Q4 2024 Pentair PLC Earnings Call
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Speaker Change: Good morning, everyone, and welcome to the Pentair fourth quarter 2024 earnings conference call.
Speaker Change: All participants will be in a listen-only mode. If you need assistance, please say no to a conference specialist by pressing the star key followed by zero.
Speaker Change: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your telephone keypad. To withdraw your question, you may press star and two.
Please also note, today's event is being recorded.
Speaker Change: At this time, I'd like to turn the floor over to Shelly Hubbard, Vice President, Investor Relations. Please go ahead.
Shelly Hubbard: Thank you, Jamie, and welcome to Pentare's fourth quarter 2024 earnings conference call.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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 10-Q and Form 10-K. Please note that during today's presentation, we will be making references to record financial results. These references reflect the time period post the invent separation in 2018.
Speaker Change: 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 participate.
Speaker Change: As a reminder, you can reference our 2024 Investor Day presentation on our IR website. Please visit our Pentair Investor Relations website and click on events and presentations to find these materials.
I will now turn the call over to John.
John Stauch: Thank you Shelly and good morning everyone. It has been a crazy last 96 hours and we are excited to finally share our 2024 results and 2025 guidance with you.
John Stauch: Our guidance as shared today includes the recently announced China tariffs, and we believe we have captured the risk of the potential Canada and Mexico tariffs within our 2025 EPS guidance range.
John Stauch: Bob will provide more detailed information within his remarks regarding this dynamic situation.
John Stauch: 2024 is another transformative year for Pentair, and we are very pleased with the strong performance of our balanced water portfolio.
John Stauch: We were excited to share our vision in March at our Investor Day, and we exceeded our financial goals driven by transformation in executing our strategy, as evidenced by record profitability and cash flow in 2024.
John Stauch: We continue to demonstrate resilience across our move, improve, and enjoy water segments as we diversified and mitigated risk amidst a dynamic macroeconomic and geopolitical environment.
John Stauch: Within FLOW, we continue to grow our commercial business and launch cutting-edge innovation with our eccentric impeller, while evolving our go-to-market strategy and industrial solutions to drive profitability.
John Stauch: In water solutions, our commercial filtration business posted strong sales, and we launched our first commercial PFAS certified filtration product, which continued to gain momentum.
John Stauch: And, in pool, the aftermarket drove strong sales growth despite weakness in new and remodeled pools, which were impacted by higher interest rates.
John Stauch: We also focused on new product development with new launches planned for 2025.
John Stauch: Overall, we finished 2024 in a stronger financial and operational position than we started the year. I'm very proud of our entire team at Pentair who continue to deliver for our customers while creating value for our shareholders.
Let's turn to the Q4 Executive Summary on slide 4.
John Stauch: We posted record Q4 adjusted operating income in ROS, marking the 11th consecutive quarter of year-over-year ROS expansion.
John Stauch: We also delivered triple-digit margin expansion across our flow, water solutions, and pool segments, which led to record ROS for all three segments, driven by our transformation initiatives.
John Stauch: In the fourth quarter, sales are down 1%, but better than expected from the beginning of the quarter, even with FX headwinds.
John Stauch: Adjusted operating income increased 17% to a Q4 record of $231 million.
John Stauch: ROS expanded by 370 basis points to a fourth quarter record of 23.8% and adjusted EPS was $1.08, up 24%, another Q4 adjusted EPS record.
John Stauch: Let's move to the full year executive summary on slide five.
John Stauch: 2024 was another record year for Adjusted Operating Income, ROS, and Adjusted EPS, despite sales ending down 1%. Our team was very successful at mitigating top-line risk amidst macroeconomic weakness globally.
In full year 24, we delivered sales of $4.1 billion.
Record Adjusted Operating Income of $959 million, up 12%.
John Stauch: Record ROS of 23.5%, expanding 270 basis points, and record adjusted EPS of $4.33, up 15%.
John Stauch: From solid execution across our flow, water solutions, and pool segments, which drove triple-digit margin expansion through transformation and early 80-20 progress,
We are now increasing our 2026 ROS target to 26%.
John Stauch: Bob will provide more details in a moment on why we have increased our confidence in achieving a higher ROS target by 2026.
Speaker Change: In 2024, we generated record-free cash flow of $693 million and increased our dividend by approximately 9%, with 2025 marking the 49th consecutive year of dividend increases.
Speaker Change: Lastly, we are introducing 2025 AdjustEDPS guidance of $4.65 to $4.80, up 9% at the midpoint. We expect that transformation in 8020 can deliver our targeted margin expansion in 2025 and beyond.
Let's turn to slide 6.
Speaker Change: Over the last five years, we have increased sales by over 6.5% compounded annually, while expanding margins 600 basis points.
Speaker Change: All three of our segments have produced strong sales growth and significant margin expansion since 2019.
Speaker Change: We continue to expect great opportunity ahead to drive long-term sales growth across flow, water solutions, and pool to organic growth and potential tuck-in or bolt-on acquisitions.
Speaker Change: We are helping the world sustainably move, improve, and enjoy water, life's most essential resource, through our three segments, each with over $1 billion in sales in 2024, and together creating a balanced and resilient water portfolio.
Speaker Change: We are pleased with the ROS achievements of each segment. We believe transformation in 8020 will continue to drive higher profitability going forward.
Let's turn to slide 8.
Speaker Change: All four of our transformation pillars, which include pricing excellence, sourcing excellence, operational excellence, and organizational effectiveness, contributed to these productivity savings.
Speaker Change: As we continue to focus on reducing complexity, streamlining our operations, and optimizing our organization for future growth, we expect to deliver $80 million net of investments in productivity savings in 2025, driven by transformation and accelerated through 8020.
Speaker Change: In early 2024, we began to implement 8020 across our three segments with staggered implementation plans.
Speaker Change: I'm happy to share that our segments have moved beyond the stages of analysis, assessment, and are all developing action plans to implement these efforts into our operations.
Speaker Change: By year end, all segments have begun their Quad 4 exits while simultaneously improving our service and operations to better serve our Quad 1 customers.
Let's turn to slide 9.
Speaker Change: Before I hand the call over to Bob, I wanted to reiterate some key takeaways.
Speaker Change: 2024 demonstrated another year of record-adjusting operating income, ROS, and adjusted EPS, driven by transformation and continued execution across all segments.
Speaker Change: We drove record free cash flow and we took a balanced approach to capital deployment through organic growth investments, dividends, share repurchases and a small tuck-in acquisition and pool.
Speaker Change: We expect 80-20 to accelerate our transformation initiatives to drive focused, profitable growth in 2025 and we are introducing full year 2025 guidance reflecting growth and adjusted EPS of approximately 9% at the midpoint.
Speaker Change: Lastly, we continue to believe that we are well positioned to address opportunities from favorable secular trends, which include concerns about access to clean and reliable water, increased awareness of human-made contaminants impacting water quality,
Aging Commercial, Public and Municipal Infrastructure
Speaker Change: interest in outdoor healthy living with people gathering at pools for exercise and fun, and favorable housing migration to the Sunbelt states which represents a large mix of our pool sales.
Speaker Change: I will now pass the call over to Bob who will discuss our performance and financial results in more detail. Bob? Thank you, John. And good morning, everyone. Let's start on slide 10 titled Q4 2024 Pentair Performance. Let's start on slide 10 titled Q4 2024 Pentair Performance.
Speaker Change: I will also be discussing our full year performance on slide 11.
Speaker Change: We delivered another strong quarter of margin expansion and adjusted EPS growth, despite sales being down slightly.
Speaker Change: These results were driven by pool sales growth and triple-digit margin expansion across each of our flow, water solutions, and pool segments.
Speaker Change: Sales for Q4 were down 1%, which was slightly better than we guided, driven by higher than expected pool sales, which nearly offset an expected decline in flow and water solution sales.
Speaker Change: Fourth quarter adjusted operating income increased 17% to $231 million and return on sales expanded 370 basis points year-over-year to 23.8%.
This improvement was driven primarily by our transformation initiatives.
Speaker Change: Adjusted EPS of $1.08 was up 24% versus the prior year.
Speaker Change: For the full year, sales were down 1% at $4.1 billion, with core sales flat, driven by growth in pool, which offset lower flow and water solution sales.
Speaker Change: Our residential businesses continue to be impacted by higher interest rates.
Speaker Change: Adjusted operating income grew 12% and return on sales expanded 270 basis points to a record 23.5%.
Speaker Change: All three segments significantly expanded margins and set new annual ROS records.
Speaker Change: Adjusted EPS increased to a record $4.33, up 15% versus the prior year.
Please turn to slide 12, labeled Q4 2024 Flow Performance.
Speaker Change: In addition to the fourth quarter performance for flow, I will also be referencing the full year performance on slide 13.
In Q4, flow sales were down 5% to $361 million.
Speaker Change: Commercial sales were up 7% reaching a new annual sales record.
Speaker Change: Residential sales were down due to higher interest rates and industrial solution sales were impacted by delayed CapEx spend.
Speaker Change: At this time, we do expect certain delayed industrial projects to begin in 2025.
Speaker Change: Reportable segment income was up 13% and return on sales increased 320 basis points to 20.4% driven by transformation.
For the year, flow sales decreased 4% to $1.5 billion.
Speaker Change: as a decline in residential and industrial solution sales more than offset an increase of 5% in commercial.
Speaker Change: Residential sales decline and flow remain consistent each quarter in 2024 which we believe suggests stabilization within end markets impacted by higher interest rates.
Speaker Change: Full-year reportable segment income grew 13% and return on sales increased 320 basis points to 21%, a record margin for flow driven by transformation.
Speaker Change: Please turn to slide 14, labeled Q4 2024 Water Solutions Performance.
Speaker Change: In addition to the fourth quarter performance for water solutions, I will also be referencing the full year performance on slide 15.
In Q4, water solution sales decreased 4% to $258 million.
Speaker Change: Commercial sales were down 5%, reflecting a decline in commercial ice, which more than offset sales growth in commercial filtration.
Speaker Change: Manitowoc Ice performed as expected, with sales down mid-single digits in 2024, following two consecutive years of 20% growth each.
Speaker Change: reportable segment income grew 21% to 62 million dollars and return on sales expanded 500 basis points to 24.1% a new quarterly record driven primarily by productivity from our transformation initiatives.
For the year, water solution sales decreased 4%.
Reportable segment income grew 3%.
Speaker Change: and return on sales increased 160 basis points to 22.6%, a new full year record.
Please turn to slide 16, labeled Q4 2024 Pool Performance.
Speaker Change: In addition to the fourth quarter performance for pool, I'll also be referencing the full year performance on slide 17.
Speaker Change: In Q4, pool sales grew 5% to $354 million, driven by both price and volume.
Speaker Change: reportable segment income increased 14% and return on sales increased 250 basis points to 33.8 percent.
Speaker Change: Demand increased more than expected, partially driven by the impact from the Florida hurricanes in late September and early October.
Speaker Change: For the year, pool sales grew 7%, driven by price and volume.
Speaker Change: reportable segment income increased 14% and return on sales increased 220 basis points to 33.2% a new annual record driven by growth and transformation.
Please turn to slide 18, labeled Transformation Initiatives and 8020.
Speaker Change: At our 2024 Investor Day, we provided a ROS target of 24% by full year 2026, while providing a path to 26%.
Speaker Change: even though we do expect slightly lower sales by 2026 than we outlined that investor day due to continued higher interest rates and a deferred residential recovery.
Speaker Change: If interest rates and residential markets improve, we expect to further benefit from our transformation initiatives at these higher productivity levels across all three segments.
Speaker Change: We expect full year 25 ROS to be approximately 24.5 to 25%.
Speaker Change: I'll provide more detail on our full year 25 guidance in a moment.
Speaker Change: Please turn to slide 19, labeled Balance Sheet and Cash Flow.
Speaker Change: We close 2024 in a very strong financial position with strong free cash flow and cash flow margin, a load leverage ratio, and a higher return on invested capital.
Speaker Change: In 2024, our free cash flow was $693 million, up nearly 26% year-over-year. Our cash flow margin was 17%, which reflects the capital light model.
Our ROIC was 15.5%, up from 14.3% in 2023.
Speaker Change: With a focus on being good stewards of capital, we continue to target high teens ROIC longer term.
Speaker Change: In 2024, we repurchased 1.6 million shares for a total of $150 million.
We have $450 million available under the current authorization.
We also increased our dividend approximately 9% for 2025.
Speaker Change: This marks the 49th consecutive year of a dividend increase and reaffirms our dividend aristocrat status.
Speaker Change: We believe our strong free cash flow allows us ample opportunity and flexibility to invest in organic growth, make tuck-in or bolt-on acquisitions, repurchase shares, and pay a dividend.
Speaker Change: We plan for these actions to be guided by our high teens ROIC target.
Speaker Change: Moving to slide 20, titled Q1 and Full Year 2025, Pentair Outlook and Expectations.
We also provide more detailed guidance on slide 21.
Speaker Change: For the full year, we are introducing our adjusted EPS guidance range of approximately $4.65 to $4.80, which represents a year-over-year increase of 7% to 11%.
Speaker Change: We expect total Pentair sales in fiscal 2025 to be approximately flat to up 2%, including FX headwinds.
We expect flow sales to be up slightly.
Speaker Change: Water solution sales are expected to be down approximately low single digits to flat.
Speaker Change: pool sales are expected to increase approximately 4% to 5% in full year 25.
Speaker Change: We expect total Pentair adjusted operating income to increase approximately 6% to 9% with Ross expansion of roughly 125 basis points at the midpoint to approximately 24.5 to 25%.
Speaker Change: Also, for the full year, we expect corporate expense of approximately $85 million.
Speaker Change: net interest expense of roughly $80 million with a weighted average interest rate of slightly over 5%.
Speaker Change: an adjusted tax rate of approximately 17% up slightly from 16.5% in 2024 and a share count of approximately $166.5 million.
Speaker Change: For the first quarter we expect sales to be down approximately 3% to 4% to between 975 million dollars to 985 million dollars.
Speaker Change: We expect pool sales to grow approximately 3% to 4%, water solution sales to be down approximately high single digits, and flow sales to be down approximately mid-single digits.
Speaker Change: As a reminder, in Q1 2024, Water Solutions was shipping ice backlogs and current orders. By Q2 2024, Water Solutions had entered a more normalized operating environment.
Speaker Change: In flow, higher interest rates, FX, and delayed CapEx are expected to impact sales in Q1 2025 for residential and industrial solutions.
Speaker Change: 80-20 actions are expected to impact both water solutions and flow in Q1. These 80-20 actions are expected to improve profitability as the year progresses.
Speaker Change: We expect quarterly sales to increase year-over-year, beginning in Q2, with the growth rate improving in Q3 and Q4. We also expect normal seasonality in sales in 2025, whereby Q2 is typically our highest sales quarter, followed by Q3 and then Q4.
Speaker Change: We expect first quarter adjusted operating income to be up 3% to 5% due to lower sales and higher ROS.
Speaker Change: Similar to sales, we expect Ross to follow a normal seasonality pattern, with the highest rate in Q2, followed by Q3, then Q4.
Speaker Change: We're also introducing adjusted EPS guidance for the first quarter of approximately $1 to $1.02, an increase of approximately 6% to 9%.
Speaker Change: In the first half of 2025, we expect adjusted EPS to be slightly less than 50% of our full-year adjusted EPS guide, roughly in line with our historical norm.
Speaker Change: Q1 is expected to be the lowest quarter for sales, adjusted operating income, ROS, and adjusted EPS as compared to the remaining three quarters in full year 25.
Speaker Change: We are targeting strong free cash flow in 2025 of 100% of net income. As a reminder, Q1 is a cash use quarter in any given year, while Q2 is typically our highest cash generation quarter.
Speaker Change: At this time, our 2025 adjusted EPS guidance range for the full year includes what we know today concerning tariffs.
Speaker Change: including a 10% tariff on roughly 200 million dollars of product source from China.
Speaker Change: We have approximately $300 million of product manufactured and purchased from Mexico.
Speaker Change: We believe we have captured the impact of a 25% tariff in Mexico within our adjusted EPS guidance range for 2025.
We have no significant spend in Canada.
Speaker Change: We have been effective in the past with the use of pricing to offset higher costs Since approximately 75% of our revenue goes through two-step distribution
Speaker Change: We have continued to accelerate transformation funnels, implement 80-20, and remain focused on investing in the long-term growth of our company.
Speaker Change: On the left-hand side of the chart, you can see the sales walk.
Speaker Change: We expect total Pentair sales in fiscal 2025 to be up approximately 1% at the midpoint.
We expect volume to be up slightly.
Speaker Change: Price to readout between 1.5 and 2% and FX to be a one point headwind.
We expect flow sales to be up slightly.
reflecting approximately low single-digit growth in commercial.
Speaker Change: down low single digits in industrial solutions and approximately flat in residential.
Water solution sales are expected to be essentially flat.
Speaker Change: Commercial sales in full year 25 are expected to be up low single digits and residential to be down low to mid single digits.
Speaker Change: School sales are expected to increase approximately 4% to 5% in full year 25.
We expect new and remodeled pools and the aftermarket.
to each be up low single digits.
Speaker Change: and we expect our recently completed December acquisition to contribute approximately 2% sales growth.
Speaker Change: As a reminder, new and remodeled pools represent about 40% of sales, and aftermarket is about 60%.
Our sales guidance reflects continued macroeconomic and geopolitical uncertainty.
Speaker Change: and cautious optimism of residential and market recovery in the second half of 2025.
Speaker Change: On the right-hand side of the chart, you can see the walk on adjusted operating income.
Speaker Change: We expect adjusted operating income to increase approximately 8% at the midpoint and ROS to be approximately 24.5 to 25%, up 125 basis points year-over-year at the midpoint.
Speaker Change: The volume price acquisitions column is primarily price, which is expected to offset inflation.
Speaker Change: We are very pleased with our strong performance and finish in 2024. Our transformation program exceeded our expectations and is expected to continue to drive momentum into 2025.
Speaker Change: We have built a strong foundation and believe we can continue to drive long-term growth, profitability, and 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.
Jamie, please open the line for questions. Thank you.
Speaker Change: We will now begin the question and answer session. In the interest of time, once again, we do ask that you please limit yourselves to one question and one follow-up.
Speaker Change: To ask a question, you may press star and then 1 on your telephone keypads.
Speaker Change: If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys.
To withdraw your questions, you may press star and two.
Speaker Change: At this time, we will pause momentarily to assemble the roster.
Speaker Change: And our first question today comes from Brett Lindsey from Mizzou. Please go ahead with your question.
Hey, good morning and congrats on a great quarter.
Thank you.
Hey.
Speaker Change: What is it to square some of the moving pieces on the legacy transformation program versus the new 80-20?
Speaker Change: I guess of the incremental $80 million, how's that split between the two savings buckets? And then, if you could just help frame the cumulative value of savings, you think, for the 80-20 program over a multi-year period?
Yeah, so first of all, you know, 80-20 or.
We're excited to have it.
Speaker Change: launched in all of our businesses, and we've gone through the analysis, and as you know, it puts you, your revenue in quadrants.
and you do that both by part and by customer.
Speaker Change: We're just going to keep the benefits of transformation in the productivity column, regardless if it's 80-20 or transformation. What 80-20 does do, though, Brad, is it helps us focus the business.
Speaker Change: And so it identifies what we really want to grow and where we don't want to spend our time growing, which has benefits to all four of the pillars under transformation. So we would expect over time that this is another additive to our transformation expectations, but it's going to be captured in that productivity column as we go forward.
Okay, got it.
Speaker Change: And then I guess just shifting over to price, obviously a lot of moving pieces with tariffs.
Speaker Change: Yeah, thank you for the question. So, you know, we we've guided to one and a half to two percent price. You know, think about that as being pretty consistent across the segments.
Speaker Change: We did mention that tariffs are included in our adjusted EPS guidance. Think about the fact that we can use price to offset any additional tariff costs.
Speaker Change: so price for us would be additive to that one and a half to two percent guidance and You would expect you know revenue to float higher if tariffs do happen
Speaker Change: We do have $20 million of price captured in the one and a half to two, which is the 10% on the China terrace, but we don't have anything related to Mexico and Canada yet in the price line.
All right, got it. Thanks. Best of luck. Thank you.
Speaker Change: Our next question comes from Julian Mitchell from Barclays. Please go ahead with your question.
Julian Mitchell: Hi, good morning. Maybe just first off I wanted to try and understand the seasonality a little bit and what's being assumed there. So I think that the Q1 is a little bit lighter share of the year than the normal because of currency and perhaps a tough start in
Julian Mitchell: commercial in water. Maybe help us kind of understand how you're thinking about the first half as a share of the year in terms of earnings and when we're thinking about the phasing of the
Julian Mitchell: tariff headwind, when are you assuming that comes into the company and starts affecting sales and earnings?
Julian Mitchell: Yeah, so I mean, we, as you remember last year, we had anticipated that we would see and the industry anticipated that they would receive some type of recovery for residential channels.
Julian Mitchell: So what happened was we saw a little bit of a loading in the distribution channels in anticipation of the residential recovery, which did not materialize. So we have our last quarter of headwinds in Q1.
Julian Mitchell: which is why you see that as a little bit more challenged. In addition, we had one program in East China that rolled off and that was this last quarter contribution. Outside of that, you know, sequentially moving from Q4 to Q1, we're generally seeing things the same. So we see Q2 as the recovery back to easier comparisons.
Julian Mitchell: as we move through the year. And as far as your questions on tariffs, we'll see some minimal impact in Q1, but the majority of it will roll out pretty consistently between Q2, Q3 and Q4.
That's helpful. Thank you and then
Speaker Change: Just maybe following up on the pool market outlook, maybe help us understand where inventories, as you see it among your distributors right now, how much early buy occurred in Q4 versus normal.
Julian Mitchell: and what's the assessment on the sort of new build market health this year?
Julian Mitchell: I would say that we're staying cautious, even though you've got new pool bills in 2024, really at historical lows.
Julian Mitchell: We're trying not to get ahead of ourselves, so our view is for new pools and remodels, up low single digits.
Julian Mitchell: aftermarket up low single digits and then we have the benefit of the December acquisition.
Julian Mitchell: Our view is that early buy was at historical levels as well as the inventory that sits within the distributors and dealers also at historical levels.
Speaker Change: Our next question comes from Steve Tusa from JPMorgan. Please go ahead with your question.
Hey, good morning. Hey, Steve.
I think.
Speaker Change: Okay, interesting 96 hours. It's been an interesting 4 to 5 years, I think, don't you? I think you'd agree with that.
Speaker Change: Every day there's something You know, yeah So just trying to like really squint at the bridge on 21 slide 21 Where are where are the tariffs embedded?
Speaker Change: There I guess it's like 95 million bucks. Is that kind of a simple math on on the tariff? That's kind of the dumb math, I guess but is that embedded in in inflation?
Speaker Change: No, so right now we would have roughly, as Bob said, we have roughly $200 million of China that would have $20 million more of inflation in it. And then you would expect that $20 million to be in price.
as
Speaker Change: general view, if we were to see the Mexico and Canada, it's primarily all Mexico for us, you would see additive price.
and you'd see added inflation.
Thank you for tuning in.
Speaker Change: Okay, so so so you're not I got you source and purchase products and you know, depending on
where that lands, you can do the math.
That's Howard
Costs with the
with the price.
Speaker Change: with the price, right? And I guess just backing up to the bridges here and the rate of inflation that you're seeing, how do you tease out that like rate of inflation versus
what your
you know getting into the into the numbers from sourcing.
Speaker Change: It just seems like the inflation, where are you seeing the most inflation, it just seems a bit high relative to, you know, relative to our expectations at least and how are you kind of like teasing that out? Yeah, so we were seeing moderating inflation clearly.
Speaker Change: I think what we're anticipating is that we're going to get that
Speaker Change: A little bit of China tariff, but as you know, Steve, most people reflect and raise their commodity prices equal to what happened from those source products. So you're going to see a little bit of an uptick in inflation across the board as people try to take advantage of getting a little bit more price.
Speaker Change: So freight was the other area that we were seeing a little bit of an uptick in. Outside of that, we were seeing moderating to slightly declining inflation as we were moving through the business model in Q4.
Speaker Change: Our next question comes from Brian Blair from Oppenheimer. Please go ahead with your question.
Hey, how are you?
Well, thanks.
you know, medium-term growth targets at the 26% level.
Speaker Change: It was within the Ross expansion story. You know, if you think about we laid out a path to the 26% by 2026 at Analyst Day, and we just delivered 107.
Speaker Change: We're guiding to 80, so that puts us at, call it, 187, 190.
Speaker Change: So again, to get to that $260 million, think another $70 million of transformation.
Speaker Change: Obviously, we'll build funnels that are higher than that, that'll help us mitigate any risk that we might have or provide upside, but we are on a very good path to continue a sustainable journey on transformation.
Speaker Change: And I would add that part of the confidence is, you know, the introduction of 80-20 allows us to focus and identify and see more opportunities. But also, just as a reminder, we're doing this without the benefit of growth.
Speaker Change: And, you know, transformation will show up as a form of scale across our existing factories and overhead costs when we do get that contribution for revenue. And we believe it's out there. We just don't know when it's going to come, and we need some help on interest rates.
Speaker Change: Some some efforts in the residential housing side So that's our encouragement and I I think as we as we continue to move along We feel good that the programs that we've introduced have created structural changes And we believe we're going to benefit from those when the growth comes forward
I can certainly see it in the numbers.
maybe offer some color on GNS. I know
Speaker Change: speak to the assets, strategic fit, how it enhances your full offering, and then how we should think about growth rates, ROS contribution, any approach. Yeah, we're really excited. It's an example of, you know, taking a look across a product line and understanding where you might have opportunities.
Speaker Change: You know while we're really strong in heater positions and in most of the markets
Speaker Change: In Florida, and in some of the South, heat pumps, which are more electric-based,
Speaker Change: are the preferred option, and it wasn't to strengthen our product line, so we had the opportunity to add and solidify some really important positions in Florida, and that's what Gulfstream represents.
Speaker Change: It's an example of a really nice tuck-in acquisition that really fits nicely with our strategy business model and financial expectations.
Speaker Change: Yeah, just roughly from a numbers perspective, we closed that acquisition at the beginning of December.
Speaker Change: We expect in 2025, roughly $35 million would come from that acquisition of top-line revenue with about 5 million included in 2024 in that one month of December. So what we're expecting, you know, a net benefit of the $30 million.
Speaker Change: And that's the two points of growth that Poole would see. It's roughly a 30% Ross business.
Speaker Change: and we bought it at about 10 times EBITDA. So a really nice bolt-on acquisition for us, expanding again our portfolio within the heater area.
Jeff Hammond: Our next question comes from Jeff Hammond from KeyBank. Please go ahead with your question.
Hey, good morning guys. Morning Jeff.
Thank you. Bye-bye. Bye.
Speaker Change: Just on margin expansion, I think you're calling for 125 basis points all in. Any kind of way to think about how the segments play out, either order or magnitude? Or are they all kind of equal contributors?
Speaker Change: Okay, great. And then water solutions, I just want to unpack what you're seeing in RESI, because we've seen kind of two down years, you're expecting.
you know, another down year as it just...
Speaker Change: you know rates or is there something else going on there and then just on the commercial side you know it seems like you're through after one cue you'll be through you know that the backlog drawdown in ice but just what are you seeing in that you know commercial food service space from a fundamental standpoint
Speaker Change: Yeah, so I'll answer the residential one first. I mean, as you can imagine, our favorite types of residential housing for residential filtration and even flow are rural homes.
Speaker Change: that have a well, and most all wells have water softening and then filtration.
Speaker Change: You know, when you get into the urban environments, you know, water is generally...
Speaker Change: acceptable to the people who drink it and and therefore you don't see the same level of infiltration penetration.
Speaker Change: So, the interest rates have really hurt that urban sprawl and the farther out builds, and that's where I think the residential businesses.
Speaker Change: been hit harder. The second element is a lot of water softeners it financed.
Speaker Change: and the consumer financing challenges have led to lower demand in that particular space. What we've been also doing is...
Speaker Change: to think through the product portfolio and be very thoughtful about where we want to
some top-line headwind.
in lieu of getting more margin expansion so we can...
Speaker Change: you know, operation lines our footprint a little bit better, Jeff.
Speaker Change: As far as the commercial, North American Ice performed just slightly down for the year last year. Most of the year-over-year challenges in the commercial was related to, as I mentioned, China. That was a large local coffee.
Speaker Change: rollout that happened in 2023 that was pretty lumpy to the year-over-year effect of how we compared against that in 2024. But when you take a look at the North American ice market, it actually outperformed our expectations last year and we just had that headwind related to China.
Speaker Change: And you see more of that continuing. We have one more quarter of challenged year of a year, which is Q1, which is the last quarter for that, and then we'd expect to get to more of that mid-single digits normal growth rate that that ice is generally benefited from.
Speaker Change: Our next question comes from Nigel Coe from Wolf Research. Please go ahead with your question.
Thanks, good morning everyone.
So another CHAP question.
Speaker Change: So, I mean, this is a nerdy question, but do you price it through a regular price increase and therefore you have to give the customer notice?
Speaker Change: or would it be a, you know, a surcharge which might be more immediate? So just just wondering on that. And then thinking about the exposure across the three businesses, I think we would all seem that the pool business has more Mexico and China exposure, just maybe any color there would be helpful.
Yeah, so first of all, we have
Speaker Change: in normal conditions, 30 to 60 day notice periods across most of our dealer distributor relationships.
Speaker Change: Obviously, when these types of events happen, we skew them more closer to the 30-day window for most of our largest customers, so that gives you a level. Usually, we have enough inventory on hand.
to mitigate any timing impact there.
Speaker Change: As far as, you know, exposure, I mean, interestingly, our water solutions business would be the most exposed to Mexico, given the fact that most of all the residential products are made in Mexico, and then we have our North American ice manufacturing in Mexico.
Speaker Change: And so those would be the, you know, so they will have a little bit more effort to recover the tariffs, and we feel like the other two businesses.
don't have that same level of exposure.
Speaker Change: Okay, that's great. And then just my follow-on is the $80 million of initiatives for the benefits in 2025. Are there any, just to be clear, are there any investments against that $80 million or is that a clean number that flows through to the bottom line? Yeah, thanks for asking. That's the net impact.
and.
Speaker Change: So, that will have both positive benefits from transformation, net of any strategic growth investments. And yes, we are making strategic growth investments, primarily in water solutions and in pool. And so, you could think about transformation being a little bit higher and then being offset by incremental investments to longer term growth programs.
Speaker Change: Our next question comes from Nathan Jones from Stiefel. Please go ahead with your question.
Good morning, this is Adam Farley on for Nathan.
I wanted to follow up on 1820.
Speaker Change: Which of the segments are seeing the most near-term revenue headwind from Quad 4 actions? And then also, have Quad 1 actions identified any areas that can potentially benefit from additional growth investments?
Speaker Change: Yeah, so, you know, 80-20 in itself is not a growth limiter, quite frankly, there isn't.
Speaker Change: In the base program itself, there's not really a view that you lose revenue. That being said, you know, our various acquisitions over time create a more of a portfolio opportunity. So, Water Solutions is seeing
Speaker Change: some exits of revenue that will help drive margin performance and lead to better productivity paths.
Speaker Change: by exiting out of Quad 4. Everybody else, it's a combination, moving Quad 4s to Quad 3s, which are changing the way that you transact with customers.
and all of the businesses have seen early signs of...
Speaker Change: of customers in Quad One that like what we're doing and feel like there's opportunities to partner more effectively with us.
All right, thank you for taking my question. You're welcome.
Speaker Change: Our next question comes from Dean Dre from RBC Capital Markets. Please go ahead with your question.
Thank you. Good morning, everyone. Morning, Dean.
Speaker Change: I just want to circle back on pool and the growth rates assumed, and I recall it was not too long.
Speaker Change: ago, right after COVID, where there was this worry that there'd never be another pool built because everyone that could possibly build one had done it. But now we're looked to be at a more normalized level. So on low single digits for new and remodeled and aftermarket,
Speaker Change: Is that, are we at sort of a normalized rate given demographics and regional? Is it...
Speaker Change: Does it reflect interest rate pressures or labor shortages in the contractor, especially on the new bill? Just kind of are we at a normalized level here or are there still some headwinds?
Dean, this is John. I want to jump in here.
Speaker Change: feel strongly we're not. I mean, if you go back to 2019, which we always point to as what we would say is a more normal year for both North American housing starts and pool starts. When you look at 2019, both of those views to 2025, we're down 24% in housing starts and 23% down in new pool builds.
Speaker Change: It's not surprising because pool builds generally are a percentage of new housing starts.
Speaker Change: given that most homes built in the South have pools attached to them.
Speaker Change: We have a long way to go to get back to normal. What we see in 2025, though, is flattish overall new pool builds, slightly higher new root models, and the ongoing benefit of aftermarket, which just feels good for a change, given what we've struggled with in 24 and 23.
Speaker Change: That's real helpful. And the second question, I'm not sure how much you can comment on this, but there's been press reports of a very large asset that's being shopped that does food and beverage, water treatment.
Speaker Change: and just kind of high-level thoughts. Is this an opportunity for you? Might there be a competitive impact if this business actually gets acquired by what would be a more natural owner versus where it is presently? So just how do you think this all plays out?
Speaker Change: Yeah, I'm not aware of that at all, Dean, but I mean, we continue to be focused on taking our businesses, especially the ones that we love, that are focused on our movement of improvement and joy. And we're in the bolt-on mode, and so not aware of any assets, so no comment on that.
Hey, good morning, everyone.
Speaker Change: Maybe just a little bit more on flow. When are you assuming CapEx delays might begin to subside there within the industrial businesses? And we know you've been continuing to streamline your overall flow of business, so what is the ongoing impact of that in 2025?
Speaker Change: First of all, and thank you Pat, it's a small part of our business, you know, roughly two hundred and some million dollars that's really related to food and beverage in industrials.
Speaker Change: So, they tend to be a little bit more projects related to expansion of beer, and obviously then we sell beer membrane filtration, and then ultimately a lot of our CO2 and gas management aspects. So, it's a smaller piece of our portfolio, but we are happening to see delays in those.
Speaker Change: projects and we're not counting on those delays to recover here in the near term, really related to financing and the overall expansion of their business models globally.
Speaker Change: And then John, to the point of new pools sort of, you know, standing at these very low levels.
Speaker Change: And you've got it to break and fix and remodeling up, you know, low single digits for 25. Are you seeing, you know, or when should we see, like, sort of pent-up demand as, you know, everybody's just sitting there? Could we see a little bit of improvement because there just hasn't been a lot of new pool activity in break and fix remodeling, or how are you thinking about that? And then, have you seen any impact from hurricanes or, you know, maybe any thought process around
wildfire areas in California on the blue side.
You know we think we're into
Speaker Change: at least the second half before we see meaningful recovery in the residential side.
Speaker Change: As rates start to come down or equity markets stabilize, which are the two funding sources for.
Speaker Change: are general pool owners. We believe stabilization leads to decisions which lead to then moving forward with projects.
Speaker Change: So, I think we've remained optimistic that aftermarket remodels will continue as people take advantage of their lower mortgages and their existing home base in the short run and then hopefully we'll see the builds as we go forward. As far as hurricanes, yes, we did benefit in Q4 slightly from the hurricanes, obviously tragic events that we don't root for.
You know, we imagine that most of the housing...
Speaker Change: Our next question comes from Andrew Krill from Deutsche Bank. Please go ahead with your question.
Andrew Krill: Hi, thanks. Good morning, everyone. I want to go back to the updated 2026 margin targets. Can you flesh out, like, what sales growth are you assuming for 2026 in order to hit this new 26% margin? And is there any new contingency in there similar to what you provided at the Investor Day? Thanks.
Speaker Change: Yeah, again, just as a reminder, at Investor Day, we talked about mid-single-digit growth. We've just guided 2025 to, you know, flat to up 2%, so we've assumed something.
Speaker Change: similar at this point for 2026 to achieve the profitability targets that we need.
Speaker Change: Again, hopefully we'll be surprised on the upside, the deferred residential recovery comes back, pool starts to grow at more historical rates, but you know, continuing to drive that transformation program to deliver the bottom line.
Speaker Change: Okay, so it's fair to assume that if we go back to your mid-single-digit growth target there's a little bit of upside to that 26%?
Speaker Change: You know, I don't, I mean right now we're updating that we feel good about the 26% ROS. I think embedded in those numbers, as Bob and I said in investment day, was growing about a hundred million dollars of EBITDA per year through 2026. So you could calculate how you get back to what the revenue number is and that's really a reflection of the fact that we didn't get the mid-single-digit growth recovery earlier in this three-year window that we had hoped for.
Speaker Change: So we're not raising our overall expectations. We're saying there's a different path to achieve it.
Speaker Change: I understand. And then real quickly just on 80-20, is it fair, I don't think it was commented on explicitly, but is it about a two-point?
Speaker Change: Headwind in the sales bridge, you're assuming, or about half of the, you know, quad four sales. Thank you.
Speaker Change: No, that's for maybe a business, but overall we would expect to see no more than roughly a point of headwind from quad forex's from an overall Pentair perspective.
Thank you.
Speaker Change: And those are embedded in our volume assumptions in our current guide.
Speaker Change: And our next question comes from Joe Giordano from TD Cowen. Please go ahead with your question.
Speaker Change: All right, good morning. This is Zain Khan on for Joe. I wanted to start with debt. Should we be expecting some significant debt pay down during this year and does the guide assume any debt reduction?
Speaker Change: We will continue to drive the leverage ratio down as a combination of just having more EBITDA and slight debt pay down. So again, when we look at our capital allocation strategy, it's increasing the dividend to the 9% that we talked about, it's share repurchases to offset dilution.
Speaker Change: It's some debt paid down and bolt-on acquisition, so a really balanced capital allocation strategy.
Speaker Change: We're not anticipating a significant amount of rate reductions, which is what we really would like to see to get the jumpstart going. So what we have is a lot easier comparisons year over year and a lot more valuable contribution to the revenue streams.
Speaker Change: Our next question comes from Sari Boroditsky from Jefferies. Please go ahead with your question.
Sari Boroditsky: Thanks for fitting me in. So this building on 8020, you talked about focusing on profitable growth. Can you talk about how you're driving growth in those top clients and products? What are some of the investments required and how are you incentivizing teams to adhere to this strategy?
Speaker Change: Yeah, I'll do it as quickly as possible. I mean, it's really about identifying what it was that people really saw in your strength as a company and they started buying core products.
Speaker Change: for Cora & Marks from you and then over time you added a bunch of complexity and
Speaker Change: and alternatives. So it's really getting back to your strengths and then working and partnering with, as you said, incentivizing the dealer, incentivizing the distributor.
and making sure you're incentivizing your sales people.
to push through your top products to your top customers.
Speaker Change: And then quickly back on the tariffs, you talked about potential pricing actions, but just wanted to see how you're thinking about sourcing, given some of the work you've done on that previously, and maybe any changes on how you're thinking about producing water treatment products in Mexico. Thank you.
Speaker Change: Yeah, I mean, I would say that structurally we thought we had a really good situation. You know, we've worked under the
Speaker Change: the agreement that was put in place and this was a really good alternative to.
Speaker Change: Service North America, both from a standpoint of not just access to products.
Speaker Change: but also access to labor, because we're pretty tight in some of the manufacturing and labor markets that we participate in. So right now I think we would react accordingly with dealing with what we need to do in the short run and then look longer term strategically at what the best alternatives would be.
Speaker Change: And our next question comes from Brian Lee from Goldman Sachs. Please go ahead with your question.
Speaker Change: Hey guys, good morning. Thanks for squeezing me in. Just two quick ones. Might have missed it, but on the pool view for 2025, fair to assume, you know, sort of a normalized two to three points of price and the rest is volume?
Speaker Change: yeah for pool it's more like you know consistent with the overall company one and a half to two points of price is what's expected
Speaker Change: Okay, fair enough. And then I know a lot of, you know, focus around the tariffs and sourcing and cost risk. There, you know, there is a larger, you know, fairly large European player that you compete with. I'm not sure if
Speaker Change: You know, as all the dust settles on the tariff situation, if the EU were to get involved or get caught up in this, does that become a, you know, potential market share tailwind for you guys, depending on kind of how all the...
Speaker Change: All the balls fall in place here, you know, sort of what products, where could you maybe stand to benefit, just trying to understand the competitive dynamic if, you know, certain regions...
Speaker Change: like Mexico and Canada maybe don't end up seeing tariffs and other regions like the EU and China do see tariffs. Just trying to wonder about some of the permutations that might actually, you know, be to your advantage potentially.
Speaker Change: Yeah, it's hard to speculate. I would say that, you know, we're looking at those and...
Speaker Change: you know, strategizing. I think the bigger challenge is when we have these
Speaker Change: types of actions, you can get disrupted in supply chains and give temporary advantage or disadvantage to different regions. But we're, you know, we're a large global player as well. And, you know, we have a large global manufacturing footprint and global capabilities. And so when we have more certainty of what's going to happen, we'll react accordingly.
Speaker Change: Okay, thank you for joining the call today. In closing, I want to reiterate some key themes on slide 22.
Speaker Change: We delivered record earnings as a result of solid execution and transformation.
Speaker Change: We drove significant margin expansion across our balanced water portfolio despite continued macroeconomic headwinds.
We ensured performance accountability across the organization.
Speaker Change: We ended the year with an even stronger balance sheet and record-free cash flow, and we maintained a disciplined capital allocation strategy with a focus on driving higher return on invested capital.
Speaker Change: And finally, we believe our focused growth strategy and solid execution are building a solid foundation for long-term growth, profitability, and shareholder value. Thank you everyone. Have a great day.
Speaker Change: Ladies and gentlemen, that does conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.
to be continued