The operator introduces the Pentair Third Quarter 2023 Earnings Conference Call and explains the format of the call. Shelly Hubbard, Vice President of Investor Relations, introduces the speakers and directs listeners to the company's website for additional information. She also reminds listeners that the presentation will include forward-looking statements and cautions them about potential risks and uncertainties.

The speaker advises listeners to review risk factors and announces that the call will be limited to two questions per person. They also mention slides in the earnings slide deck and share two recent recognitions for their work in social responsibility and sustainability. The speaker then hands the call over to John, who begins by summarizing the executive summary on Slide 8 and expressing satisfaction with the third quarter results.

In the third quarter, sales and adjusted margins continued to increase for the sixth consecutive quarter. Adjusted EPS exceeded previous guidance and free cash flow also saw a significant increase. The company's focus on delivering the core, improving sustainability, and investing in transformation, innovation, and M&A has led to strong results, including the launch of 25 new products in 2023. The company's mission to help the world sustainably move, improve, and enjoy water is driving long-term value for shareholders.

The company has made significant progress in innovation and product launches, with a focus on building a strong future in the Pool, residential, commercial water treatment, and industrial waste sectors. The transformation journey that began two years ago has helped the company evolve into a leading diversified water company, with a focus on pricing, sourcing, operational excellence, and organizational effectiveness. The Manitowoc Ice acquisition has exceeded expectations and the company's transformation initiatives have driven margin expansion.

The company's performance in the third quarter led to an increase in adjusted EPS guidance for 2023. They are monitoring macroeconomic developments and investing in long-term growth. The company has a strong track record of generating cash flow and increasing dividends. Sales were down 4% in Q3, but margin expansion was significant due to diversification and transformation initiatives. Residential sales were down, but commercial and industrial sales were strong. The volume impact on sales improved from the previous quarter.

In the third quarter, the company saw a 3% increase in segment income and a 140 basis point expansion in return on sales. This was driven by productivity from transformation, margins from an acquisition, and price versus cost benefits. The adjusted EPS was $0.94, with net interest expense of $29 million and a 15% adjusted tax rate. The Industrial & Flow Technologies segment saw a 3% increase in sales, with strong growth in commercial and industrial sales offsetting a decline in residential sales. Segment income grew 18% and return on sales expanded 250 basis points, driven by progress on transformation initiatives. The segment's success is attributed to a revised go-to-market strategy and industry leadership, with a focus on standardized solutions and expanding into new markets such as datacenters and municipal infrastructure.

In the third quarter of 2023, the company saw growth in their Water Solutions segment, driven by their acquisition of Manitowoc Ice and price increases. This led to a significant increase in segment income and return on sales. The residential business within Water Solutions also showed signs of stabilization, while the commercial business remained strong. In contrast, the Pool segment saw a decline in sales due to inventory corrections and a tough comparison to the previous year. However, the negative impact of volume improved from the previous quarter and was partially offset by pricing increases.

Despite lower Pool sales in Q3, return on sales increased due to price offsetting inflation, rightsizing direct labor, and improved productivity from transformation initiatives. These initiatives focus on four key themes: pricing excellence, strategic sourcing, operations excellence, and organizational effectiveness. The goal is to achieve a 23% return on sales and expand margins by over 400 basis points by the end of fiscal 2025. The transformation initiatives are in different stages and are expected to compound and drive margin expansion through 2025 and beyond. The strategic pricing playbook has been developed and is being implemented across segments and categories, with early readouts in Q3.

The company is implementing strategic price actions that differ from annual price increases, as they are evaluating all products through a value-based model. They have completed Wave 1 of their sourcing excellence initiative and have begun Wave 2, with expected savings to begin in 2024. They have also completed facility consolidations and are working on lean transformation plans. Wave 3 is expected to begin after 2025. The company is confident in their ability to execute on pricing actions and identified savings.

In the third quarter, the company generated strong free cash flow and reduced its net debt leverage ratio. The company plans to remain disciplined with its capital and focus on debt reduction in the current higher interest rate environment. For the full year, the company is updating its adjusted EPS guidance and expects sales to be down 1%, with a 10-11% increase in segment income. For the fourth quarter, the company expects sales to be down 3-4% and segment income to increase 3-8%. The company is also introducing adjusted EPS guidance for the fourth quarter.

Pentair expects total sales to decrease by 1% in fiscal 2023, with mid-single digit growth in IFT sales and high-teen growth in Water Solutions sales. However, Pool sales are expected to decline by a high-teen percentage, leading to an overall increase in segment income and ROS expansion. The company is pleased with its Q3 and year-to-date performance, with six consecutive quarters of sales over $1 billion and margin expansion. They credit their diversified water portfolio, transformation initiatives, and Manitowoc Ice acquisition for this success. The company also has a strong balance sheet and disciplined capital allocation strategy. During the Q&A session, they will address questions about their pricing strategy in the Pool segment.

During the earnings call, John Stauch was asked about the Pool market and its performance. He mentioned that there was a slightly bigger inventory correction than previously expected, around $150 million. He also stated that this could potentially impact Pool's performance in 2024, especially with the current higher interest rate environment.

John Stauch, CEO of Pentair, is pleased with their Q3 results, which played out as expected. They focused on sell-through data and metrics of their channel partners to gain clarity on the market. They believe the inventory issue is behind them and are now preparing for a strong 2024. They beat their Q3 sales forecast, with a 4% decrease compared to the expected 7% decrease, but did not change their forecast for IFT or Water Solutions. While Water Solutions has benefited from the acquisition of Manitowoc Ice, they will face tougher comparisons in the future. In IFT, there are no indications of channel destocking.

During a recent conference call, John Stauch, CEO of Pentair, addressed questions about the company's Pool division. Stauch explained that the elevated interest rates would make it more challenging for productivity-based projects and expansion investments to meet their hurdle rates. He also mentioned that the company is expecting to see a significant improvement in Pool's performance in 2023, as the channel destocking is completed and normal seasonality returns. Stauch believes that the price will remain elevated in the mid-single digits and the volume outlook for Pool in the next 12-18 months is expected to be positive due to the absence of inventory correction.

The company predicts that the Pool building and overall remodeling markets will not expand, but there may be some recovery in the aftermarket. Interest rates and financing conditions are impacting spending in all sectors, including the company's end customers who are having a harder time accessing capital. This may slow down projects and make financing tougher for building projects.

The company's commercial water solutions platform has had a strong year, with solid market activity and success in various segments. However, they may face challenges in the future due to tough comparisons and a shifting market.

John Stauch, CEO of Manitowoc, discusses the company's progress and forecasts a CAGR of 8% for the business from 2019 to 2023. He also mentions the positive impact of the end-to-end solution and cross-selling between the company's legacy businesses, resulting in a couple points of incremental growth. The company is excited about the synergies and go-to-market strategies of the combined businesses.

John Stauch, CEO of Pentair, responds to a question about the impact of destocking on the company's financials. He confirms that the $150 million impact mentioned in the previous quarter is still accurate. When asked about the company's leverage levels and potential use of their balance sheet, Stauch and CFO Bob Fishman state that paying down debt is currently their priority. They are also considering strategic acquisitions, but the market is not favorable at the moment. Maintaining investment-grade status is a top priority for the company.

The company has implemented interest rate swaps and collars to manage their variable rates, resulting in 65% of their debt being fixed. This has helped to bring their weighted average rate down to 5.3%, with a potential increase to 5.5% in the future. The company has also focused on paying down their debt, which has been beneficial. In regards to the profit bridge, the company saw inflation as a headwind year-over-year, but expects to see a more neutral or slightly positive impact in the future, with a focus on productivity from their transformation initiatives. This is a shift from the previous benefit of price versus cost.

The speaker adds that inflation has been covered by price and is expected to decrease in the fourth quarter. The team has done a good job of understanding and factoring in inflation. Productivity is expected to be a major driver of segment income next year, with significant savings from transformation expected to kick in. Wave 1 of transformation is expected to read out in 2023, with healthy funnels in place for each of the four pillars. The momentum going into 2024 is positive.

The company has faced challenges with their transformation initiatives due to engineering work and resupply efforts, but they are starting to see benefits in the fourth quarter and expect it to continue into next year. They anticipate a third of their businesses to participate in pricing exercises in 2023, with two-thirds participating in 2024. They are focused on improving their return on sales (ROS) and expect it to improve next year. For Pool, they expect Q4 to have higher shipments than Q3, and Q1 to be better than Q4.

The company expects to see a return to normal seasonal patterns in the second quarter of next year, with the third quarter being slightly weaker and the fourth quarter starting the pre-load for the 2025 season. They are focused on avoiding inventory issues and maintaining strong sell-through going forward. In terms of their infrastructure business, the year-over-year comparisons may be tougher due to a strong 2022, but they are still seeing strong orders in the mid-single digit range. The company is also focused on non-project-related wins and recurring revenue streams. For their Manitowoc Ice business, they have seen success and synergies, but are facing a tough comp due to backlog drawdown and order rates.

The company is seeing more normal growth in the commercial food equipment and other markets. Backlogs have returned to normal levels and the company has had a strong year with a 20% growth. They expect a more normalized year next year and are confident in their business. The current growth rate is not sustainable for their ice business and they expect a modest pre-buy this year, which is included in their current view of Q4.

The company is trying to maintain a steady level of production throughout the year to avoid a drop in shipments in any one quarter. They are offering discounts to encourage customers to buy ahead for next year's pool season. The forecast reflects a more normal seasonality and early buy, which will set them up for growth in 2024. The fourth quarter guidance shows a significant increase in ROS compared to the previous year, but a slight decrease sequentially due to returning to more normalized levels. The company is pleased with the ROS expansion in the fourth quarter and it will provide momentum for the end of the year.

Joe Giordano asks John Stauch about margins for Pool and Water Solutions in the third quarter and going into next year. Stauch says that despite a decline in volume, Pool margins were still good and he expects them to continue to be strong. He also explains that Water Solutions has a mix of residential and commercial components, and the decline in revenue from the residential side actually helped improve the overall margin due to a more favorable mix.

During a conference call, Joe Giordano asks about the expected growth for Pool in the fourth quarter. CEO John Stauch responds by saying that they are a piece of their distributor's puzzle and that they are predicting their revenue numbers to go up from Q3. He also mentions that they were close in their Q3 revenue estimate and feel good about their Q4 estimate. Later, Scott Graham asks about the 2.8% productivity jump and if it was helped by a better supply chain. Stauch responds by saying that they are working more seamlessly with their supply chain and are benefiting from more efficient deliveries.

During an earnings call, CEO John Stauch discusses the pool industry, stating that they expect 2023 to have builds at pre-pandemic levels, with high-end pools still being built and low-to-mid market pools being affected by interest rates. He also mentions that they are expecting flattish builds and an increase in aftermarket heading into the 2024 pool season. He notes that they will provide more information and updates on their 2024 guide during their Q4 earnings report.

The operator introduces Deane Dray from RBC Capital who asks about the company's innovation and if there is a target for new product vitality and margin differential. The CEO responds that there is a target for vitality and sees a margin lift from new products after a year or two. The next question is about the company's products in relation to the Build America, Buy America provision in infrastructure spending. The CEO mentions that they have historic brands that are made in America and this gives them a fair opportunity to win jobs. The next question is about Manitowoc Ice within the Water Solutions segment.

The speaker is asked about the company's performance in the past year and their outlook for the future. They decline to provide specific numbers for 2024 but mention satisfying customer demand for the rest of the year. They also mention exiting lower-margin business and the impact it will have on Water Solutions next year. The final question asks about the company's commitment to a specific financial target, to which the speaker responds positively.

Bob Fishman, Sabrina Abrams, and John Stauch discuss the performance of the business in the third quarter, which exceeded expectations. They also mention the impact of Pool and the company's pricing strategy for the upcoming year. John Stauch reiterates key points, including strong execution, updated guidance, momentum in transformation initiatives, and a focus on long-term value creation. The conference call then concludes.

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