Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Pentair PLC (PNR, Financial) achieved record sales, adjusted operating income, return on sales (ROS), adjusted EPS, and free cash flow in Q2 2024.
- Sales increased by 2%, adjusted operating income rose by 16%, and adjusted EPS grew by 18% year-over-year.
- Free cash flow exceeded $500 million, and the company repurchased $50 million worth of stock in the second quarter.
- Pentair PLC (PNR) increased its dividend for the 48th consecutive year, maintaining its status as a dividend aristocrat.
- The company raised its full-year adjusted EPS guidance to approximately $4.25, reflecting strong performance and confidence in future execution.
Negative Points
- The residential segment within the flow business experienced a 10% decline year-over-year, impacted by higher interest rates and a slow housing market.
- Water solutions sales declined by 8% due to economic pressures, particularly in international markets.
- The pool segment faced challenges with new in-ground pool builds expected to decline to around 60,000 in 2024 from 72,000 in 2023.
- Higher interest rates and a sluggish economy led to a reduction in revenue expectations for the second half of 2024 by about $120 million.
- Inflationary pressures, particularly in commodities and labor, continued to impact the company's cost structure, with inflation running slightly higher than anticipated.
Q & A Highlights
Q: Can you give us more color regarding what you're seeing in pool and your assumptions for break-and-fix and remodeling? How concerned are you about inventories in the channel at this point for '24?
A: We started the year saying pool would grow approximately 7% full year. We've now guided that to up mid-single digits. A significant piece of our growth is coming from the fact that last year's inventory correction will not be happening this year, plus a couple of points of price, and then an assumption that says the overall market is down roughly mid-single digits. We have seen a little bit of pressure on new pool builds and remodels, which is why we brought our guide down for the pool season.
Q: Your transformation impact is impressive in raising the productivity to $100 million. How much of it is helping '24? Does it give you more confidence towards maybe that upside case as you go into '26?
A: 80/20 was not in our 2026 Investor Day longer-term targets. Very little of it is included in our 2024 update guidance. We've completed the training sessions and the fact-based analysis on roughly half of our revenue streams, and we'll have the other half done in roughly the next 90 days. We're very encouraged by what we're learning and finding, and it does give us confidence that we can continue to improve margins as we go forward.
Q: Can you parse out the commercial water solutions revenue decline in Q2 across Everpure, Man Ice, and KBI, and what you're anticipating in the back half by business line?
A: Most of the decline in water solutions is coming from not participating in low-value service contracts within our KBI services arm. Filtration grew double-digit in Q2, and the Manitowoc Ice business continues to perform to expectations. We are tweaking our global residential water treatment business, reflecting some of the lower-revenue streams in non-US-related businesses.
Q: Can you talk about the pricing environment that you're seeing out there and how that should trend over the course of the year?
A: We are assuming 1 to 2 points of price for the year. We don't expect to outperform that between now and the rest of the year. There are pockets of being able to recover some of the incremental inflationary areas, but we don't feel that inflation is significant enough to go out with another round of pricing.
Q: You raised the transformation benefits from $75 million to $100 million. Can you give us some sense of how it would compare to what you've been able to do with the transformation initiatives this year?
A: We always had an internal funnel that was higher than what we had confidence with in the beginning of the year on the external side. $100 million now reflects that most of the programs that we had in the internal funnel are now being realized. When we look at 80/20, the near-term impact of walking away from quadrant four could be 4% to 5% total revenue, but it should ultimately allow us to reduce labor and redirect efforts to our top customers.
Q: Can you provide any color on the government stimulus contribution to flow in the second half?
A: We are pleased with the infrastructure spend and have focused our activity there. We don't expect much contribution in the second half; it's modest. We called it out as a particular area of the economy that continues to be invested in, which offsets some of the lack of interest rate benefits we're getting elsewhere.
Q: Can you break down the strong growth in pool in Q2 by contribution from Alibi, sell-in, and sell-through?
A: Sell-in and sell-through were about flat in the quarter. The rest of the growth in Q2 was due to the year-over-year comparison of last year's sizable inventory correction. This year, generally sell-in matched sell-out.
Q: Can you talk about the level of productivity you're getting in pool and how it affects your willingness to put volumes out in pre-buy?
A: Early buy is done to level load the factory and maintain consistent employment levels. We make that decision based on the level of revenue we're comfortable with to still maintain a decent profit level. It's too early to make that call right now, and we'll have those discussions as the season approaches.
Q: Can you clarify if the PFAS solution is a secondary treatment or an integrated solution?
A: It is an add-on to what we currently have, enhancing our existing filtration capabilities.
Q: Can you delve into what was so inflationary for you guys and how it affects the price-cost dynamics?
A: We have some stubborn commodity inflation around a couple of raw materials and significant labor inflation, especially in non-core US areas like Mexico. These are the abnormal inflation areas. Overall, we feel that when you look at it on a full-year basis, it levels out, but within periods, there could be some abnormality due to rebates and discounts.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
