Good morning, and welcome to the Pentair Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Shelly Hubbard, Vice President of Investor Relations. Please go ahead.

Thank you, Anthony, and welcome to Pentair's third quarter 2023 earnings conference call. On the call with me are John Stauch, our President and Chief Executive Officer, and Bob Fishman, our Chief Financial Officer. On today's call, we will provide details on our third quarter performance as outlined in this morning's press release. On the Pentair 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. 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 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. 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 10-K. Following our prepared remarks we will open up the call for questions. Please note that we will limit your questions to two, after which, we ask you to then re-enter the queue in order to allow everyone an opportunity to ask questions. A quick reminder before I hand the call over to John. Similar to last quarter, we have included slides 4 through 7 in our earnings slide deck, which provide a brief overview of Pentair. Please see the slide titled Strategic Framework, Pentair at a Glance, Pentair Overview and Making Better Essential for more information. In reference to Slide 7, Making Better Essential, we are proud to share two recent recognitions that Pentair has received for its work in social responsibility and ESG. We've been recognized as a constituent of the FTSE4Good Index Series and we have been named one of America's Greenest Companies 2024 by Newsweek. This recognition from Newsweek evaluated Pentair's environmental performance in relation to our industry, assessing our progress against key environmental factors, including greenhouse gas emissions, water usage, waste profile and commitment to disclosing sustainability data. Pentair's achievement supports our purpose to create a better world for people and the planet through smart, sustainable water solutions. We look forward to continuing to reduce the environmental impact of our operations and further integrate sustainability into our product innovation as guided by our social responsibility strategic targets. Please refer to our published 2022 Corporate Responsibility Report for more information on our sustainability strategy. I will now turn the call over to John.

Thank you, Shelly, and good morning everyone. Let's begin with the executive summary on Slide 8. We are very pleased with our third quarter results, which surpassed the guidance that we provided on our last earnings call. Q3 marked the sixth consecutive quarter of sales over $1 billion, and the sixth consecutive quarter of adjusted margin expansion. Segment income increased 3% and ROS expanded by 140 basis points. Adjusted EPS was $0.94 versus our previous guidance of $0.84 to $0.89 and year-to-date free cash flow was $453 million, up 115% over the prior year. As we look to the full year, we are updating our 2023 adjusted EPS guidance range to $3.70 to $3.75, which reflects the high end of our previous guidance. I want to celebrate these strong results with all our employees. The resilience and dedication to serving our customers and delivering value for our shareholders during a year of global macroeconomic uncertainty is making a difference. Thank you for your leadership. Let's move to Slide 9 titled Strategic Focus. Through our mission to help the world sustainably move, improve and enjoy water, we are enabling the right investments to both deliver the core and build our future to drive long term value for shareholders. In Deliver the Core, we have driven profitability and productivity across all three segments, Industrial & Flow Technologies, Water Solutions and Pool in 2023. We have also been making better essential through our products and solutions for people and the planet with a focus on sustainability and we have been investing in our people to develop talent and build a higher-performing culture. Another strategic focus of ours is to build our future to accelerate performance. In 2023, we have further invested in the transformation, innovation and M&A. In fact, we've seen great results across all three of these areas with our transformation having begun to read out and new innovation launch this year with exciting new products coming in all three segments. And our Manitowoc Ice acquisition is exceeding expectations. Regarding innovation, in 2023, our businesses have launched 25 new products. Examples include a new high-efficiency ice maker for convenience stores and fast-casual restaurants designed in advance to meet the future EPA regulation for refrigerants, expansion of our Energy Star award-winning and smart IntelliFlo3 pump series and the advancement of our Beer Membrane Filtration solutions to operate continuously with higher levels of smart automation. In addition to these new product launches, our innovation teams continue to make great progress advancing our strategy to build our future as they focus on our longer-term growth being centered on the Pool of the future, re-imagining residential, commercial water treatment and industrial waste to value solutions. Over the last three years, we have launched over 100 new products. Let's turn to Slide 10, titled Transformation Update. We embarked on this transformation journey nearly two years ago with the intent to transform our business for the Pentair of the future. Our company has evolved substantially with the separation of nVent and then evolving to a leading diversified water company. Through our four key transformation themes, including pricing, sourcing, operational excellence and organizational effectiveness, we are streamlining our processes and building additional capabilities, which add more tools in our toolbox to drive growth and productivity. In Q3, transformation gained momentum and drove a substantial increase in productivity sequentially from Q2. After implementing Wave 1, both pricing and sourcing, we expected transformation to begin to scale in the second half of this year and we are pleased to note that our transformation initiatives remained on track. Let's turn to Slide 11, titled CEO Summary. We delivered another strong quarter with significant ROS expansion. Our Manitowoc Ice acquisition continued to exceed expectations. Our IFT and Water Solutions segments more than offset Pool's volume decline and our transformation initiatives drove margin expansion. Our performance through Q3 resulted in another positive update to 2023 adjusted EPS guidance. All in, we are building a strong foundation to drive long-term growth and profitability across our diverse water portfolio. We have updated the full year adjusted EPS guidance to a range of $3.70 to $3.75 from the previous range of $3.65 to $3.75. We are mindful of the uncertainty across the global macroeconomic and geopolitical landscape and we continue to closely monitor macroeconomic developments and implement risk mitigation strategies, when and where necessary. We have continued to accelerate transformation funnels, while focusing on investing in the long-term growth of our company. We remain confident in our diversified water business model, long-term strategy and our transformation initiatives, which we expect to continue to drive shareholder returns. We have a long successful track record of generating strong cash flow and being disciplined with capital allocation. We achieved 47 consecutive years of dividend increases and are targeting high-teens ROIC. We have a strong balance sheet and an enviable five-year financial track record. I will now pass the call over to Bob who will discuss our performance and financial results in more detail. Bob?

Thank you, John, and good morning everyone. Let's start on Slide 12, titled Q3 2023 Pentair Performance. We delivered another strong quarter of significant margin expansion despite sales being down 4% year-over-year. The diversification of our portfolio and our transformation initiatives continued to more than offset Pool's lower volume impact on margins. Core sales for Q3 were down 7% year-over-year, driven by our residential businesses. Our commercial and industrial businesses performed well in the quarter. While Q3 sales declined primarily due to the volume headwind in Pool, the negative volume impact on Pentair and Pool improved sequentially from Q2. Third quarter segment income increased 3% to $212 million and return on sales expanded 140 basis points year-over-year to 21%. This improvement was driven primarily by productivity from transformation, accretive margins from the Manitowoc Ice acquisition and some price versus cost benefit. We delivered adjusted EPS of $0.94. Net interest expense was nearly $29 million and our adjusted tax rate was 15% during the quarter with a share count of 166.6 million. Please turn to Slide 13, labeled Q3 2023 Industrial & Flow Technologies Performance. Industrial & Flow Technologies sales increased 3% year-over-year, driven by commercial sales growth of 8%, and industrial sales growth of 12%, which more than offset a decline in residential sales of 7%. Segment income grew 18% and return on sales expanded 250 basis points to 19.4% marking the fifth consecutive quarter of equal to or greater than 200 basis points of improvement. The strong margin expansion was a result of continued progress on our transformation initiatives. IFT's continued success was partly driven by a revised go-to-market strategy and industry leadership that has been underway over the last two years. For example, within our industrial businesses, our strong reputation and industry expertise is driving above-industry growth. We've been moving away from primarily project-led business to standardized solutions focused on ease of doing business with distributors. And our key accounts have begun to reinvest in sustainable product lines following the pandemic. Within our commercial businesses in IFT, we are focused on driving business beyond warehouses and office space to datacenters and institutions such as universities, airports, hospitals, and government buildings. We also believe there are large opportunities in municipal infrastructure as driven by the Infrastructure Investment and Jobs Act legislation in the U.S., with a focus on investments in clean water, flood control, and broadband. Interestingly, one of our customers is the leader in directional drilling equipment for fiber optic cables. We continue to believe the aftermarket is a good opportunity for future growth because of our significant product install base. Lastly, we believe we are in a strong position to benefit from the Build America, Buy America Act as our compliance is expected to give us a strategic advantage. Within our residential businesses in IFT, we have seen a return to normalization. Recall that these products are typically not a discretionary spend. When a sump pump or a well pump breaks, it's critical to get it fixed. Please turn to Slide 14, labeled Q3 2023 Water Solutions Performance. In Q3, Water Solutions sales increased 9% to $299 million, driven by our Manitowoc Ice acquisition and price. Segment income grew 40% to $69 million and return on sales expanded 510 basis points to 23%, driven primarily by our accretive Manitowoc Ice acquisition and productivity from our transformation initiatives. Margins have expanded over the last seven quarters from 10.8% in Q1 of 2022 to 23% in Q3 of 2023. Within our residential business in Water Solutions, we noted last quarter that we are seeing North America stabilize. This was evident in Q3 as residential sales declines improved sequentially from Q2. Within our commercial business in Water Solutions, filtration sales in North America remained strong and Manitowoc Ice continued to exceed our expectations. Please turn to Slide 15, labeled Q3 2023 Pool Performance. In Q3, Pool sales declined 21% to $309 million. The volume decline of 28 points was primarily due to continued channel inventory corrections in the quarter and reflects a strong Q3 2022 comparison. Sequentially, the negative impact of volume significantly improved from Q2. The pricing benefit of 7 points helped partially offset the volume decline. Despite lower Pool sales in Q3, return on sales expanded 130 basis points due to price offsetting inflation, prior actions to rightsize direct labor to align with lower volumes, and improved productivity driven by our transformation initiatives. Please turn to Slide 16, labeled Transformation Initiatives. Similar to last quarter, we believe this slide provides a good illustration of our transformation initiatives and our ultimate goal of driving margin expansion. For reference, our transformation initiatives focus on four key themes: pricing excellence, strategic sourcing, operations excellence, and organizational effectiveness. As we've mentioned in past quarters, we expect strategic pricing actions to benefit the top-line of all three of our segments. We expect our other three transformation initiatives to help improve our overall cost structure. As a result, we are targeting ROS of approximately 23% by the end of fiscal 2025, expanding margins over 400 basis points as compared to fiscal 2022. Please turn to Slide 17, labeled Transformation Runway. As you look at each of the four key themes, you can see that the work within these transformation initiatives is in various different stages. For example, in 2023, we have begun to see early readouts from Wave 1 within pricing, sourcing, and operations. We are beginning Wave 2 within each of these three themes and expect margin benefits to read out in 2024. You can see how each new wave is expected to compound on the others to drive expected margin expansion year-over-year through 2025 and beyond. In pricing excellence, the strategic pricing playbook has been developed, which is just beginning to roll out across segments and categories. For example, in Q3, we began to implement strategic pricing actions across select products within our Pool segment. While these price actions are reflected in our recent annual price increase, please note that these strategic actions differ from annual price increases. Typically, on an annual basis, we evaluate overall inflation, both materiality costs to determine the appropriate price increase across our products. With regards to strategic price actions, we are evaluating all products through a value-based model and identifying which ones have opportunities for adjustments. Recall that in the past, we primarily evaluated pricing through a cost-plus approach. In sourcing excellence, the implementation of Wave 1 is underway with savings currently reading out. As a reminder, Wave 1 included materials such as electronics, motors, maintenance, repair, and operations spend, packaging and logistics. Additionally, we successfully kicked off Wave 2 this summer with over 800 suppliers attending our supplier show. For reference, Wave 2 materials include metals, moldings, resins, ocean freight, and purchase finished goods. We expect Wave 2 to begin to read out beginning in 2024. Incremental to our strategic sourcing waves, we have seen benefit from our rapid renegotiation process that is a part of our transformed sourcing excellence work. In operational excellence, we have completed the consolidation of three facilities while continuing our execution on lean transformation plans across our sites. In organizational effectiveness, we are in the earlier stages with Wave 1 and expect margins benefits to be realized beginning in 2024. Due to the staggered nature of these transformation initiatives, we expect Wave 3 to begin to read out post 2025 in operations excellence and organizational effectiveness. Overall, we are excited about the savings we have begun to realize from the early waves and remain confident that our teams can execute on pricing actions and savings we have identified particularly in sourcing. Please turn to Slide 18, labeled Balance Sheet and Cash Flow. In Q3, we generated $143 million in free cash flow, up nearly 100% year-over-year, reflecting another strong quarter. Year-to-date, our free cash flow was $453 million, up nearly 115% year-over-year. Our net debt leverage ratio was 2.1 times, down from 2.6 times in Q1 and 2.2 times in Q2. Our maturity stack is very manageable. Total debt is now less than $2 billion. And the average rate is approximately 5.3%. Our ROIC was 14.1%, exceeding our cost-of-capital and includes debt from the Manitowoc Ice acquisition. We continue to target high-teens ROIC in the long term. We plan to remain disciplined with our capital and continue to focus on debt reduction amid the higher interest rate environment. Moving to Slide 19, titled Q4 and Full Year 2023 Pentair Outlook. For the full year, we are updating our adjusted EPS guidance to approximately $3.70 to $3.75 from our previous range of $3.65 to $3.75. Also for the full year, we expect sales to be roughly down 1%, segment income to increase 10% to 11% with corporate expense of approximately $85 million to $90 million, net interest expense of roughly $123 million to $125 million and adjusted tax rate of approximately 15%, and a share count of 166 million. For the fourth quarter, we expect sales to be down approximately 3% to 4%. This is mainly attributable to expected lower Pool volume year-over-year and the return of seasonality in our business now that lead times have normalized. We expect fourth quarter segment income to increase 3% to 8% with corporate expense of roughly $23 million, net interest expense of roughly $28 million to $30 million, and adjusted tax rate of approximately 15%, and a share count of 166 million. We are also introducing adjusted EPS guidance for the fourth quarter of approximately $0.82 to $0.87. Moving to Slide 20, titled Full Year 2023 Guidance at Midpoint. We continue to expect total Pentair sales in fiscal 2023 to be approximately $4.1 billion or down about 1%. We continue to expect IFT sales to be up mid-single digits and Water Solutions sales to be up high-teens. For Pool sales, we have made a slight adjustment to down high-teens from previous guidance of down mid-teens at the high end of the range. Segment income is expected to increase approximately 10% to 11% with ROS expansion of over 200 basis points to 20.9%. Moving to Slide 21 titled Q3 Progress Summary. We are very pleased with our Q3 and year-to-date performance. As John mentioned earlier, our third quarter marked the sixth consecutive quarter of sales over $1 billion, and the sixth consecutive quarter of adjusted margin expansion. We have executed well in a dynamic environment and delivered on our commitments. Specifically, our diversified water portfolio and transformation initiatives have driven significant margin expansion despite Pool's volume decline. Our Manitowoc Ice acquisition has exceeded our expectations. We have instilled performance accountability across the organization, which is being measured through key metrics. We have a very strong balance sheet and free cash flow generation. And we have a disciplined capital allocation strategy that aligns to our high-teens ROIC target. I'd now like to turn the call over to the operator for Q&A, after which John will have a few closing remarks. Anthony, please open the line for questions. Thank you.

We will begin the question-and-answer session. Our first question will come from Brett Linzey with Mizuho. You may now go ahead.

Hey, good morning all.

Morning.

Hey, first question just on pricing in Pool. So it sounds like you're going to have two different actions here. So, one being the normal course of business and then on top of that, some surgical. If you could just square that comment. And then anything you can share in terms of the magnitude of the actions that you're contemplating there?

No. I think just to clarify, as we go into next year, we're only counting on a price increase, which would be a more normalized price increase and modest compared to prior years, but slightly higher than what we would have said would have normally occurred, which is covering the inflationary aspects. Not aware of anything incremental than that and those price increase, they're already been announced to the market.

Yeah, our comment towards that, not only did we use an approach that looked at inflation, but for certain product lines, looked at adjustments based on a value-based model. But that is all included in the pricing that went out to be effective Jan 1.

Understood. Thanks for that. And then just wanted to circle back to the comments around the market extensions within IFT commercial. Great to see some opportunity outside those traditional verticals. Is there any way to quantify the total addressable market size that will increase here, given this new reach, this new focus?

No, but I mean it opens up what we would say would be at least $1 billion plus for our particular opportunities. And I think that's a conservative estimate, Brett.

Okay, great. Best of luck, thanks.

Thank you.

Our next question will come from Andy Kaplowitz with Citigroup. You may now go ahead.

Hey, good morning everyone.

Morning.

Morning.

John, can you update us and give us more color on what you're seeing in the Pool market? It looks like you're suggesting with your Q4 guide slightly bigger inventory correction in the $150 million you were guiding to. Maybe you could give us some more color on that. And then how do you think that sets up Pool for 2024, especially given the higher interest rate environment?

Yeah, so I think, first of all, we're pleased that we were able to predict the way that Q3 was going to unfold, and it played out, generally, as we expected. I think we focused on sell-through data. And then also focused on the metrics of our channel partners and I think that data is providing clarity of what's going on. I think the inventory is generally behind us. I don't think that's what Q4 represents. I think Q4 represents what we would say is reflecting the higher interest rates and the impact it could have on the sell-through aspects within the market and it's helping to position ourselves for the best possible 2024 that we can have. So it's a modest participation in early buy, it's making sure that we're not continuing to build inventory ahead of next year. And it's setting ourselves up for a really good 2024.

That's helpful, John. And then you beat your forecast for Q3 sales overall, were down 4%. I think you were expecting down 7%. You didn't change anything other than Pool, which we just talked about. But my question is whether you're seeing anything in IFT or Water Solutions that stopped you from raising your forecast at all? I would imagine you want to be conservative as you talked about, but any more color there on current economic conditions, how they're affecting the other segments?

No. I mean I think Water Solutions has benefited from significant performance at Manitowoc Ice and we're really pleased with how that acquisition came in and has performed. Just a reminder though, we're going to start comparing against really good delivered quarters in the prior years and so that year-over-year performance is going to moderate. I think the market outlook for that business continues to be strong, but it's going to be hard to continue to put up those types of numbers on a consistent basis.

And then in IFT, anything you're seeing in terms of channel destock or anything like that?

No, but I think it's only fair to suggest that higher elevated interest for longer makes sure that productivity-based projects and/or expansion investments are going to be up against higher hurdle rates and we're reflecting that in our particular revenue forecast as we go forward.

Appreciate the color, John.

Thank you.

Our next question will come from Brian Lee with Goldman Sachs. You may now go ahead.

Hey guys, good morning. Thanks for taking my questions. I know there's a lot of questions around Pool. I'll just throw another one in there. And lot of moving parts and the macro is still uncertain, but is there sort of a framework you guys can provide us to think about for Pool? Because if all goes right, it sounds like by the time we get to end of '23 here, channel destocking is fully complete, you've got normal seasonality returning, price is still kind of elevated in the mid-single digits, so I guess, first off, do you see that holding in '24 on the price side? And then just from a volume framework perspective, assuming all those things, do you play out as you expect channel destocking seasonality? Like, what is the framework we should be thinking about in terms of the Pool volume outlook here as we think about the next kind of 12 to 18 months?

We're optimistic about our ability in 2023 to continue raising our guidance thanks to our diversified portfolio, which is balancing out the steady performance from Pool. Pool has historically generated significant income and growth for us, but this year has been slightly more challenging than we expected, mainly due to larger inventory and a weaker overall market. As we move into 2024, we anticipate benefiting from the absence of that inventory correction. Towards the end of the year, we will assess market conditions. I believe it's realistic to say that we do not expect overall Pool builds to increase from this point, nor do we foresee an expansion in overall remodeling. However, we anticipate some recovery in the aftermarket, which had been stronger in previous years but has now stabilized. Many of these purchases are essential, and we expect to return to a potential overall growth, along with the advantages of reduced inventory.

Okay, fair enough. Makes sense. And then maybe just with interest rates backing up here and the macro, I think a lot of focus around kind of what it meant for your Pool business all year long. Are you seeing anything beyond the resi sector in your kind of end-market exposures that are having any impacts or constraints on spending when it comes to that sort of cost of capital environment and just financing condition is getting a little bit tougher here? Anything you can speak to at kind of a high level? Thanks.

Yeah. I mean I think you're calling it. I think we're seeing it everywhere to be honest with you in little bits. I mean, as a reminder, 75% of our end customers are small dealers and professional trade channel people and their borrowing of capital is higher and harder to get access to capital. I think that slows down some of the projects that we're working on. We're not exposed to commercial buildings more than a $100 million or a couple of hundred million, but I think you're going to see financing be tougher on the building side. And so an elevated higher interest rates for long, just I think produces a sluggish environment is the way we're looking at it, which is why we're really putting that accelerator on the transformation initiatives we have, pricing selectively, making sure that we understand the market back and how to position our products and services effectively in the industries and then making sure that we're managing the cost structure well within the company.

All right. Appreciate it guys. Thank you.

Thank you.

Our next question will come from Bryan Blair with Oppenheimer. You may now go ahead.

Thank you. Good morning, everyone.

Morning.

Just hoping to drill down a little bit more on commercial water solutions trends. It sounds like underlying market activity remains pretty solid. Just curious if your team is seeing anything shift on a sequential basis. I know a lot of questions have been asked already in terms of macro backdrop, higher for longer rate environment, et cetera. Specific to that platform, are you seeing anything as we get into Q4 or the outlook for 2024 that concerns your team in terms of the strength that you've been leveraging recently?

There's no doubt that commercial water solutions has had an excellent 2023, going to market with end-to-end solution of water quality, ice and services has been very compelling. Manitowoc has had an excellent year. And we've done well in North America filtration. So overall, we continue to see the market within the restaurants, primarily the quick service restaurant space being solid for us. The challenge for us is bumping up against a tough compares next year. But overall, the markets that we serve are doing well.

To provide some insight on growth, despite expecting significant shipments in Manitowoc this year and feeling optimistic about their progress, the overall compound annual growth rate from 2019 to the end of 2023 is approximately 8% or slightly higher than our previous forecast of mid-single digits. As Bob mentioned, the markets are recovering globally and are actively participating in that recovery.

I appreciate the color. That's very helpful. You mentioned the end-to-end solution and there's no doubt that the value proposition combining Everpure, KBI, Man Ice, that's resonating with your customer base. Can you speak to direct cross-selling traction within the platform, what's been realized to date for your legacy businesses, not just the lift to Man Ice?

Yeah, I mean I would quantify that value as a couple of points of incremental growth as the overall commercial water solutions business from those synergies. I mean, lots of excitement and putting Everpure in the trade shows, next to the Manitowoc Ice and vice-versa and helping our customers which are a distributor and an installer realize the benefits of promoting both. And I think when you have a good filtered solution on an ice machine, you're extending the life of the ice machine. And then it also leads to the service capabilities we have and the fact that we can offer some of those services. More importantly, just understand what the service provider is up against, so that we can redesign for service and also work with our partners to help them get in and out of those end markets faster. So I mean there's a lot of energy and excitement and we couldn't be more pleased with the synergies and the go-to-market strategies of these three businesses put together.

All makes sense. Thanks for the color.

Thank you.

Our next question will come from Mike Halloran with Baird. You may now go ahead.

Hey, good morning, everyone. So two quick ones here. First on the destocking impact last quarter, you talked about a $150 million impact on destock this year. Is that still the number we should be thinking about or has that changed now?

No. I think there's nothing that's changed in that number. It played out as we said as expected.

Thank you for that. Regarding the balance sheet, you are currently twice leveraged on a net basis. Bob mentioned that paying down debt remains a priority. Could you discuss how the changes in interest rates have impacted your financing terms? Have there been any adjustments in the leverage levels you are considering for the future? More specifically, at what leverage levels would you feel comfortable being more aggressive with your balance sheet for activities like buybacks or mergers and acquisitions?

Mike, I promised myself I wouldn't give a target today. I think right now, I think we all have to be mindful of access to capital and managing with our capital framework and I think paying down the debt right now is a good use of it. Obviously, we're always looking at strategic complementary businesses to our current business units. The market is not robust though at the moment. And even when you're seeing assets availability, you've got to question how those interest rates environments affect their business. So you're not seeing transactions happen. So I think just paying down the debt right now and giving ourselves the maximum flexibility is where Bob and I are focused for the remainder of this year and into next year.

Yeah. I would just add to that, that obviously staying investment-grade is hugely important to us. As the variable rates have crept up, we did undertake the interest rate swap and the collar, so that turned out to be a smart move where when you include the collar, effectively 65% of our debt is fixed. That brings us to kind of a weighted average rate of 5.3% in the quarter, maybe 5.5% going forward. So overall, we've done some good things to manage within this environment and paying down the debt has certainly helped from an overall perspective.

Thanks for that. All very reasonable. I appreciate it.

Thank you, Mike.

Our next question will come from Julian Mitchell with Barclays. You may now go ahead.

Hi, good morning. Maybe just wanted to follow up on the sort of profit bridge a little bit from Slide 12. So the sort of price net of inflation number was close to zero. It seemed inflation picked up a bit as a headwind year-on-year versus the prior quarter. So maybe help us understand kind of the inflation moving part in Q4 into early next year. And should we expect that price net of inflation number to be sort of close to zero like it was in Q3?

No, I think that's a good observation. I want to remind you that the inflation we showed in our bridge is year-over-year. It doesn't necessarily reflect sequentially this year; we might have experienced some elevated inflation on certain purchases from last year. We believe that overall, we are moderating to a price versus cost situation that is neutral or slightly closer to neutral, while also focusing on the productivity contributions from our transformation initiatives, which is the model moving forward. If you remember, we were experiencing significant benefits from price compared to cost earlier this year and last year, and now that is transitioning to more of a benefit from our transformation as we progress. Bob, do you have anything to add?

I would like to add that although inflation increased in the third quarter compared to the second quarter, we were able to offset this increase with our pricing. We anticipate that inflation will decrease significantly in the fourth quarter, especially where our prices exceed inflation rates. Earlier this year, we projected that inflation would represent about 4.5% of sales, and we are on track with that expectation. The team has done well in understanding inflation and how it impacts our operations. Overall, I am pleased with our current situation and expect moderation in the fourth quarter.

That's helpful. And as you said, hopefully, that productivity piece becomes larger as a driver. It was substantial already in Q3. Maybe just sort of refresh where we are on the sort of Wave 2 from transformation savings and how substantive that productivity number should be as a segment income driver next year when you kind of roll together sort of incremental savings from transformation next year.

Yeah, and that is a very important part of our margin expansion story. As we talk about price equaling inflation, it's important that productivity then drives that ROS expansion. So we were pleased to see the $29 million read out in the third quarter, up significantly from the single-digit in Q2 and expect to have a significant transformation benefit in the fourth quarter. We're really within Wave 1 in terms of reading out in 2023. We've built some healthy funnels around each of the four pillars of transformation. And so that will start to read out to an even greater extent next year. So overall pleased with the momentum going into 2024.

Got it. And your sort of second half run rate for those savings, we should expect that sort of to be steady through at least the first half of next year, I suppose. And then maybe the sort of comps get a bit tougher on productivity.

Wave 2 will begin to have an impact soon. The materials took significant time to realize due to extensive engineering work and resupply efforts with our supply community. We're starting to see benefits from those efforts in Q4, and this momentum will carry into next year, with Wave 2 transitioning into a sourcing strategy in the second half of next year. To provide some insight, about a third of our businesses engaged in pricing exercises in 2023, and we expect that to increase to nearly two-thirds participating in 2024. This is how the waves Bob mentioned will begin to unfold, allowing us to realize performance improvements within the businesses.

That's great. Thank you.

Thank you.

Our next question will come from Saree Boroditsky with Jefferies. You may now go ahead.

Hi. Thanks for taking the question. Just building on the transformation initiative comment, discussing and benefit from Wave 2 in the second half of next year. Can you just quantify how we should think about that as contributing to margin performance?

We're very focused on ROS expansion. So if you think about us finishing around 21% this year, we've talked about improving the ROS to 23% by 2025, and we've said that's being done in a linear way versus it being all back-end loaded. So we expect the ROS to improve next year as we head towards that 23%.

I appreciate the information. Going back to Pool, there have been many questions today, and you mentioned that some of the early buy programs had modest participation. As you consider the fourth quarter delivery in relation to the first quarter, can you share your thoughts on the delivery patterns and how they might impact first quarter sales? Thank you.

Yeah. I mean I think what we'd like to see unfold is we believe Q4 can be higher from a shipment perspective for Pentair than Q3 and then we would expect Q1 to be better than Q4. And then we would be in the normalized pattern, end of Q2 next year finally being a normal seasonal pattern, which should be the strongest full quarter of the year. And as a reminder, Q3 is modestly less than that. And then again Q4 starts the pre-load for the 2025 season. So we feel like we worked through this and now we've got a clear line-of-sight to more normal seasonality in the business and really keeping our eye on sell-through going-forward so that we don't get into this inventory situation with our channel again.

Appreciate the color. Thank you.

Our next question will come from Jeff Hammond with KeyBanc Capital Markets. You may now go ahead.

Hey, good morning, guys.

Good morning.

Hi, Jeff.

Just on IFT, can you just talk about the order trends you're seeing? I don't know if it was really a comp issue but it seemed like there was a step-down in the growth rate. And I'm just wondering what the orders are telling you about kind of the go-forward there.

Yeah. I mean, just, again, we're looking at year-over-year comps, Jeff, and our infrastructure businesses had a really solid 2022 and so some of these growth rates reflect against the prior quarter of 2023. I think the orders continue to be strong from a mid-single-digit indicator as we go forward, but the year-over-year comparisons are going to be tougher. And as Bob mentioned, we are really focused on non-project-related wins. We're focusing on service, we're focusing on aftermarket, we're focusing on recurring revenue streams with our key distributors and end-market providers, Jeff.

Okay, great. Can you discuss the tough comparisons with Manitowoc Ice, particularly regarding the success and synergies? What’s happening with backlog drawdown and order rates in relation to this challenging comparison? We’re also noticing that commercial food equipment and some other markets might be starting to experience more normal growth.

Yeah. I would say backlogs have returned to more normalized levels. Just as a reminder, Manitowoc grew roughly 30% in the second quarter, will have grown or did grow 20% in the third quarter and for the full year, Manitowoc will be up roughly 20%. So they've had a very strong year. To John's point, when you look at the CAGR from 2019, that's sitting at roughly 8%. So we do expect a more normalized year next year as we bump up against 2023's 20% growth. But overall, the business remains very healthy. The end-to-end approach in terms of going to market is resonating well. So very confident in the Manitowoc business.

And Jeff, your data points are right. This isn't a sustainable growth level for our ice business. I mean, when you're mid-to-high single-digits, we would have hoped that that is a more linear growth rate that we get to and obviously, we're going to satisfy the demand and make sure that it's a Manitowoc Ice machine that someone is putting into their restaurant. So it gives us the ongoing service and relationship with that customer. But this is not normal as we've said all year.

Okay. Appreciate it, guys.

Thank you.

Our next question will come from Andrew Krill with Deutsche Bank. You may now go ahead.

Hey, thanks, good morning, everyone. Want to go back to the Pool pre-buy. I think you might have said you're expecting like a modest pre-buy this year. So just any more insight you can give on that and maybe try to quantify how it's tracking versus more normal years. And just to clarify, are you assuming that as part of the 2023 guide or would that be incremental to the Pool sales guidance? Thanks.

No. It's all included in our current view of what our business will do in Q4. And just to remind everybody, what we try to do is level-load factories to make sure that we're not taking down our shipments in any one quarter beyond the level of our employment groupings. So we're obviously encouraging the channel to buy ahead of next year's pool season through discounts that we offer in term extensions, right? We're now at a level that we think is prudent for us and that's where the modest early buy is. And as you know, the channel would take more if they are incentivized more to take it. And if they don't, then those become standard buy orders in the next year. And so that's always what the forecast is reflecting. And we have to do it in our economic best interest. Our channel partners do it in their best economic interest. And right now, we feel our guide is the best reflection of what we'd say a more normal seasonality and a more normal early buy, which would set us up nicely for a 2024 growth year.

Got it, thank you. And just for the 4Q guide and the implied margins for the total company, it marked a pretty meaningful step-down sequentially. I think historically you've been more flattish from 3Q to 4Q. And I know it isn't necessarily a normal year but just seems a little, perhaps, conservative, especially with the cost actions starting to come through. So maybe if you could unpack that and if like any segments in particular you think the margins are weaker than normal for 4Q. Thanks.

What we implicit in our guide is significant ROS expansion versus last year's Q4. When you look sequentially, it does come down, but a lot of that does reflect some of the seasonality that, that is returning back to more normalized levels. So overall pleased with the ROS expansion in Q4 versus last year's Q4 and it will be the momentum we need exiting the year.

Thank you.

Thank you.

Our next question will come from Joe Giordano with Cowen. You may now go ahead.

Hey, guys, good morning.

Morning, Joe.

Hi, Joe.

I wanted to start by discussing margins and stay on that for a moment. Pool margins dropped below 30%, and while we may be nitpicking a bit, we had previously viewed 30% as a new baseline. You’re close enough to consider that a valid point. Looking ahead into the fourth quarter and into next year, does the 30% still feel like a reasonable minimum level?

I'd say yes on the second part of your question and I think delivering the margin that we did despite the year-over-year decline in volume is what I'm most proud of the team having accomplished. And yeah, I mean, I do think we're splitting hairs. I think they're directionally in a really good spot as a business model and obviously getting growth from here is going to leverage up nicely.

Okay, regarding Water Solutions, there was commentary last quarter suggesting that margins would decline significantly in the third quarter due to the deliveries by Manitowoc in the second quarter, but the opposite occurred; margins actually increased sequentially. How should we view margins in this segment? I understand Manitowoc is still performing at a high level, but what is your perspective on the sequential margins and the sustainability of this 22% to 23% range?

Yeah. I would remind you that Water Solutions has a residential component and systems businesses and they also have the commercial water solutions. When we mix towards commercial, we're going to have a lot higher-margin profile. And what we're really doing is being very selective on the products that we're offering on the residential side. And we try to mix up that business. And so a lot of the decline in the revenue was on the residential side. And that actually helped the overall mix of the business to the positive.

Okay, that makes sense. And if I could just sneak in one last one on just the volume. So I mean your Pool volumes this quarter came in better than what we were thinking about when we spoke three months ago. Commentary from your largest distributor calls for like fourth quarter, their inventory levels in dollars are going to go up from the third quarter. So like, that kind of implies growth for you guys. If they do normal seasonality, implies growth in Pool of like high-single-digits. If they do less, maybe it's more modest growth. But how would you kind of think about where growth can look like for Pool in the fourth quarter?

Well, I think we're a piece of their puzzle. So we'll start there. And I think we are indicating that we do think sequentially our revenue numbers do go up from Q3. And then it's really a discussion of how much more. And I really think that we do our best to predict that business with reasonable accuracy and getting it exactly to the dollar is improbable. And so I would say, we got really close in Q3 and I think we feel really good about our Q4 revenue estimate at this moment.

Thanks guys.

Thank you.

Our next question will come from Scott Graham with Seaport Research. You may now go ahead.

Good morning, John, Bob, Shelly. How are you?

Morning.

Morning.

Hi, Scott.

Good. Thank you. So the productivity jump was obviously meaningful. How much of that 2.8% maybe was some help from a better supply chain, sort of external?

Well, I think a lot is coming from that, Scott. I mean, I think we're working more seamlessly with our supply chain today. Obviously, we've caught up on most of the demand to them and aligned with our channels. And so we are benefiting substantially from a lot of more seamless deliveries across the entire supply chain today.

Okay. Regarding Pool, historically, these numbers have generally been 40, 30, 30 for new remodels and then for maintenance in the aftermarket. As we look at a weak 2023, where do you anticipate those numbers will end the year? Is that something you can estimate?

I believe they are generally in that range. We could discuss whether it's weak, but I think overall builds in 2023 will definitely be at pre-pandemic levels, aligning with what we observed before the pandemic. So, I think we are in a more normalized space. Scott, the insight is that there are high-end pools and low-to-mid market pools, and interest rates are definitely affecting the low-to-mid segment, while high-end pools continue to be constructed. I think we'll likely start to refine our numbers to break them down by the demographics being served, but generally, the model is still functioning effectively.

Okay, thank you, John. Last one, you indicated builds, you are assuming kind of flattish. We're modeling flattish and then aftermarket up. Were you referring to the fourth quarter or a period of time longer than that?

No, we're discussing our current expectations as we approach the 2024 pool season.

Okay. So your mid-single-digit plus long-term thinking on Pool, it's not going to be that next year, based on that.

We'll give that in January, Scott. I'd remind you that there is an inventory correction next year, which creates some benefits and then there's the overall general market conditions that we are addressing. But when we get to giving our Q4 earnings, we'll update and share with our 2024 guide.

All right, thank you. Had to try.

Yeah, you tried. Thank you.

Our final question will come from Deane Dray with RBC Capital. You may now go ahead.

Good morning, this is Jeff Reive on for Dean. Maybe my first question, you talked about your innovation, the 25 new products this quarter, 100 for the year, over the last 12 months. Is there any internal metric you target? Like, are you targeting new product vitality? And what are the typical margin differential on new products?

Yeah. I mean we do. We have all those. Vitality is obviously the right product line by product line. When we create new valuable products at the market or that our customers want, we tend to see margin lift from those new products, not usually at its initial stage, it usually takes probably a year or two for that to recognize. But that is the model we work to.

All right. So nothing to quantify. And then regarding IFT, you mentioned the Build America, Buy America provision in infrastructure spending. Are there any products you offer that are almost entirely American-made while your competitors are not? And is this a significant part of your business?

We have brands that have been around for 120 to 130 years, which originated in the United States. These brands have a long history here, and they are manufactured domestically. Our employees take great pride in these brands, as do our customers, and this gives us a fair chance to compete for jobs in the market.

Got it. Thanks.

Thank you.

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