The Pentair Second Quarter 2023 Earnings Conference Call has begun with Shelly Hubbard, Vice President of Investor Relations, introducing John Stauch, President and Chief Executive Officer, and Bob Fishman, Chief Financial Officer. The call will provide details on the second quarter's performance as outlined in the morning's press release. Investors are encouraged to use the non-GAAP financial measures provided to further understand the company's performance and the impact of items and events on the financial results. Forward-looking statements are cautioned due to certain risks and uncertainties that may cause actual results to differ from expectations. Following the prepared remarks, the call will be open for questions.

Shelly highlighted Slides 4-7 of the earnings slide deck which provide a snapshot of Pentair's purpose, mission, vision, values, performance, installed base, and 47-year track record of dividend increases. In Q2, Pentair achieved record sales, segment income, return on sales, EPS, and free cash flow, leading to an increase in their 2023 adjusted EPS range to $3.65 to $3.75.

In the second quarter, the company achieved record sales in the IFT segment, driven by double-digit growth in both the commercial and industrial businesses. Margins were driven by price and transformation initiatives, as well as improved offerings to drive margin expansion. The company also strengthened its balance sheet and reduced its net debt leverage ratio.

In Q2 of 2023, Water Solutions saw strong sales growth and margin thanks to the recovery of foodservice and hospitality venues and a shift in consumer behavior. The Manitowoc Ice acquisition has been successful and has enabled the company to provide end-to-end water solutions. Residential water treatment is nearing the bottom of the cycle and PFAS awareness is rising, leading the company to invest in R&D to provide certified products. Pool has had a difficult year due to higher than usual demand and supply chain challenges disrupting lead times.

Pentair delivered another quarter of quality earnings with ROS expansion across all 3 segments. Despite lower volumes in Q2, they managed to drive significant margin expansion from price, cost actions, and transformation savings. They expect Q3 to reflect a bottom in Pool volume as channel inventories correct, and believe Pool remains an attractive market. They are introducing Q3 guidance and raising the full year adjusted EPS range to $3.65 to $3.75.

Pentair had a record second quarter in 2023, with sales of nearly $1.1 billion, a 2% increase from the previous record set in Q2 of the previous year. This growth was driven by strong sales in IFT and Water Solutions, which more than offset lower Pool volumes. The Manitowoc Ice acquisition, which closed in July of 2022, also contributed to the sales growth. Pentair has achieved 47 consecutive years of dividend increases and is targeting high-teens ROIC, and has a strong balance sheet and a 5-year track record of financial success.

In the second quarter of 2023, Core sales improved 9% in both IFT and Water Solutions with Pool declining 28%. IFT saw a 9% increase in sales driven by 28% growth in commercial sales and 13% growth in industrial sales, while Water Solutions saw a 51% increase in sales due to the Manitowoc Ice acquisition and volume and price increases. Segment income grew 14% and 27% respectively for IFT and Water Solutions, and return on sales expanded 230 and 250 basis points for IFT and Water Solutions respectively. Manitowoc Ice sales increased 30% and segment income grew 130%, while North America residential business stabilized.

In Q2 2023, Pool sales declined 28% to $334 million due to channel inventory corrections, strong Q2 2022 comparison, and cooler and wetter than usual U.S. weather. Despite the lower sales, return on sales expanded 190 basis points due to price significantly offsetting inflation, rightsizing direct labor to align with lower volumes, the elimination of 2022 manufacturing and supply chain inefficiencies, and benefits from transformation initiatives. Pentair is expecting a $150 million channel inventory correction in 2023, which is expected to become a tailwind in 2024. The transformation initiatives focus on pricing excellence, strategic sourcing, operations excellence, and organizational effectiveness, and are expected to improve the overall cost structure.

The company is targeting a ROS of 23% by the end of fiscal 2025, and plans to expand margins by 400 basis points compared to fiscal 2022. This will be achieved through four key themes: pricing excellence, strategic sourcing, operations excellence, and organizational effectiveness. Wave 1 of each of these themes is underway, with readouts beginning in 2023, and Wave 2 expected to begin later this summer with readouts in 2024. Wave 3 is expected to begin post 2025, with margin benefits beginning in 2024. The company is confident that their teams can execute on pricing actions and savings identified in sourcing.

The company reported a record free cash flow in Q2 and has lowered their pro forma net debt leverage ratio. The return on invested capital was 14.9% and the company has hedged their variable rate debt. For the full year, the company is raising their adjusted EPS guidance to $3.65 to $3.75. They also expect sales to be roughly down 2% to flat and segment income to increase 10% to 12%. For the third quarter, they expect sales to be down 7% compared to the prior year.

Pentair expects total sales to be down 1% to $4.1 billion, with IFT sales up mid-single digits, Water Solutions up high teens, Commercial up 50%, and Residential down 10%. Pool sales are expected to be down mid-teens, with new and remodeled pools down 25-30% and aftermarket inventory down 20%. Price is expected to be up mid-single digits, and Pool sales are expected to return to normal in 2024.

Pentair is expecting an 11% increase in segment income and a 200 basis point ROS expansion to 20.9%. The company has also diversified its portfolio and has seen progress in its transformation initiatives, generating strong free cash flow and further strengthening its balance sheet with the repayment of debt. The company believes that its industry leadership, diversified brand portfolio, transformation strategy, ESG focus, favorable secular trends, and strong balance sheet make it a compelling investment opportunity.

Julian Mitchell questions John Stauch about the cadence of sales in the Water and IFT divisions, and Stauch explains that the growth in Manitowoc is due to industry demand and will eventually moderate. In IFT, there is strong growth in commercial and industrial, but it will also moderate in the back half of the year. Mitchell then follows up with a question about the Pool segment, asking for more color on how conversations with channel partners and sell-through have evolved in the last two to three months.

Robert Fishman states that they are pleased with the progress of Wave 1 of their transformation, which largely consists of motors and drives, casting, electronics, logistics, and packaging. They have seen a lot of benefits in the transportation area and expect to see more in 2024 in the other components of Wave 1 spend.

Bob is pleased with the way his team has responded to deflation in the global marketplace, leading to successful relationships with suppliers and lower prices in ocean shipping and air consumption. The team has also taken corrective action to reduce inefficiencies such as spot buys, expedites, and partial truckloads. John is pleased with the way prices held up in 2023 and expects a more normalized pricing environment going into 2024.

John Stauch explains that Pool's transformation initiatives are already showing positive results and they are using outside partners to benchmark and give breakthrough thinking to ensure consistent and predictable results. Pool is also investing in their channels, customer experiences, and innovation, which will offset the transformation benefits. These investments are included in their 2025 gross target.

John Stauch provides context on the Manitowoc Ice channel, noting that it has historically been a steady 5-6% grower, though 2019 saw a significant downturn. He states that they are now back above 2019 restaurant numbers and that they expect high single-digit growth by 2023.

John Stauch is impressed by the commercial and infrastructure team's ability to grow margins in ROS while also growing, which he did not think was possible. Going forward, the team will focus on winning projects and jobs that have aftermarket and service components, while aiming to grow at mid-single digits while maintaining these margins.

Robert Fishman discussed the company's goal of expanding ROS year-over-year, even with the headwind of the Pool business in Q3. He is confident that trends in the Pool business will bottom and inventory will normalize.

Robert Fishman of Manitowoc states that the inventory correction of $150 million will not repeat in 2024 and that he expects price increases as they go into the next year. Additionally, he predicts that Water Solutions will have a slight decrease in margins sequentially due to not having as much volume as before, but that the filtration and residential pieces of Water Solutions will still benefit from transformation.

John Stauch mentioned that weather did not play a big part in the company's Q2 Pool softness, and that the inventory correction was more to blame. He also added that the current hot weather trends are positive for demand, but that heaters are not necessary. Robert Fishman then added that even in the deflationary environment, the company still has to work with suppliers to point out commodity prices that are coming down.

Robert Fishman and John Stauch discuss the strategic sourcing initiative, which includes negotiating price decreases and reducing carriers by 2/3. This is part of the deflationary work that will lead to a 23% ROS by 2025. Additionally, the Wave 1 benefits of purchasing savings and direct material will result in double-digit savings. These savings will show up in the bridges as productivity and not inflation.

John Stauch and Steve Tusa discuss the price and productivity bar in relation to the transformation work being done. Robert Fishman mentions that the price benefit has been a tailwind over the past few quarters and is mainly due to carryover pricing decisions. Lastly, John Stauch addresses the sell-through in the channel and the magnitude of the prebuy implied in the guide.

John Stauch is discussing the sell-through performance in the first couple of quarters of the year, which is slightly behind original expectations due to prebuys, discretionary items, and slower finance Pools. He then talks about how the Q4 shipments will be split between early buy and standard orders, which will be known by the Q3 earnings call. Damian Karas then follows up by asking about the trajectory of Pool margins next year, to which John Stauch does not answer. Nathan Jones then asks about IFT volume, which has been flat over the last couple of quarters but has become more selective on projects.

John Stauch discussed how Flow's residential business has been slow due to residential trends in the Water Solutions and Pool industries. Flow is looking to grow in the commercial infrastructure sector, which includes data centers, warehousing, and other buildings that require fire pumps and water. Stauch also mentioned that they have exited direct-to-consumer businesses and are working through year-over-year comps related to those decisions. The underlying growth in the core components business is moderating but does not have inventory challenges.

Joe Giordano and John Stauch discuss the growth of IFT in the second half of the year, with Flow contributing to low-to-mid single digit growth. They also discuss Pool, which has seen sizable revenue declines but higher margins, and John Stauch states that it is a good basis to build off of as they grow, with the potential of volume leverage on the overhead structure of the business.

The presenter thanked everyone for joining the earnings call and reiterated the key themes: strong execution in the diversified portfolio, strength in IFT and Water Solutions segments, raised 2023 guidance, transformation initiatives reading out, and expected value creation beyond the fiscal year. The presenter concluded the conference and thanked everyone for attending.

This summary was generated with AI and may contain some inaccuracies.