Q2 2025 Pentair PLC Earnings Call
Good morning everyone and welcome to the Penn tear second quarter 2025 earnings conference call.
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Speaker Change: At this time, I would like to turn the floor over to Shelley hubber vice president of investor relations ma'am. You may begin.
Shelley Hubber: Thank you, operator and welcome to Pentair second quarter 2025 earnings conference. Call on the call with me, are John stalks our president and chief executive officer and Bob Fishman, our Chief Financial Officer. On today's call, we will provide details on our second quarter performance as outlined in this morning's press release.
Shelley Hubber: On the penta 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
Shelley Hubber: The non-gaap financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with gaap. They are included as additional clarifying items to Aid investors in further. Understanding the company's performance in addition to the impact of these items and events have on the financial results.
Before we begin, let me remind you that during our presentation today we will make forward-looking statements which are predictions projections or other statements about future events.
Shelley Hubber: Listeners are cautioned that these statements are subject to certain risks and uncertainties many of which are difficult to predict and generally beyond the control of Pentair, these risks. And uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully, review, the risk factors in our most recent form, 10 q and form, 10K.
Please note that during the presentation. Today we will be making references to record Financial results. These references reflect the time period. Post the invent separation in 2018.
Shelley Hubber: Following our prepared remarks, we will open up the call for questions. Please limit your questions to 2 and re-enter the queue if needed to allow everyone an opportunity to participate.
John Stalks: I will now turn the call over to John.
John Stalks: Thank you, Shelley and good morning everyone. Thank you for joining us today.
John Stalks: Before we get to our record Q2 results, I want to take a moment to recognize our entire penter team.
John Stalks: Your leadership has helped to elevate us to new levels of Financial and operational execution and an extremely valid environment.
John Stalks: Thank you for putting our customers first and continue to drive shareholder value.
John Stalks: Now, let's turn to the Q2 executive summary on, slide 8.
John Stalks: Across all 4 metrics sales, adjusted operating income return on sales and adjusted EPs, and 1 of the most continuously challenging Dynamic, Landscapes globally.
John Stalks: In Q2 sales increased 2% in pool. Grew 9% adjusted operating income increased. 9% our OS, expanded by 170 basis points to 26.4% and adjusted. EPS Rose 14% to $1.39.
John Stalks: We also delivered record free, cash flow and repurchase 75 million of shares in Q2 driven by continued confidence in our ability. To execute, we have increased our full year 25.
John Stalks: We now expect sales growth of approximately 1 to 2%.
John Stalks: And adjusted EPS to be approximately $4.75 to $4.85 up 11% at the midpoint versus full year 2024.
John Stalks: In Q2 we made an incremental investment, in an exciting, new startup known as hope hydration whose mission is to deliver free water through its digitally connected water refill, Hydro stations which generate revenue from advertising and sponsorships.
These Hydro stations, use everpure technology from Pentair water solutions, to bring free high-quality and chilled drinking water to cities stadiums, airports and Commercial spaces.
John Stalks: We excited to help Hope accelerate their growth strategy, broaden their impact and help to reduce the consumption of single-use plastic water bottles.
John Stalks: Let's move to the Strategic overview on slide 9.
Speaker Change: At enter, we are continuously evolving to drive consistent long-term shareholder value.
Speaker Change: We have talked about our transformation initiatives and more recently 8020.
Speaker Change: At the same time, our teams are also focused on driving growth within their businesses and investing in strategic growth initiatives, including high-performing Talent, new, and breakthrough product Innovations, go to market strategies and digital transformation.
Speaker Change: We remain on track to deliver our expected transformation savings this year and we expect continued margin opportunity Beyond 2026. As we accelerate the implementation of 80/20 and the transformation progress continues
Speaker Change: The soft the residential and Market has enabled us to focus on improving our overall business and best position Pentair to leverage higher demand when residential and markets recover.
Speaker Change: We Believe The Catalyst to an improving housing market will be lower interest rates.
Speaker Change: Lastly, we continue to remain agile in a rapidly changing macroeconomic and geopolitical environment.
Speaker Change: Let's turn to slide 10.
Speaker Change: We shared this slide with you last quarter, which shows the success of our transformation program.
Speaker Change: Since the beginning of 2023, we have delivered over 200 million, in transformation savings, net of Investments, which includes the 44 million. We drove in the first half of this year.
Speaker Change: We have committed to a total of 80 million in 2025, net of Investments and we see additional savings in 2026, to achieve our RS. Target of 26% by 2026 year end.
Speaker Change: I'm very grateful for what our teams have accomplished and I am energized with the opportunity to drive further benefits in the next several years.
Before I hand the call over to Bob. Let's turn to slide 11.
Speaker Change: There are several key themes that I wanted to share.
Speaker Change: We delivered a record quarter in Q2.
Speaker Change: We increased our full year 2025 guidance due to increased confidence in our strategy.
Speaker Change: We continue to build a foundation of optimal operational efficiency that can be leveraged when volume returns to normal.
Speaker Change: We have a balanced water portfolio and a capital light business model. With 75% of our business is going through 2, Step, distribution and roughly 75% of our Revenue representing replacement sales and we have strong free, cash flow, a solid balance sheet, and a balanced Capital deployment strategy, to accelerate earnings and return on invested capital.
Speaker Change: As a focus water company, providing solutions to move improve and enjoy water. We continue to believe that we are well, positioned to address opportunities from favorable, secular Trends, by getting water to where it needs to be and away from where it doesn't and by filtering and purifying water for people that drink and enjoy.
Speaker Change: I will now pass the call over to Bob. We'll discuss our performance and financial results in more detail.
Speaker Change: Bob.
Bob Fishman: Thank you, John. And good morning everyone. Let's start on. Slide 12.
Bob Fishman: Adjusted operating income return on sales and adjusted EPS in Q2 despite lower volume.
Bob Fishman: We also drove record, free cash flow.
Bob Fishman: in Q2, we delivered sales of 1.1 billion up to percent adjusted, operating income of 297 million up 9%,
Bob Fishman: Ross of 26.4%.
Bob Fishman: Which expanded 170 basis points, driven primarily by transformation and price.
Bob Fishman: And adjusted EPS of a139 up 14%.
Bob Fishman: For sales, we're up, 1% year-over-year driven by 7% growth in pool, which was offset by a 1% decline in flow and a 3% decline in Water Solutions.
Bob Fishman: moving to the adjusted operating income walk on the right hand side, price and transformation, drove significant margin expansion in Q2
inflation was approximately 37 million which included about 15 million dollars of tariff impact,
Bob Fishman: We also delivered strong transformation, Savings of 20 million.
Bob Fishman: Please turn to slide 13.
Bob Fishman: Low sales were flat year-over-year.
Bob Fishman: With flow residential sales were down. 1% as higher interest rates, continued to pressure, residential and markets.
Bob Fishman: But the rate of decline has improved considerably over the last 2 years.
Bob Fishman: Commercial sales Rose 1% marking the 12th consecutive quarter of year-over-year, sales growth.
Bob Fishman: An industrial sales were flat, but a nice Improvement versus the last few quarters.
Bob Fishman: Segment income, grew 10% and return on sales, expanded 210 basis, points to 23.4%
Bob Fishman: The strong margin expansion was a result of continued progress on our transformation initiatives as flow. Continue to benefit from improvements in, its go to market strategies and its focus on complexity reduction.
Bob Fishman: Please turn to slide 14.
In Q2 water solution, sales declined 4%, to 298 million driven primarily by lower volume, which was partially offset by higher price.
Bob Fishman: Commercial sales were down, 3%. Largely driven by softer and markets within Food Service.
Bob Fishman: Within residential, sales were down 6% year-over-year, primarily due to a continued slug issue as housing market and portfolio actions to improve the growth and profitability of the business.
Bob Fishman: During the quarter, we also strategically divested our small Commercial Services business, the Dynamics of the lower margin service business had changed over the last couple of years and this allows us to focus. Even more on our higher margin, filtration and Ice businesses.
Segment income declined 4% to 70 million and return on sales was flat at 23.5%.
Bob Fishman: We drove significant transformation savings, during the quarter and price offset inflation.
Please turn to slide 15.
Bob Fishman: In Q2 pool sales increase 9% to 427 million driven by Price volume and our Q4 2024 Gulf Stream acquisition.
Bob Fishman: Segment income was 153 million up 14% and return on sales increased 160 basis points to 35.7%, driven by price and transformation.
Bob Fishman: We do expect price versus cost to normalize in Q3 as we incur a full quarter of tariffs.
Bob Fishman: Please turn to slide 16.
Bob Fishman: We generated record free, cash flow of 596 million in Q2 up 14% year-over-year.
Bob Fishman: Change remains strong and our return on invested Capital surpassed 16%.
Bob Fishman: Long term. We continue to Target High Teens roic.
Bob Fishman: Our net debt, leverage ratio is 1.2 times down from 1.6 times a year ago.
Year to date. We have repurchased. 125 million, a shares.
Bob Fishman: Over the last 2 years, we have generated significant free cash flow which has enabled us to strategically deploy, Capital via Debt Pay down dividend, share purchases and strategic acquisitions.
Highest shareholder returns.
Bob Fishman: Let's turn to our outlook on slide 17.
Bob Fishman: For the full year, we are increasing our adjusted EPS, guidance to approximately $4.75 to $4.85, which is up roughly 10% to 12% year-over-year.
Bob Fishman: We're in our sales guidance.
Bob Fishman: To up approximately 1 to 2%, despite an approximate 40 million, headwinds relating, to the sale of our Commercial Services business in Q2.
Bob Fishman: We expect flow sales to be up low single digits.
Bob Fishman: Water solutions to be down mid single digits with core sales approximately flat and pool sales to be up approximately 6% to 7%.
Bob Fishman: We expected adjusted operating income to increase approximately 7% to 9%.
We continue to expect to drive approximately 80 million dollars in transformation savings this year, net of Investments.
Bob Fishman: for the third quarter, we expect sales to be approximately flat to up 1%
We expect flow sales to be up approximately mid single digits.
Bob Fishman: We anticipate water solution sales to be down approximately mid to high single digits.
With core sales, approximately flat.
Bob Fishman: Including commercial water sales to be up approximately low to mid single digits.
Bob Fishman: Full sales are expected to be up approximately 3%, to 4%.
Bob Fishman: We expect third quarter, adjusted. Operating income to increase approximately 4% to 7%.
Bob Fishman: We're also introducing adjusted EPS guidance for the third quarter of approximately a dollar, 16 to 12.20 up, roughly 6% to 10%.
Bob Fishman: Let's turn to slide 18.
Bob Fishman: We are executing well in an uncertain environment.
Bob Fishman: We've updated our 2025 tariff impact to be approximately 75 million for the full year.
Bob Fishman: Which includes 15 million in Q2 and then estimated, 60 million dollars in the second half of 2025.
Bob Fishman: This 75 million which is included in our guidance, compares to our previous estimate in q1, of 140, million,
Bob Fishman: The reduction in the China, tariff rates from 145% to 30% in Q2, was the primary driver of the decrease in our full year tariff impact estimate.
Bob Fishman: We have increased prices and implemented mitigation strategies across our businesses to offset the expected tariff impact.
Bob Fishman: Our 2025 guidance does not include the possibility of an additional $10 million in tariffs related to Copper the European Union and other countries which could take effect on August 1st.
Bob Fishman: We expect to take mitigating actions as needed to offset these additional tariffs if they occur.
Bob Fishman: We continue to monitor the rapidly changing landscape, and remain agile to quickly adjust as necessary.
Bob Fishman: We have a strong balance sheet and free cash flow along with a balanced Capital, allocation strategy.
Bob Fishman: We plan to continue to deploy capital in areas that drive the highest returns for our shareholders. While being mindful of protecting Capital during periods of macroeconomic and geopolitical uncertainty.
Bob Fishman: I would now like to turn the call over to the operator for Q&A.
Speaker Change: After which John will have a few closing remarks?
Speaker Change: Operator. Please open the line for questions.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session in the interest of time. We do ask that you please limit yourselves to 1 question and a single follow-up.
Speaker Change: To ask a question, you may press star and then 1 on your telephone keypad,
Speaker Change: If you are using a speaker-phone we do ask that you. Please pick up your handset before pressing the keys to ensure the best sound quality.
to withdraw your question, you may press star and 2
Speaker Change: Again, that is star and then 1 to join the question queue.
Speaker Change: We'll pause momentarily to assemble the roster.
Speaker Change: Our first question today comes from
Speaker Change: Andy kaplitz from Citigroup, please, go ahead with your question.
Andy Kaplitz: Good morning, everyone. Nice quarter.
Speaker Change: Thank you.
Speaker Change: Expectations. So was that better than expected volume or more price? And then you raised tool for the year to up, 6 to 7 versus, I think up 4 to 5 where you were before, where's the Improvement coming from? Is it less assumed the man degradation, you know, any color between New Pools, renovation break, and fix would be helpful.
Yeah. I mean I think we're now seeing an environment that we would expect new pool builds that we generally thought were flat maybe modestly up now feeling like they'll be modestly down.
Speaker Change: I think also on the remodel side, we're we're seeing that environment be deferred. I I feel like there's a little bit of slide to the right that's occurring um, on some of the larger projects. And we're also seeing customers extend product life by spare parts, spare part kits. You know, and, and seeing a little bit more repairs. And we would have normally seen in these types of environments. I think all of that's got to be driven by the incremental prices. I mean overall, I mean, we're up about 15% in price and the trailing 12 months, you know. I the whole industry is and I think at some point that's starting to have an effect as people are waiting for the interest rates to reduce. So overall, I mean, we're getting the price which is great. Um, we're seeing volume, you know, flattish to slightly down, which is in line with our expectations. But we're not seeing the acceleration of it that we would normally have expected, um, as we head into the back half of the year. So all that's adjusted in the guide, I think we feel good about a positioning, we feel good about what we're doing from a, a new product development, a new introduction.
But we got to get this Market going.
Speaker Change: Very helpful then John. And Bob, I'm just trying to understand how you're thinking about price versus the cost for the year because I think you passed through. I think it was 75% of the pricing on that original 140 million expected tariffs in early April, it's a lot higher than the 75 million of expected total tariff costs you have now. So are you forecasting? Rebating in the year, beginning in some contingency for maybe, you know, new tariff costs that could come in August 1st. How are you thinking about, uh, price versus costing your guy
Speaker Change: Yeah, generally in terms of the Tariff we're we're thinking about price, offsetting the tariffs. If, if you remember back at the beginning of of q1, we had estimated the Tariff impact that roughly 150 140 million dollars.
Speaker Change: Uh in Year and that was primarily, you know, driven by that, uh, hi China tariff. Um, now when we size it it's closer to uh, that 75 million. So think of roughly a 65 million benefit from those lower tariffs.
Speaker Change: We also talked um, at the beginning of 2 Q 2 around, staggering our pricing. So, doing some pricing in April, some in May, and some in June, uh, because of the reduction in the tariffs. We are not going out with roughly $50 million of price. Uh, that was built into the, um, uh, beginning of, uh, Q2 forecast. So if you
Speaker Change: Think about it uh 65 million lower in tariff, 50 million less price for a net 15 million benefit and and we've raised the guidance about that amount.
Speaker Change: Steve Tusa from JP Morgan. Please go ahead with your question.
Speaker Change: Uh, hey, good morning. Hey, Steve. Um, yeah. So just just a follow-up on that. So I, I guess, um, is the price that we see in the numbers today. It seems like that only reflects part of what you guys have put through, given kind of like the timing and the quarter, you know, understanding you guys aren't going out with the, you know, the other, uh, the the rest of the, the price, you thought you'd need to cover the tariffs.
Speaker Change: That's correct. I mean, we will have a normalized what I'd say, a more normal price increase Steve and and our normal pool season, that will be slightly higher than an average year, which reflects generally more commodity inflation, um, in general cost of inflation, but the recognition of that as you recall, that that's goes out as, you know, Prelude it early by and we don't necessarily receive that this year, receive it next year, but there's no other scheduled tariff increases at the moment in our guide.
Speaker Change: Right? But I mean, I say that would change Steve, if we get, you know, big headwinds, we're going to have to go back and talk to our customers and put those through the channel. But right now, we're not anticipating those.
Speaker Change: In the back, half of the year.
Speaker Change: Okay. And and just 1 2 4 slightly more in Q4 than Q3, but you'll see that that price begin to accelerate in Q3 and Q4 Steve. And you'll also see more inflation because, as we, we set on that 1 slide, we didn't realize all of the tariffs and Q2. So we have a little bit more headwind and tariffs and yeah.
Speaker Change: Yeah, of course, and then just just lastly, on on the fourth quarter. Is there anything you're you're planning for? I mean, how are you thinking about? You know, seasonality in the fourth quarter, is there any you know, um, is there is is is most of the caution on the end markets and pool reflected in the 3Q guide, or is there something that you would expect to kind of trigger in the fourth queue on that in the fourth queue on that front?
Speaker Change: I have a little more caution in Q3, um, with Q4 more anticipating a 2026 pool year and more people positioning themselves into the 2026,
Speaker Change: Um, you know, look for how they're going to work with their customers on the remodels and the new pool builds.
Speaker Change: I I'm hopeful that we're going to see some interest rate reduction at some point Steve and then we're going to need some time lag between those interest rates uh as they get reduced and when people get excited that they can start investing again,
Speaker Change: Our next question comes from Brian Lee, from Goldman Sachs, please. Go ahead with your question.
Brian Lee: Hey guys. Good morning. Thanks for taking the questions. Um, maybe just on on the pool guidance here. Uh, you know, you you raised it a couple hundred bips, um, can you, uh, might have missed this but did you delineate, how much of that is being driven by, you know, price, implementation and, and, and what you're seeing in price capture and pull forward versus? Um, is, is there any Improvement in demand? Underlying the the increase in the guidance or or has anything changed on, kind of the volume slash demand side of the equation for, for your guidance, for pull this year.
The um, the the way we're, uh, we're thinking about the, uh, 6 to 7% guide for pool, which is up from 4 to 5 percent. Last quarter is, is roughly a couple of points from the acquisition that we did in Q4 of 2024? Um, then we've got price of call it approximately 5%, and then down, um, slightly, uh, for the reasons, John mentioned with volume, uh, you've got lower new pool, demand and remodels, uh, as well as a bit softer, aftermarket. Um, so that's the, uh, pieces that make up the up 6 to 7%.
Okay, fair enough. That's helpful. And then I know John alluded to this. I mean, you're you're you're optimistic um, or or maybe hopeful that uh, interest rate relief will will be coming and and that could help kind of set the set the set the tape for for 26. But if if we're sort of in this, um,
Uh higher for longer environment. And and we see, you know, the macro persist here into, you know, well into 4 q and what what are your early reads into? Kind of what the pool build cycle is going to look like next year in that environment and you know what, what are sort of the um, the the volume Trends, you would anticipate, uh, as some of the pricing talents from this year, maybe dissipate, like, what, what sort of the normal run rate. If, if this is kind of the macro, we're going to be, uh, seeing for the next, let's call, you know, 6 to 12 months persisting.
Brian Lee: Recycle, we'll we'll get more around that as we head into the 26 guide, I think right now our anticipation is that volume remains a little bit sluggish. And what we've got to do is grow our, our content per pad from NPI introductions, you know, sales and marketing campaigns making sure that our dealers are well informed, as to the new products, and how to install those new products and, and really get the, um, industry excited about the benefits of automation, those still remained the top growth. Um, levers for us, regardless of the pools are, are growing or not.
Brian Lee: Where these these levels of pool builds. We haven't seen these since after the financial crisis of 0809 and 10. So, you know, it's been uh, you know, the whole industry is anticipated that we come up from here. Uh, I think it's just a matter of when
Brian Lee: I think if price uh, if inflation rates are interest rates, don't come down. Then I think people are wondering when the build costs and or the overall build starts to soften um, I don't see that happening. So I think what we're talking about is you know, wealthier second home buyers that are building homes in the warm weather States still and that's the primary 80% of our sales go into those areas so that's what we're anticipating um too early to call 26 though. Right now
Speaker Change: Our next question comes from Nathan Jones from stifel please. Go ahead with your question.
Nathan Jones: Good morning, everyone. Hey, good morning. Nathan
A bit more of the the longer cycle more capex, driven businesses, which I think probably mostly sit in flow.
Nathan Jones: Um, maybe you could just talk about
Nathan Jones: The environment there. How do you how tariffs and how I guess the macro uncertainty or potentially impacting customer decision making deferred Capital spending things that would impact kind of your your order book or your quoting uh rather than what's in demand today.
Nathan Jones: Yeah, we were pretty um you know, Canon transparent that we certainly saw in Q4 of last year. The q1 of this year, a little bit of slowing in the order books.
Um and the quoting activity, we did see some pickup here in Q2. And in fact we um, have booked orders as we head into Q3 and Q4 and feel pretty optimistic about some of those longer cycle businesses, saw a recurrence. Some investment in the infrastructure Flow side.
Nathan Jones: And we also saw some of our industrial um businesses inside of that flow on segment. Also see some pickups as we head into the the remainder of the year.
Nathan Jones: Yeah, really pleased be able to uh, you know, guide flow to roughly mid single-digit growth in Q3 and then, to up the full year, from up slightly to upload single digits, so good, good, momentum for flow, exiting the year for sure.
Nathan Jones: And I would think, because obviously a little bit started to anniversary some of those difficult, you know, residential comps meaning, we've got easier comparisons and residential. And we're starting to get the non-residential piece of our business as a growth contributor. As we as we exit the year in flow,
Obviously, those are a little bit longer Cycle takes longer to book, takes longer to turn them into into revenue and earnings. So does that, you know, improving strength there, you know, improving orders, pretend to, you know, a growth year in 2026 for those businesses.
Yeah, I mean I think it's encouraging but you know we're we're more in the um configured order side, which is um and more standard order side. So we're we're recognizing things within a quarter or 2 non so we're we're not as as long cycle as as some companies may be. So these are pretty standard um projects and pretty standard deliveries for us.
Our next question comes from Julian Mitchell from Barkley's, please. Go ahead with your question.
Hi, good morning. Um, I just, um, wanted to understand, um, a, a little bit better. The moving Parts on the sort of op profit, or, or ebit, dog guide. So, the ebit dog guides on changed at 1.1 billion dollars or so, um, you pushed up the the revenue guide, um, a point or so. Um, so is the sort of the, the Delta there.
Speaker Change: Smaller gross, tariff headwind and the higher sales guide, but the unchanged e bit. Dark guide is the main moving part, sort of
Weaker volumes at pool and then some small effect on the divestment earnings. It sounds like that's pretty low, margin that business. But is there anything else kind of in that bridge on the the E bit dark guide? Kind of Now versus prior not, not really. In fact, you know, you've got rounding as as income goes up, ibida will go up. So if you think about the raise, in our guide of call at 7 cents, I think about roughly 5 cents is, uh, the, the business or the income piece. Um, so call that 10 million dollars and the rest is below the line because of the strength of our free cash flow, uh, in uh, in Q2, we're getting about 2 pennies because of lower interest expense.
That's helpful. Thank you. And then just to home in a little bit on the um water solution segment.
As I don't think that's come up, much yet, so maybe help us understand. You know, I think first half organic sales were down low, single digits. Um, the year is guided, um, flattish core. So help us understand the confidence in that, um, acceleration in in the back half, um, in in water. Um, and maybe any more clarity on that commercial divestment,
You know how much of that old kbi Services business is being installed and and what's the margin on it?
Speaker Change: Was really to focus more on the higher margin, filtration and Ice businesses to exit, that lower margin Services business. And as a result, we really avoid significant cash outlays into the future. Um, so that is a margin, accretive smart decision for us. Uh, as we focus more on our core businesses of ice and filtration, um, that that will result in US losing roughly, 20 million dollars per quarter in Q3 and Q4, uh, based on the sale of that Services business, um, that's implicit, uh, that's included in the guide. Uh, when you think about how the business is is doing, um, first half versus second half. Uh, I'll start with the residential piece, as, you know, we were going through a lot of portfolio. Rationalization. Uh, we'll have 1 more quarter of that in Q3 for residential, uh, and then that business should
Speaker Change: Start to stabilize uh, on the uh commercial uh, water side excluding Services. Uh, we did have a disappointing Q2 uh, we saw a softer Food Service Market than we expected. Um, but in the back half of the year, we do expect growth of low to mid single digits as that business slowly recovers in terms of the ice and the filtration business.
Our next question comes from Brian, Blair from Oppenheimer. Please go ahead with your question.
Brian Blair: Thank you. Good morning everyone.
Speaker Change: Morning. Uh,
Speaker Change: I'm hoping you get offer a little more detail on the decision that I best kbi and we we knew at the outset that that was a lower margins asset.
Speaker Change: you know, had that
Speaker Change: you know, at the at the Ross level deteriorated, you know, significantly relative to when you purchased the business because there seemed to be pretty natural synergies between every pure man, ice
Speaker Change: And kbi so they're they're they're must have been a trigger there. Yeah, so we had a we bought a Services uh, company. Um, the expectation was at the time there was a part that went into the water replacement. Um, think about every Superior cartridges and and solving those challenges and then there was a frozen carbonated beverage rearrangement for a key. Um, hamburger customer. What we learned is that we were in a lot of low density routes in rural environments.
Speaker Change: And while we had a good penetration of our water, um, you know change outs, we weren't able to grow and ultimately we had a fixed price contract.
Speaker Change: And we were absorbing substantial labor inflation. And also lost, um, Services revenue from driving and routes. And the opportunity would have been to invest, um, more deeply and expand our presence, which really creates Channel conflict with some really good partners that we have that do this already, or to hand this, over to somebody who's already in the interest or industry, to for them to get synergies from it. And that's a decision we ultimately made. So, I mean, Dynamics, change drastically. Um, during this period and we made the best decision going forward that we could, and we're very comfortable that we still have the right. Um, you know, customer relationships there and we got the right Service, uh, to, to serve the channel.
Speaker Change: Okay, that makes a lot of sense. I appreciate the detail. Um and sticking with water solutions you've you've offered
Speaker Change: Your take on, you know, commercial and and residential Dynamics, and and Outlook, uh, perhaps do the same with us first international business.
Speaker Change: Yeah, I mean, I think the amount of rationalization in in residential water treatment, reflects its Global footprint.
Speaker Change: You know, strong, large footprint in Europe, and pretty big 1 in China as well. So we're making sure we're well positioned.
Speaker Change: longer term in making sure that we're in the higher end of the markets and we're not in the commodity side and that's reflected in a lot of the revenue that we're walking away from and really trying to strengthen the core filtration components of the residential business that Dynamic isn't
Speaker Change: You're seeing a little more challenged environment than really what works experiencing um internally.
Speaker Change: Our next question comes from Lindsay from your question.
Speaker Change: Hey, good morning. Congrats on the quarter. Thank you.
Hey um wanted to come back to to tariffs, appreciate all the details. So you're you're dialing in the 60 million full year 140 previously. Obviously, a lot of moving pieces doesn't look like your your flowing through the the full Tailwind I guess. Does the does the framework contemplate? Some some potential softening developing in the second half and it's more of a hedge or you actually marking the market. What's a lower exit run rate?
Speaker Change: Yeah, just to um go over the math, the full year expected, this year is 75 million versus the 140. So if you think about that's a 65 million benefit, um then we talked about 50 million less price. So the net benefit is around 15 million and I would say we've flown in about 10 million of that to the full year guidance. So again, staying cautious. Um, we talked about the fact that August 1st, there's a potential 10 million headwind there, not sure. Um what exactly is going to happen, uh, on August 1st, but we'll be able to work through our mitigating actions. Uh, if those tariffs actually do take place,
Speaker Change: Right? And then you noted some of the operational efficiencies in in the factories looks like you're optimizing the footprint moving in that. Uh next wave has the Tariff situation in any way, slowed or perhaps accelerated. Some of that decision-making as you're reconfiguring the supply chains and any help on on the phasing of of those uh initiatives.
I think it's, um, if I picked 1 in the middle, I think it's kind of paused it, right? I I think if we could have more permanent Clarity on, where we should avoid and where we should go to, I think it would help the investment of substantially. Um, clearly our strategy of being local for local on the factory, footprint continues to make sense, um, and where we have those Avenues, we're we're doing it but it takes us a while to move Supply chains because of qualification of products, um you know we have to test everything and we have to make sure our quality levels are still high. So we're working through all that and giving ourselves some options and then I think we can start to accelerate uh the long term footprint um strategy that we have once we have better clarity.
Speaker Change: Yeah, really pleased with the start to the year around transformation. We've driven roughly, 44 million dollars of savings in the first half. Uh, we've got it to 80 million for the full year. Um, this is uh, really following the 67 million of savings 2 years ago, 107 Million last year. So really strong momentum and it still is kind of low to Middle innings.
Speaker Change: In terms of the transformation program uh were we, able were able to see some really nice balance between the sourcing savings and the efficiencies that we're bringing to our factories.
Speaker Change: And I would just add to that that I want to remind everybody. We're still committing to the 26% in 26 of of our OS, if we get volume. Um, ahead of the meager expectations, we have, we're going to get some tremendous leverage across the factories that's going to add to the ability to raise margins and add to those transformation savings because it's the 1. We have not yet realized our full expectations from is through the factories and that leverage on volume.
Speaker Change: Our next question comes from Jeff Hammond from keybanc Capital markets, please go ahead with your question.
Jeff Hammond: Hey uh, good morning guys. Good morning. Just want to go back to to pool and and and be crystal clear here. So it's it doesn't seem like anything's really changed in your
Pool volume Outlook, maybe news a little better. And, you know, remodel upgrade a little worse is that fair. And then just as you talk to your channel Partners, how would they characterize?
A channel inventories.
Jeff Hammond: Good about our positioning of inventory, both from Distributors and dealers and we feel good about our ability to have visibility on what sell through should be. I think weather was a little bit of impact in Q2, you know, it's hard to judge. Um, so we'll see how that comes through the Q3 and Q4. Um,
Jeff Hammond: You know, shipments.
Jeff Hammond: And then just on the, the Tariff Dynamic. I mean, moving pieces. You mentioned Europe and copper. Um, do do you assume like you're going to kind of let this play out and then you'll just
Jeff Hammond: You know, move anything else you do on price will just go into next year's price increase.
Jeff Hammond: That we we've been publishing now gives you, you know, where the biggest um risks would be. I mean we don't have a settled China tariff yet. I mean we have a verbal but we'd like to see some clarity on that that would probably be the bigger 1. Um, you know, copper is going to affect the entire industry and every industry. So we'll we'll see what, um, we do there. Uh, but you know, generally we're looking at this is, you know, inflation I'm on Commodities because as we put the tariffs in place, even us manufacturers tend to go up to the line of where those tariffs are. So we're going to reflect what happens in August 1st. We'll work with our dealers and our and our channels, and we'll, we'll do our best to recover that in year, um, for the impact that will will, will see happen. Jeff.
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. Hey, just want to Circle back on the deveer of the commercial services and John you gave uh a really crisp answer to Brian's. Uh question just on the rationale. I mean, as soon as I heard fixed contract in, in this environment um you could see why you wanted to access. So that that's clear but what wasn't clear was are you going to lose any of that pull through on the aftermarket? Because you no longer have a captive service. But so is that factored? In, in terms of not selling as many Replacements cartridges, Etc,
Speaker Change: No, I I don't believe so Dean. I think we built really good relationships primarily through the distribution channels and the synergies of the man's walk and everpure. And as a reminder we go out with every pure um, as its own brand and man to walk with its own brand. And so we've been able to really position our filtration as the filtration of choice and if anything that position has gotten stronger over the last um 3 years, 4 years. Um, competitive pressures have weakened some, I'm not going to mention who those companies are, but there are dynamics where we've been better positioned to solve in, in a more, um, standard consistent way, our customers challenges and we feel better about
Speaker Change: About those relationships today then we did even when we bought kbi. So I think it's the right timing and and we'll continue to work with the partner um who bought kbi to make sure that they get the filtration offering and and I think we continue to expand that channel.
Speaker Change: Great. And then are there other devices being contemplated in the near term and then a quick 1 for Bob. Uh, this is your outstanding quarter in free cash flow conversion and it's just you know it's nearly 260% uh conversion uh how did it play out according to your expectations uh working capital. Maybe there was a little bit less capex but just uh some observations there, please. Yeah. So let me let me answer the first 1 and then I'll let Bob take the Victory lap on cash because we, we certainly are proud of that number
Speaker Change: I would say that when we look at the vest, you know, we're looking at really product line exits. So when we look at 8020 or we do our product line exits, we look at it as
Speaker Change: is there is it inside of a shared Factory or not? Is it got its own dedicated? Um, infrastructure? What would the Erp transition look? Like what would a digital migration look like? And then generally what's the cost benefit of that. And so if some apps that we have is better off in somebody's hands or it's difficult to run Dean, we'll we'll consider it short answer. To your question is I have nothing really else pending. Uh, and I think we we have the ability to um run most of our uh product line successfully inside of our portfolio. So I wouldn't expect uh, develop
Speaker Change: Mr. Chairs to be a big part of the future.
Speaker Change: Again, give us a given us a very uh strong number and what is typically our strongest free cash flow quarter of the year.
Next question, comes from Andrew Krill from Deutsche Bank. Please, go ahead with your question.
Andrew Krill: Hi, thanks. Good morning, everyone. Um, just want to ask on the topic of tariffs again, just any observations of pre-b buying like to the extent, you know, you can measure that. Um, it didn't seem obvious but wanted to check and then I guess therefore, you know, if there could be any form of an air pocket in the third quarter, any car there would be helpful.
Andrew Krill: Yeah, I think we saw definitely in q1. Um, mitigating strategies that would include bringing in what you could and you know, we were very transparent. Um the benefits that we had created regarding that. I I think Q2 both in the cash flow of us and probably as an industry is indicative of the fact that a lot of us collected on what we did in q1 and Q2 and I think the pre-b buying has slowed um because I think the the normalization of the tariffs um are are better today than than they were when we were putting those strategies in place. So I think we've been monitoring that. I I don't think we feel that there's a lot of the pre-b buy that happened in Q2 relative to Q3. Um what we saw was that happening in Q2 relative to q1, so buying in q1 to Q2, that's what we saw it and that's what we mitigated it.
Hope that didn't confuse you but I don't think.
Makes sense that's very helpful. And then for going back to the transformation savings and 44 million in the first half. So about 36 million for the rest of the year, just through the assuming that's pretty evenly. Split between the third and fourth quarter. And then any difference by segments on, you know, which could have more or less of a benefit? Thanks.
Andrew Krill: I I would model as rough roughly even between Q3 and Q4. Um, and then, you know, I look to the the 2 um, segments that have the biggest opportunity from a complexity reduction perspective, so again, uh, flow and Water Solutions. Both hard at work in in terms of driving, those transformation savings.
Andrew Krill: Yeah, and the only thing I will add to that is I just want to remind everybody, it's net of Investments too. And, you know, despite the fact that we're not seeing that, um, rebound, yet, we are putting some heavy, uh, technology investments in, in the form of R&D Innovation and digital. Um, and and analytics and you're going to see those investments in in pool and Water Solutions primarily. But I just want to remind you that transformation is net of incremental sales marketing and Technology Investments.
Speaker Change: Our next question comes from Nigel. Co from Wolfe research. Please go ahead with your question.
Speaker Change: Thanks. Good morning everyone. Thanks for the question. Um, so yeah, thanks guys. I just want to double click on free Cube. I mean, you're pointing to some pretty important inflections. Uh, with um, I think it's flow up mid single digits and, um, the uh, commercial water solutions up, uh, low to mid singles. Um, just wondering, you know, what, what gives you confidence? Um, you know, in that Outlook, uh, obviously pretty different outcomes. What we saw in queue. So, is there anything in the order of book or or backlog? That's informing that, uh, that, uh, confidence
Speaker Change: in the way we look at, it is sequentially more than we look at a year-over-year. And then obviously year of year, is a result of what happened last year versus what's happening this year. So when you look at sequential order and shipment rates, that's what drives the confidence, and what our outlook for Q3 is and the comparables in every business, on a year-over-year basis are just different. Um, and and that's why I think it looks, um, stronger than it really is, if you looked at it through the sequential perspective, does that make sense? I don't, I don't want to confuse. Yes, it's more. It's more complicated than anything else. Okay, I get that. Yeah, exactly. And then, and then,
Speaker Change: And then another crack at the pool pricing. Um, so John, I think you you're you're appropriately. Um, you know, highlighting the fact that it's been a lot of prices gone into this end market and obviously underlying conditions, uh, remain quite challenging. Their, do you think there's any threat to the the pricing here? We tend not to see pricing roll backs, but do you think that uh, promotional activity could pick up or discounting and and do you think that next year will be a normal year of pricing normally see, you know, 2 or 3% pricing? Do you think next year could look like that? Would you think the sheer volume of price? Um, you know, kind of prevents that happening?
Speaker Change: Say that when you take a look at the profit pool being, you know what is realized by the equipment manufacturers? What is Ari realized by distribution? And then what is being realized by the end dealer? I think there's been a shift where the dealers generally benefiting right now and I say that because they're getting both service Labor Service revenue and pricing margin on product. You know, the manufacturer is able to push through to distribution, uh, the Tariff increases and I would expect that distribution is being caught slightly in the middle as we go forward. That's not a dynamic that's healthy. And that's a dynamic that's that needs to be considered as we think through, how do we get those profit pools more in Balance, um, for the longer term. Um, so I I think it's something we're monitoring. I don't think there's warning signs yet but it's, it's something we have to make sure that those Dynamics um, come out to play the way we do. It is adjusting rebates to dealers on products that we need them to sell versus, just General Revenue pools and making sure that we're moving the content into
Speaker Change: To um, the channel that's better for all.
Speaker Change: Our next question comes from Joe Giordano from TD Cowen please go ahead with your question.
Joe Giordano: Hey, good morning, everyone.
Speaker Change: Hey, good morning. Hey! Hey! Hey um, just curious. John you mentioned like price and pull up 15% in trailing 12 months just curious like
Speaker Change: Is that creating an opportunity for you know foreign product to come in and enter the market at a lower price point. We've heard some stuff about that. Just curious if you're seeing it at all,
Speaker Change: Yeah, I don't think we're seeing it yet. I do hear about it, and I do think that that's something we got to monitor. I mean, again, probably more in the low end of the market, on Dumber products. I mean, you know, I, I think, we believe that we need to get every pool automated and once you're automated into the manufacturer's, um, you know, um, iot system. And and the app you're going to generally buy the higher value products along with the pad. I think you could see service providers in this type of environment, switching out certain pad components for lower price products. It's not good for the industry. It's not good for safety. Um, it's it's not good at the overall value contribution, but you could see it happening if we don't see volume. Um, and we don't see demand continued, I think it'll be noise um, in in the early stages, but I I think we got to keep an eye on it.
Yeah, fair enough and then just on the kbi divestment correct me if I'm wrong. I thought there was like that owning that business was kind of like a
Speaker Change: part of the thesis to buying Manatauk ice, right? Like combining all this stuff and can you kind of talk us through? I mean, I understand the reasons and and how the dynamic has shifted at kbi, but like, does it change the Outlook at all for, you know, how to make manage walk? Ice successful Within penter?
Speaker Change: Yeah, so let me let me just re address the strategy when we bought kbi, we didn't have management. And the theory was that we needed to have a service provider to make sure that our high value and very valuable to the industry ever pure. Um, cartridge would not be switched out for lower cost competitive product, that that's what our theory was and that's what we did. So it was really more of a defensive strategy. We did believe that we could also grow the penetration. And really think about the franchise saying this is our spec that we want and then make sure that the franchisees are honoring that spec and putting those units in place. Um, when you fast forward and you bring man to walk along. Um, now between man talk and everpure going through same distribution. We're starting to scale up the availability of both the Manatauk brand and the everpure brand, and we become much more relevant in the industry. So that we're less dependent on what the individual service provider is is doing. Um, that being said, we would still have it today. If all those Dynamics, I mentioned
Speaker Change: did not come to fruition and as you look forward to any business it's got to be is the incremental investment worth the the work and we just determined it wasn't at this stage and we needed to put it in somebody else's hands and continue to work with that new partner um to sell our cartridges to
Speaker Change: Our next question comes from Andrew basaglia from BNP parabol. Please go ahead with your question.
Andrew Basaglia: Hey, good morning, everyone.
Speaker Change: Good morning. Good morning.
Speaker Change: Uh I just wanted to check on, you know, your your cash flow has been strong lately and preference towards using that um for repo versus m&a. Um and what are discussions like on the on the deal side, given the Tariff uncertainty, now that we got a full quarter underneath us.
Speaker Change: I need to recover a lot of the preco views, I think a little bit of buyback, a little bit of dividend and and ongoing basis is the right thing to do. And I don't think that precludes us from doing both on m&a. We are seeing more bolt-on m&a into the pipelines. I think we got to be continued to be disciplined. We got to continue to make sure that the right strategic deals and we got to make sure they have the right value returns for shareholders. Um, but I do think the pipeline is starting to open up and we might see some in the future here.
Speaker Change: Yeah, okay okay, okay maybe um, just 1 last 1 on that your previous distributor comments, um it was certainly at some point um you know, they're going to feel the pinch as well.
Um, with pricing. So I'm wondering
Yeah, where first off price? Really realization sounds like came in around where you expected. And then, um, I guess going forward, I I, you know, how does that Dynamic work when we go to look out to 20206 with
Speaker Change: Um, Distributors ability to keep taking price.
Speaker Change: Well, as part of 8020 um you know we have done a lot of customer simplification of who we ship to so we ship primarily to our top uh Distributors now and only to our top distributors. It it really is about making sure we're aligning the dealer incentives to move the product through, that's beneficial to us and the channel and the End customer. Right? So what you see sometimes is you get a mix and they might go buy the spare parts and then maybe the spare parts weren't priced appropriately, and they can put a lot of labor on top of it.
Speaker Change: So I think it's our responsibility to make sure that we're working with the channel to continue to grow content on the pad and then we go out and try to get our fair share of that content and that's what we'll continue to do, is we head into 26? And as we look at those incentive plans that we put into place for the dealers.
Speaker Change: Our next question comes from 3 Biscay from Jeffrey's. Please go ahead with your question.
3 Biscay: Hi, thanks for putting me in. Um, maybe just another 1 on Poole, you know, I think you mentioned potential for sluggish volumes in 2026 but maybe just talk about how you're thinking about replacement demand from the bulk of equipment that was put in during the co years. And when does that start to show up in volume?
Yeah, it's a real quickly. I'm not I don't I want to make sure I'm clear. I didn't say sluggish. I'm saying we haven't yet seen um, significant volume recovery. We were planning on it. I, I don't know if it's going to be here in the back half of the year. I don't know where it sits for 2026. So just want to make sure we're there. Um, and then I I just think that overall there is still a lot of opportunity for new product and for training dealers for training customers and making sure that we get to every pool being automated and making sure that people understand the value proposition of that. And I think there's a ton of opportunities to still grow, um, within the current environment.
Speaker Change: Okay, thanks for the clarification and then maybe just 1 on price. You know, you talked about pulled a man being impacted by all the price increases just maybe how you're thinking about the pricing over the next several years. Um, you know, does pricing slow down at some point. Is it just discounts or can you introduce more entry-level equipment? Just to make more pools, more affordable to more people? Or is that just not part of the equation? I, I think our, our, you know, our value propositions always be working the higher end, pools and have the technological advancements. That the industry wants to needs and and make sure we're we're driving value and content. I do think though that price normalization, you know, getting back to that, you know, 1 to 2% for years reflecting General. Inflation is the hope of every industry so that you can work within the context of driving productivity plans and making sure that you're providing that incremental value to the channel. And that's something we're working on. I'm sure every industry is working on it, you know, there's just a lot of volatility right now. And you know what we have to do is protect our share and our base and make sure that we're
Speaker Change: Managing our channels, the best possible to always be on the positive side of that, but it's going to be for everybody if that inflation comes down and the pricing can come down.
Speaker Change: A great day.
Ladies and gentlemen, that does conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.