guided to 75 at the beginning of the year and are now at 100 million.
Speaker Change: The transformation savings were led by sourcing if you'll remember, you'll wave one and wave two or complete this year, wave three will complete next year and then we'll start that process over again. What I really liked about the third quarter though is we had balance.
Speaker Change: really across sourcing, manufacturing and operational spend below the line. So good balance across those three areas from a transformation perspective.
Speaker Change: The other thing that's really increasing our confidence is 80-20, and that being an enabler to the transformation. While it really is a growth play, we are very focused right now on quad four and reducing a lot of the complexity within quad four. [inaudible]
Speaker Change: There's a number of techniques now that we've rolled out the 80-20 training to over 1200 people in the company.
Speaker Change: There's different techniques that we're using in quad one versus quad four. And again, think of quad four as being our bee customers, our bee products.
Speaker Change: Roughly 4% of our revenue.
Speaker Change: and we're looking at things they're like reducing the number of skews.
Speaker Change: being able to price, providing a standard size, minimum order quantities, extending lead times.
Speaker Change: Offering Fewer but Standard Options.
Speaker Change: So those are the techniques that the teams are using there. Again, our goal is to treat all of our customers fairly but differently.
Speaker Change: So there is an opportunity to reduce the complexity and quad for as a reminder the cost to serve.
Speaker Change: In Quad 4, somewhere between 15 to 25% of our overall costs. And so that creates an opportunity as well. And we have lots of really great examples so far, now that we've rolled it out to the team. We've freed up capacity in a number of our manufacturing sites. We've reduced the resources to support. We've reallocated dollars from Quad 4 to improve the customer experience in Quad 1. So it's really starting to take traction and improve our overall transformation story. And again, once we eliminate that complexity in Quad 4,
Speaker Change: We can start to spend more time on improving the customer experience which we've already started in the first quadrant. And so again, think about 65% of our revenue sitting in that quad one where we have the opportunity to improve product availability, lead times on time delivery, provide better service to our channel, other through automation, to training, insight into their businesses, product information. So again, it's a major cultural change as we embark on on 80-20 and we think that's going to be a huge accelerator for the transformation plan.
Speaker Change: Paul McSense, and Trenzer, are very encouraging. Given the operational cadence that you now have, if we do have a stronger growth environment in 2025, you're obviously well positioned to lever that. In addition, you're balance sheets now in pretty good shape. I can't imagine it being any pushback there. How is your deal pipeline looking at this point? And is your team focused on capital development over the near term to hopefully further lever a stronger demand environment don't for it?
Speaker Change: Always looking, you know, right now I think we are very mindful of, you know, making sure that anything we look at have to drive returns and...
Speaker Change: I would say the pipeline is a trickle, it isn't gushing and so we're mindful of how precious our capital is and we're putting it to the best use possible given all the global and economic environment that we're working with in.
Speaker Change: And to answer your question, we are very pleased with the leverage within the company when we...
Speaker Change: You're closed on the minutes to walk the hill back in.
Speaker Change: Yo, July of 2022, we have levered up to 2.7, 2.8 times. A year ago, we were at 2.1 and now we're at 1.4 times.
Speaker Change: So, really, as a testament to the eBada that we've driven, the eBada will be over a billion dollars this year and driving that fast free cash flow to repay the debt.
Speaker Change: and overall improve our leverage multiple. The balance that we had in 2-3 from a capital perspective was...
Speaker Change: was very strong. We were able to continue to invest in growth. We paid down some of the debt, continued with the share repurchase, and obviously continued with that dividend strike.
Speaker Change: Well, thanks again.
Speaker Change: Thank you.
Speaker Change: The next question comes from Siri Borditsky with Jeffries, please go ahead.
Speaker Change: Good morning, this is James O'n for Sarah. Thanks for taking questions.
Speaker Change: I wanted to kind of go back on 80-20, so I know that it's still in the early stage, but you do it and I'll see if I'm most of the revenue stream here. So can you kind of provide more color on when you expect to realize the benefit from 80-20 and what percentage of revenue do you expect to discontinue due to on profitable nature of products?
Speaker Change: Yeah, it's Bob said, I mean, you know, if you look across the portfolio, what mathematically
Speaker Change: and a normalized environment would be in what we call a clock four or would be roughly 4% of the company.
Speaker Change: It's very improbable and unlikely that you could get out of all of that revenue.
Speaker Change: in any 12-month period of time.
Speaker Change: You have contracts, your obligations, you have...
Speaker Change: You know, it's certain requirements of how you serve distributors and where those dealers can buy. So, you know, this would be in a best case scenario from an exiting standpoint, probably half of that would be the...
Speaker Change: Opportunity, and then mostly over 12-18 months.
Speaker Change: You know, period you'd expect to recover most of that lost volume that would be transferred into the A customer streams. So overall, 80-20 should not be a revenue reduction. What it should allow you to do is prioritize your resources and efforts as Bob said.
Speaker Change: to taking care of your best customers around your top products.
Speaker Change: and really allow you to free up resources to drive innovation and drive higher along to Morgana Gross.
Speaker Change: You know, I think we're, we're really...
Speaker Change: got a good paid, right? So the way we expect to get paid is by reducing that complexity in quad four, and ultimately then being able to reinvest in the future growth of the company. So I think in a 12-month period, the amount of revenue lost is nominal.
Speaker Change: But it is a transfer and you should see it in the margin and the transformation pipe from the efforts that we're driving through 2020.
Speaker Change: Got it, thanks for the color and I'll follow up on the pull business here. So can you discuss more on the like demand used so from the pre-buy and when you kind of expect to shift those orders?
Speaker Change: Yeah, we take the, you know, we put in our price increases, generally as a reminder, first of all, the purpose of early buy is to balance our factories and not whip saw, our labor teams and have to hire a bunch of people and then let them go. So we work with the channel to make sure that we can have, you know, minimal shipment requirements in Q4 and Q1 that allow us to keep our talented workforce.
Speaker Change: So with that in mind, we put in prices in Q3, we announce what those price increases will be on the new product and then our channel places early buy orders at the old prices and then they get terms that allow them to pay us later for that business. Think about it in a normal setting as roughly a quarter's worth of revenue that we generally ship in Q4 and Q1.
Speaker Change: And then through those orders we still take standard orders for the states that are still open and, you know, product that's still needed and that's what level loads the Q4 and Q1 revenue streams.
Speaker Change: Got it, thanks for taking questions.
Speaker Change: The next question comes from Jeff Hammond with Keybank Capital Marketing. Please go ahead.
Jeff Hammond: Hey, just to maybe go back to the 80-20, you mentioned this 15 to 25% cost on the 4% of sales. I'm just wondering, you know, as you kind of go through that assessment, maybe cut half of those sales, you know, what do you do with that 15 to 25% of cost? And is there a cost savings number over and above the 260 to think about with 80-20?
Speaker Change: So first of all, I don't think it's all addressable because you have like overhead depreciation, you know, factory costs insurance that, you know, obviously is more fixed, but think about I think there's at least a 10% cost opportunity in quad four related to the
Speaker Change: The Effort.
Speaker Change: Even compliance and sustainability efforts in addition to shipping, packaging.
Speaker Change: All kinds of different workstreams that aren't as efficient for the B products going to be customers that we're expecting to reduce and so what do we expect to do with the cost is get rid of them.
Speaker Change: And that is the goal, Jeff, and that will show up in the transformation savings and his Bob has mentioned.
Speaker Change: We did not have 80, 20 expectations in their original transformation guides.
Jeff Hammond: Right, and so at some point in time as we know what these are valued at, we'll have to update our long-term productivity guidance and targets to reflect what we think the 80-20 benefits would be.
Jeff Hammond: As a reminder, we're doing things in waves just like we did in transformation, so we've addressed about 50% of the revenue from an action orientation this year. We expect that to read out next year, and then we've finally trained everybody in 80-20, and we'd probably expect that to be the second half of next year. [inaudible]
Speaker Change: Okay, and then just, you know, a couple of quick ones, I'll pull one back to the early buy, just how should we think about the balance of early buy timing between 4Q and 1st half 25, I know.
Speaker Change: You know, you were pretty balanced last year and then just any green shoots.
Speaker Change: A new or remodel as we start to see.
Speaker Change: You know, I at least some rate cuts I know, you know, the mortgage rates have been slower to move, but just any green chute sex. Yeah, yeah, finding first of all, I would define this early by as completely normal.
Speaker Change: I think we're back to a more normalized view of it, and so I think growth next year will be more reliant on what happens with new pool builds, and also what happens with the modeling and aftermarket. We don't know those predictions and forecast yet. We run monthly dealer voice of customer, and we do dealer in channel checks to make sure that we understand what the thinking is so that we can be prepared from supply chain. To address that, and we'll be in a position to share that when we do the guide for next year and the Q4 earnings announcement. It's too premature to call that yet.
Speaker Change: Okay, thanks guys. Thank you. The next question. Mr. Manchrew Krill with Deutsche Bank. Please go ahead.
Speaker Change: Hey, thanks more than everyone. So I'm going to get some help on the implied margins for four to you this year. I'm getting around 23% down about a hundred dips sequentially. Can you walk us through, I guess, kind of the moving pieces on why you're expecting margins to be down sequentially? I think normally they're a bit more flatish or rubber program. Thanks.
Speaker Change: Well, first of all, you're directly close, so I think that would be appropriate.
Speaker Change: View, we tend to see a drop on the moon.
Speaker Change: and Q3 to Q4 historically, and traditionally, Q2 and Q3 are our P-Corders, that's when we're fully utilizing our factories and our teams.
Speaker Change: Applying to revenue off the full cost base. So typically we take a little drop-down from Q4 or Q3, Q4.
Speaker Change: In Revenue, and that's generally why the margins become a little softer. A couple of minutes of holidays, and also the way that the schedules work by the way we work with a dealer and a distribution channel that tends to ease off on its purchases towards the end of the year through the holiday season, and a lot of their customers don't want people servicing their houses during those holiday periods.
Speaker Change: And from a year on year perspective, we do expect the Ross to be up significantly in the fourth quarter similar to how it was in the third quarter. Good news in Q4 is we're going to see better balance across all three segments of flow water solutions and pool health contributing to that Ross expansion story.
Speaker Change: Great, great, helpful. And then go back to the transformation savings and the final, you know, 30 million or so, you're spending for four to you. Any health by segment, you know, which could benefit more or less, or should we think about them being pretty, you know, even they spread among the three. Thank you.
Speaker Change: Yeah, from our perspective, because the Rosal, you know, increase for all three segments, you can expect transformation really benefiting all three of those segments in the fourth quarter.
Speaker Change: Thank you.
Speaker Change: The next question comes from Nathan Jones with C-4, please go ahead.
Nathan Jones: Good morning, everyone. Hey, David.
Nathan Jones: I guess I'm going to ask a bit more of a philosophical question about interest rate cuts. You've got a few businesses that you called out as negatively impacted, you know, residential flow, new pool construction, that kind of stuff. Can you talk about, you know, typically what kind of lag you see to interest rate cuts before it begins to start impacting those businesses? [inaudible]
Speaker Change: Yeah, I think it's six to nine months to see meaningful impact on Nathan. Obviously, just the feeling that they're going to continue to head down would start the encouragement of people being able to think that they could go out, for instance, get a variable rate mortgage, maybe refinance later. But you know, we're not yet seeing, you know, the credit markets reflect the lower rates and you...
Speaker Change: You probably saw that even mortgage rates ticked up and borrowing rates did not necessarily go down. So I think while we're encouraged by a single larger movement, we're still going to need a few more before we've got a bunch of consumers and customers that are confident that the borrowing rates are going to be lower in the future.
Speaker Change: Kim Ruby starts the impact second half next year and into the first half of the year.
Speaker Change: Probably a good assumption. Same that up as we finish Q4 and have better understanding, but that would be a reasonable way to look at it.
Speaker Change: There's a couple of the pillars on your transnational initiatives that we haven't talked to too much today around operational excellence, organizational effectiveness. These give us an update on the initiatives there and the expected impacts you're looking for. Thank you very much for your time.
Speaker Change: Yeah, I need a two big work streams. I mean, the organizational excellence is one that we're really working as more of an offset, right? We want to drive.
Speaker Change: Some of the non-productive activities out of the organization and reinvest in innovation and sales and marketing and certainly supporting our customers more effectively. So we haven't talked a lot about being a significant positive to the P&L but it's important because it'll free up resources to invest. On the operational footprint we've made great progress but growth will help a lot and we need to get leverage across the factory footprint. We'll see you in the next video.
Speaker Change: And then while we've over-driven a lot of the activities, we've seen some headwinds, as I'm sure most companies have, from insurance, utilities, property taxes, those types of things that actually negatively impact the operational piece of the PNL. So while we probably haven't highlighted enough, we're making great progress there, and we're just trying to get ahead of some of those inflationary elements that have hit the manufacturing side harder than they probably hit across the overall PNL. We're just trying to get ahead of some of those inflationary elements that have hit the manufacturing side harder than they probably hit across the overall PNL.
Speaker Change: Thanks very much for taking my questions.
Speaker Change: The next question comes from Mike Halorin with Beard, please go ahead.
Mike Halorin: Hey, morning, everyone. Two quick ones here. One on the commercial side on the water solutions, just any variance between the ever pure and man-eye businesses and then.
Mike Halorin: and maybe just talk a little bit to how Cross-Selling's going on that side of things.
Speaker Change: Yeah, again, from our perspective, please with how...
Speaker Change: Commercial Filteration, is performing this year.
Speaker Change: for Manatuake, I just as a reminder, you know, this year.
Speaker Change: We had guided down, roughly, midfingled digits.
Speaker Change: after their record, you know, 4.45 years last year, we do expect them to return to growth.
Speaker Change: Next year, over all those businesses from a Ross Perspective continued to perform.
Speaker Change: Very well. So please with commercial filtration and men it's a lot, guys.
Speaker Change: Overall, you know, for the Ford Foli-O.
Speaker Change: Under a little bit of pressure in the third quarter of water solutions in total, that has to do with the compare we faced last year, but also with, you know, some of the selling efforts within commercial filtration where we lead with the system and then benefit from the recurring revenue down the road. So overall, you know, you make an investment today in the systems and then drive that recurring revenue stream. So a few things that play there, but generally, please with the performance and commercial water for the quarter and for the year. And then to your question on cross synergies, I couldn't be more pleased and that's what you're seeing a lot of the filtration.
Speaker Change: You know, revenue this year is the synergies we talked about in the man to walk outside. It was man to walk pulling over here. It wasn't really going to come the other way around. So, you know, when we look at that deal model, we're ahead of our expectations and expect, um, 2025 to be on or above those expectations. So, really feel good about the performance of this business and the synergies that we committed to.
Speaker Change: Thanks for that, and then following up on a question earlier on the capital, you should decide things. Certainly understand the M&A piece in light of that. What's the equation from your perspective on how to approach feedback from here? You're doing something consistent at the picture today. What would it take in your mind to be in a little bit more, and maybe walk through that process?
Speaker Change: Hey, you know, I think Bob and our most pleased that we're starting to really generate cash at the levels that we expected to. As a reminder, we still have a lot of transformation.
Speaker Change: Headwinds, and restructuring that...
Speaker Change: We still see as an opportunity in 25 and 26 as we ramp that down and...
Speaker Change: and that's going to give us more confidence in our ability to continue to pay off the debt and have a lot more flexibility.
Speaker Change: as far as what we want to go accomplish.
Speaker Change: Billion Dollar Ziba Da, we always want to have a little acquisition powder for the strategic acquisitions.
Speaker Change: We are a collection of acquisitions, some of those completely strategic to what we want to be as a company and some that weren't. And so I think what we want to do is when we look at the acquisitions in the pipeline, we want to make sure that they're synergistic to things that we do today, and we want to make sure that we're giving our customers more product that they want to buy from us, so we're being really disciplined in what we're looking at. We want to make sure it has the type of returns that our shareholders expect. So the meantime, we're continuing to buy back shares and pay down the debt. That's where the focus has been.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: The next question comes from Joe Giordano with TD Cowan, please go ahead.
Joe Giordano: Nice, guys. It's been more important. I joke. You've highlighted in the slide some of the P-Files products that you guys have developed. And I'm just curious, like, what's been the early uptake there, like, who's buying? Has it been more like industrial customers, municipalities? Maybe if you can scale the opportunity there.
Speaker Change: Yeah, it's so first of all, I mean it's, you know, on a percentage basis, immensely.
Speaker Change: Huge growth, but we're still in the early stages of revenue there, so let's say North of a million, but I think we're most encouraged that we have.
Speaker Change: Several sets of customers that are extremely interested. First of all, our distributors and dealers are excited and enthusiastic that they're working with a partner like Pentea who's...
Speaker Change: who's put a product line out there that can solve their needs and it gives them something new to talk to their customers about. But most of the uptake has predominantly been in the commercial and hospitality areas where they really, really care about the quality of the water that they are servicing and giving to their customers. But we have seen a little bit of encouragement in people up paying in the residential markets as well. So overall, enthused about the start and we're hopeful that it's really just wakening people's mindset to water quality and starting to spur a conversation of paying a little bit more for a little bit, a lot more value and feeling confident in the water that they're drinking.
Speaker Change: And then just last from me, you mentioned the delays on the industrial side and in CapEx projects. And you mentioned it could be several quarters. I guess when we talked to other industrial companies, no one's talking about cancellations, but everyone's talking about significant pushouts, and I guess like one does one become the other.
Speaker Change: Yeah, I think when it goes several more quarters, I think you should think about it leaving the funnel and not, you know, being in the funnel. I always look at front log, which is, you know, the types of things and product projects that we're quoting. Usually that's not a good indication because engineers always stay busy in the project front log side. Back logs meaningful. And, you know, what you'd expect is that you're starting to grow that backlog because people are still placing those projects and then they're timing them maybe. This isn't that meaningful for us. It's just more of our relative comment that there's a piece of our business that could have been double digit growth that's now coming back to flatish growth.
Speaker Change: Thank you.
Speaker Change: The next question comes from Brett Lindsay with Missuho. Please go ahead.
Speaker Change: Hey guys, good morning, this is Peter Kossson from Bretton, Zeeb, so just one more in the 80-20. After you guys went through all the revenue streams and products lines, how are you thinking about the opportunity by segment? Thanks.
Speaker Change: You know, it's Bob mentioned.
Speaker Change: Yes.
Speaker Change: We always have a favorite segment of the moment, but the opportunity is equal across all three segments.
Speaker Change: It is really a combination of
Speaker Change: Long Jabbidy, Global P&Ls
Speaker Change: our desire to chase the chase and seize over time.
Speaker Change: to sign up customers who we thought would be bigger than the art today.
Speaker Change: and those opportunities equal across all three segments and...
Speaker Change: We're working through the playbooks and we're very confident that all three of our segments are going to get an equal participation in 2020.
Speaker Change: You'll some will be more margin.
Speaker Change: and I think that will slide to flow into water solutions, especially on the residential end, and others will be a growth capability which would be pool and probably areas like man and to walk it ever pure, but all of the businesses have an equal opportunity.
Speaker Change: Johnson, thank you guys.
Speaker Change #100: The next question comes from Scott Graham with C.Port Research. Please go ahead.
Speaker Change #101: K.I.M. Good morning, thanks for taking the question.
Speaker Change #102: So, implied from your third quarter guidance there was a, you know, a fourth quarter implication that it looks like you're a new fourth quarter guidance a little bit lower than on the sales side and I was wondering if that's because of both the pre-buy and the industrial project push-outs so again the implied slower sales are those the reasons for the fourth quarter
Speaker Change #103: Our guide remains the same. I will acknowledge that consensus might have been slightly higher but our guide that we put out in this forecast is equal to what we had in the last forecast. Scott, I think we're managing through the growth and transmission opportunities we have and I think the way that the year is playing out is consistent with the way we saw it last quarter.
Speaker Change #104: Okay, I'll check that map with Shelly on my phone, I have no problem.
Speaker Change #105: for Poole. So the full-year guide of sort of mid-single would imply, you know, a slightly down fourth quarter and what I'm wondering is...
Speaker Change #105: E.F.
Speaker Change #106: This year's pre-buy is largely equal to last year's pre-buy in terms of the mechanics who took it and the level loading into the fourth quarter. Why would fourth quarter sales and pool be implied down? I don't know.
Speaker Change #107: You know, within our guide for the fourth quarter, we actually have pools slightly up and flow and water solutions slightly down to get to our overall guidance for the quarter. So pool is up in the fourth quarter.
Speaker Change #108: Okay. I guess thank you. The last question there is, so both the word assumptions and flow had a productivity which if you...
Speaker Change #108: Thank you for joining us in closing I wanted to reiterate our key themes first solid execution across our balanced water portfolio drove significant margin expansion for the 10th consecutive quarter second we are increasing our 2024 adjusted EPS guidance, which reflects continued confidence in our strategy and our ability to mitigate risk where we can in Maine.
Speaker Change #108: Chain agility in a dynamic environment third we expect our transformation initiatives and our 80 20 to continue to drive strong margin expansion and adjusted EPS growth and finally, we believe our focused water strategy and solid execution are building a foundation to continue to deliver value creation beyond 2020 for fiscal year. Thank you everyone.
Speaker Change #108: Have a great day.
Speaker Change #110: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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