The operator introduces the Pentair First Quarter 2024 Earnings Conference Call and reminds participants that the call is being recorded. Shelly Hubbard, Vice President of Investor Relations, introduces the speakers, John Stauch (President and CEO) and Bob Fishman (CFO). The company's earnings release and slide deck can be found on the investor relations website. Non-GAAP financial measures will be discussed and listeners are advised to review risk factors in the company's recent Form 10-K and Form 10-Q.

The speaker thanks the audience for attending the Investor Day and discusses the company's strong Q1 results, including margin expansion and increased segment income and adjusted EPS. Transformation initiatives, such as value-based pricing and sourcing, are on track and expected to drive benefits in the future. Operational footprint optimization and 80/20 training have also been implemented.

The company is optimistic about returning to a more normal operating environment after four years. The lead times and backlog are normalizing and the order rate trend is in line with expectations. The residential, commercial, and industrial verticals within the three segments are showing mixed trends. The company's corporate responsibility report for 2023 shows progress and the company is proud of the work being done in sustainability. The quarter's earnings were better than expected and the key themes from the Investor Day are on track.

The company has reported strong financial results for the first quarter, with sales over $1 billion and a 90 basis point increase in return on sales. Sales were down 1% compared to last year, but all three segments showed sequential growth from the previous quarter. Segment income increased 3% and return on sales expanded to 21.4%. Adjusted EPS was $0.94, exceeding guidance and up 3% from last year. The company is optimistic about entering a more normal operating environment after nearly four years. Flow sales declined 2% due to a decline in residential sales, which are closely tied to the housing and agriculture market.

In the first quarter, segment income and return on sales for the company grew significantly, with the return on sales exceeding 20% for the first time. Water Solution sales were slightly up, while Pool sales declined but showed improvement from the previous quarter. The company expects Pool margins to continue to improve throughout the year and has updated its three year margin targets to reflect expansion through 2026.

In the first quarter of the year, we saw a cash use of $127 million, similar to the previous year. However, we expect strong cash generation in the second quarter, which is historically our highest quarter. Our net debt leverage ratio has improved and we are targeting a high return on invested capital. We will continue to focus on debt reduction and share repurchases to offset dilution. Our adjusted EPS guidance for the full year remains unchanged and we expect sales to increase in the low single digits for Flow, remain flat for Water Solutions, and increase by 7% for Pool. We also anticipate an 8% to 11% increase in segment income for the full year. Our transformation initiatives are expected to contribute to margin expansion and we plan to remain disciplined with our capital allocation.

The company expects sales to increase by 1-2% in the second quarter, with strong growth in Pool sales and challenges in the Water Solutions segment. They anticipate a 10-12% increase in segment income and a 13% increase in adjusted EPS. The operator then opens the line for questions from analysts. The first question is about the company's end markets for the rest of the year, and the response is that they are generally in line with expectations, except for some weakness in the Residential and Agricultural sides of the Flow segment. The second question is about the impressive margins in the Flow segment, and the company believes they will continue to be strong, with nothing in the first quarter being non-repeating.

The company's ROS expansion in Q1 was a result of their focus on strategic sourcing, pricing excellence, operational efficiency, and complexity reduction. The sustainable gas business, which had several losing projects last year, has been right-sized and is now performing better. This has contributed to the 20% ROS result in Q1, and the company expects this to be a good starting point for future performance.

In the first quarter, the company will continue to manage the mix and drive transformation programs, with a focus on Flow performance. The analyst asks about the decline in productivity in the Pool business and if this is due to investments. The company expects ROS to increase year-on-year for the rest of the year, with a significant growth in Q2. They are also investing in driving growth and transformation in the Pool business, which will lead to further ROS expansion in the future. The company is comfortable with the ROS expansion in Pool for the remainder of the year, and as they ramp up for significant growth in Q2, there will be a manufacturing leverage play. In response to a question about remodel inquiries, the company confirms that they have seen an increase in these inquiries.

The speaker asks for clarification on the expected impact of the current market trends on the company's financial performance. The CEO and CFO explain that they expect a decline in the Water Solutions segment due to a tough comparison from the previous year, but they are encouraged by increasing demand for remodels in the pool market. They also mention that the Ice business and services may face some headwinds, but the filtration business is performing well. The speaker follows up with a question about the commercial water segment and the services segment.

John Stauch and Bob Fishman of Pentair discuss their expectations for the year, stating that they expect Ice to perform as expected. They also mention challenges in the Pool business and a focus on more profitable services. They reiterate their goal of $75 million in productivity for the year and mention potential inflation impacting price and cost.

The company is monitoring freight and copper prices and may go back out to recover prices if needed. Their goal is to offset price and cost for the full year. In the first quarter, they saw a 3% increase in price and expect a 2% increase for the year, with 3% inflation on the cost base. Productivity and transformation will increase in the next three quarters, with Pool segment having a significant contribution in the second quarter. Corporate expenses are expected to decrease in the second quarter. Debt reduction is the priority for capital deployment, and the company expects to be under two times levered by June or July.

Bob Fishman, CEO of a company, discusses their cash flow and interest expense for the year. He mentions that they have built in a $100 million interest expense and have no plans for rate cuts. They are expecting a strong Q2 in free cash flow and have a target range for debt reduction. They also plan to restart share repurchases and have optionality for driving shareholder value. In terms of sales, they are expecting Waters to be down mid-single digits, Flow to be flat, and Pool to be up 10% or more. When it comes to inventory, their own inventories are flat from the previous quarter and significantly lower than the previous year. They are closely monitoring customer and channel partner inventories and comparing their own inventory rate to historical levels for this time of year.

Bob Fishman and John Stauch discuss the inventory levels at Pool, stating that while there is still room for improvement, they have seen a 10-day decrease year-over-year. They believe that the volume in the second quarter will help bring down inventory levels, and they are working closely with their channel partners. They also mention that the Pool market is still down mid-single-digits, but they are seeing better insights and a more normalized situation.

The speaker discusses the impact of interest rates on the financing and sales in the industry. They mention that lower interest rates could signal brighter prospects for the industry, but they are currently facing challenges. They also mention the recent acquisition of a competitor by Home Depot, but do not anticipate any short-term impact on their business. They expect some improvement in certain verticals in their Water Solutions segment as challenges from the previous year moderate.

The company is halfway through implementing value-based pricing and has seen positive traction so far. They have also been successful in implementing 80/20 strategies and are using pricing playbooks to strategically impact their business outcomes.

The speaker discusses the benefits of implementing an 80/20 strategy and the importance of treating top products and customers differently in order to drive growth and reduce complexity. They also mention the potential for automation in the Pool business.

John Stauch, CEO of the company, discusses the current state of automation in their customer base and expects a higher penetration rate this year as people have more time to think and dealers become more productive. He also mentions the need to simplify the portfolio and bring the right value proposition to accelerate the penetration rate. When asked about the preordering activity for Pool, Stauch states that most of it will be shipped in the second quarter. He also discusses the company's capital allocation strategy, mentioning the possibility of using cash flow for buybacks to offset dilution in the short term and considering M&A opportunities for the long term.

The company is considering potential bolt-on M&A opportunities and is pleased to see some potential deals. However, valuations and performance must be carefully evaluated before any transactions can be completed. The Flow side of the business saw weaker performance, particularly in the North American water supply and disposal markets. Pool is performing well due to inventory tailwinds, while residential water treatment is flat compared to last year's severe decline.

The speaker is discussing the company's performance and outlook, specifically focusing on the Pool division and its impact on earnings. They mention the positive effects of remodels and aftermarket, but note that new Pool construction is still down compared to previous years. The speaker also addresses the company's guidance for the second half of the year, which is expected to be similar to the first half. They mention the strength of the first half and express confidence in the momentum continuing. A question about the seasonality of EPS is also brought up, with the speaker stating that historically, the third and fourth quarters are similar in terms of earnings.

John Stauch, CEO of the company, states that the normal cadence of their business will likely be similar to previous years, with a slight skew towards Q3 over Q4. This is due to the fact that 75% of their business involves dealer trades, which tend to slow down during the holiday season. Additionally, the lack of a normal industrial cycle also affects year-end shipments. The company's backlog is expected to be lower at the end of the year, with a return to more normal operating conditions. Strategic pricing initiatives are expected to have a positive impact on pricing for the remainder of the year and potentially into the next year.

Strategic pricing has two main benefits: it gives confidence in setting the right price based on product features, and allows for firmer control over rebate structures. The company aims to drive pricing actions to at least be neutral in the face of material inflation and costs. The margin guide for the year suggests potential for higher than 22%, with potential upside from transformation and mix. The company is focused on price offsetting inflation and taking advantage of favorable mix to drive ROS expansion.

During a conference call, Joe Giordano from Cowen asks about the company's strategy in regards to potential regulations on PFAS. He wonders how the company balances this with their 80/20 focus on current revenue streams. CEO John Stauch explains that they are focused on fewer, more impactful innovation projects, including a whole home system for water. However, they are not optimistic about a short-term impact from potential regulations, as they have not seen a significant increase in demand for their current products. The call ends with a follow-up question from Steve Tusa of JPMorgan.

The company's second quarter results were largely driven by the transformation initiatives, with $4 million captured out of a total of $75 million expected. The remaining $70 million is expected to be linear over the next three quarters. The company's performance in the water solutions sector was offset by growth in the pools sector. The company is confident in its strategy and is monitoring external factors. Progress on transformation initiatives is expected to continue driving margin expansion. The company expects to continue creating value beyond 2024.

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