Hello and welcome to the Pentair First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. As a reminder, this conference is being recorded. I would now like to hand the call to Shelly Hubbard, Vice President, Investor Relations. Please go ahead.

Thank you, and welcome to Pentair's first quarter 2024 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 first 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-K and Form 10-Q. Following our prepared remarks, we will open the call up for questions. Please note that we will limit your questions to two, after which we ask you to reenter the queue in order to allow everyone an opportunity to ask questions. Note that we have now published our Pentair investor overview on our IR website, which includes the overview slides we previously included in our quarterly earnings presentations. Please visit our Pentair investor relations website and click on Events and Presentations to find this new overview. I will now turn the call over to John.

Thank you, Shelly, and good morning, everyone. First, I want to thank all of you who attended our 2024 Investor Day in New York last month. We appreciate your time and your insightful questions as we dove deeper into the business and provided our path to 24% ROS by full year 2026 with the potential for upside. Now, let's begin with our strong Q1 results on slide four. The eighth consecutive quarter we continue to drive margin expansion. In Q1, ROS expanded 90 basis points despite sales being down slightly against peak channel inventory challenges in our residential segments. We exceeded our first quarter guidance as our Pentair teams drove solid execution across all three segments. In the first quarter, segment income and adjusted EPS also increased year-over-year. Our transformation initiatives remained on track to deliver margin expansion, as we highlighted at our recent Investor Day. Approximately 50% of our total revenue has adopted and implemented value-based pricing as part of our strategic pricing initiatives. We are well into wave two of our sourcing initiatives, which we expect to begin to drive benefits in the second half of this year, and we have continued to drive operational footprint optimization and plan to continue this going forward. We have recently introduced 80/20 training to 50% of Pentair's revenue streams and have identified some quick wins and larger-term opportunities. Lastly, we are encouraged by signs that we are returning to a more normal operating environment for the first time in nearly four years. Both our lead times and our backlog have been normalizing, and our order rate trend has been in line with our expectations. As we expect to return to a more normal operating environment, we have seen a mix of trends across our residential, commercial and industrial verticals within our three segments. For example, in Flow, commercial and industrial verticals performed well in Q1, while higher interest rates continue to impact residential and agricultural verticals. Within Water Solutions, our commercial businesses servicing the foodservice and hospitality verticals performed as expected. We believe residential will improve as year-over-year challenges moderate. Lastly, in Pool, a majority of our revenue is in the Sunbelt states, with a focus on higher-end in-ground pools. In Q1, higher-end pools and the Sunbelt states remain resilient, with the exception of California, where weather had a slight impact. From our recent dealer survey, remodeled pool projects appear to be increasing and services we surveyed were optimistic about the aftermarket. Let's turn to slide six. Last week, we published our 2023 Corporate Responsibility Report with an update on our progress. At our Investor Day last month, our leader of ESG and Sustainability, Karla Robertson, provided a preview of our 2023 results on this slide. I'm very proud of the work Karla and our sustainability team are doing and the progress our teams throughout the company are making against our strategic targets. Before I turn it over to Bob, let's turn to slide seven. We delivered another quarter of quality earnings with better-than-expected results. Our Investor Day key themes remain on track. Our 80/20 training and workshops are underway with what we believe are promising early readouts, and we are reiterating our full year 2024 outlook while introducing strong Q2 guidance with an adjusted EPS midpoint up 13% as compared to the same period last year. All-in, we continue to build a strong foundation to drive long-term growth and profitability across our diverse water portfolio. 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 eight. With sales over $1 billion, we delivered another strong quarter of quality earnings. Return on sales or ROS expanded 90 basis points despite sales being down 1% versus last year's record Q1. Core sales were down 1% year-over-year, driven primarily by growth in Water Solutions, which was more than offset by slight declines in Flow and Pool. Sales across all three segments increased sequentially from Q4. Pool sales in Q1 exceeded Q4 2023 sales, which in turn exceeded Q3 2023 sales, as we had guided to last October. First quarter segment income increased 3% to $217 million, and return on sales expanded 90 basis points year-over-year to 21.4%. These results were driven by favorable mix, price more than offsetting inflation, as well as transformation. ROS improved sequentially from Q4 and approached the Q2 2023 record of 21.6%. We delivered adjusted EPS of $0.94, which exceeded our guidance and was up 3% year-over-year. As John previously mentioned, we are excited to be entering what we believe to be a more normal operating environment for the first time in nearly four years. Please turn to slide nine. Flow sales declined 2% year-over-year. Commercial sales growth of 9% and industrial sales growth of 2% were more than offset by a decline in residential sales of 12%. Our residential sales are more closely tied to the overall housing and agriculture market. Segment income grew 19%, and return on sales expanded 350 basis points to 20.1%, marking the first time ROS has reached or exceeded 20%. The strong margin expansion was a result of price and mix exceeding inflation and continued progress on our transformation initiatives. Please turn to slide 10. In Q1, Water Solution sales were up slightly to $273 million, driven by commercial sales up approximately 1% and residential sales down approximately 1%. Segment income grew 6% to $56 million, and return on sales expanded 110 basis points to 20.4%, driven primarily by favorable mix and transformation continuing to drive operational efficiencies. This is the eighth consecutive quarter of ROS expansion. Margins have nearly doubled from 10.8% in Q1 2022 to 20.4% in Q1 2024. Within our residential business in Water Solutions, we have continued to see improvement in our year-over-year sales rate for the last five quarters. Within our commercial business in Water Solutions, both filtration and ice drove sales growth, which was offset by lower services revenue due to project life cycles. Please turn to slide eleven. In Q1, Pool sales declined 1% to $359 million. However, Q1 sales improved nearly 7% sequentially from Q4 2023, as expected. Segment income was $111 million down 5%, and return on sales decreased 110 basis points due to lower volume and an increase in costs as we prepared for the peak Pool season in Q2 and investment in transformation. We expect Pool margins to expand each quarter year-on-year for the remainder of 2024. Please turn to slide 12. At our Investor Day in March, we updated our three-year margin targets to reflect margin expansion through full year 2026, extending our plan by a year. With contributions from all four of our key transformation initiatives—pricing, sourcing, operations, and organization—we are targeting ROS to expand by 540 basis points to 24% as compared to the full year 2022, and have the opportunity to do even better, as we discussed during our Investor Day. In full year 2023, we achieved ROS of 20.8% and expect to continue to drive margin expansion to approximately 22% by year-end. Please turn to slide 13. This runway provides context of when we expect each wave to deliver margin expansion in our reported results. Note that we expect our transformation benefits to compound with each additional wave and the entire process to begin to repeat in 2027, creating a continuous cycle of ongoing savings. Please turn to slide 14. In Q1, we used $127 million in cash, which is consistent with the prior year quarter. Q1 is predominantly a cash use quarter and typically followed by strong cash generation in Q2, our seasonally highest quarter. Our net debt leverage ratio was 2.1 times, down from 2.6 times in Q1 a year ago. Our ROIC was 14%. We continue to target high teens return on invested capital. We plan to remain disciplined with our capital and continue to focus on debt reduction amid the higher interest rate environment, along with share repurchases to offset dilution. With the net debt leverage ratio within our target range, we have additional flexibility to strategically allocate additional capital to areas with the highest shareholder returns. Moving to slide 15. For the full year, we are maintaining our adjusted EPS guidance range of $4.15 to $4.25, which is up roughly 12% at the midpoint. Also for the full year, we continue to expect sales to be up approximately 2% to 3%, with Flow sales to be up approximately low single digits, Water Solution sales to be approximately flat, and Pool sales to be approximately 7% for the full year. We also expect segment income to increase 8% to 11%. For the second quarter, we expect sales to be up approximately 1% to 2% compared to last year's record Q2. We expect strong growth in Pool sales in Q2 somewhat offset by challenging compares in our Water Solutions segment. We expect second quarter segment income to increase 10% to 12% with significant ROS expansion. We are also introducing strong adjusted EPS guidance for the second quarter of approximately $1.15 to $1.17, up roughly 13% at the midpoint. I would now like to turn the call over to the operator for Q&A after which John will have a few closing remarks.

Thank you. We will now begin the question-and-answer session. Today's first question comes from Mike Halloran with Baird. Please go ahead.

Good morning, everyone. Thanks for the question. So two questions here. First one just how are you thinking about the end markets as you work through the rest of the year? I mean the overall topline guidance is really unchanged. So I guess the question is, are you seeing anything different today than you were thinking a few months back? And how are you thinking about the sequentials from here across your end markets?

So far, Mike, I would say things are playing out exactly like we thought and hoped for, with the exception of maybe within our Flow segment, the Residential side and the Ag side being a little weaker as we progress through the end of the year. Other than that, everything is generally in line with our previous expectations.

Thanks for that. And then on the Flow margins, awfully impressive and certainly seems a little different than I would have expected seasonally. So maybe some thoughts on how you think those margins sequentially work from here, in particular, anything in the first quarter that's not repeatable from a mix perspective or anything else? And is this just an example of the right foundation to build ROS with all the work you guys are doing internally?

It really is. On the Flow side, we were extremely pleased with the ROS expansion in Q1. And again, we've said that they will be one of the main beneficiaries of the transformation program. So I expect the segment to continue to expand their ROS year-on-year because a lot of the play there is around strategic sourcing, the pricing excellence, the operational footprint, and basically the complexity reduction play.

Thank you. The next question comes from Brian Lee with Goldman Sachs. Please go ahead.

Hey guys. Good morning. Kudos on the solid execution here.

Thank you.

I guess maybe as a follow-up to Mike's question. I mean, I think the most eye-catching metric was definitely the ROS and Flow. Looks like both price cost and transformation benefits were driving a lot of this. I know it's a little bit lumpy if we look historically, but what is kind of the right run rate to think of in this segment coming off this 20% result in Q1? How much more, I guess, price cost or transformation or anything else you want to outline as we think about year-on-year improvements in ROS, just particularly for Flow?

Yes. I mean just to reiterate what Bob said, I think we've done a nice job of refocusing the business and driving transformation. One thing that really kind of helps is, if you think about Flow. There is a business inside of Flow. It's our sustainable gas business, which last year had several larger losing projects, and we've been able to right-size that business and bring those project executions back up to, let's call it, low single-digit margins. But we are getting a very favorable year-over-year comparison against those performance last year. So we do think this is a good starting point. And as we move through the year, we're going to continue to manage the mix and drive the transformation programs and really pleased with the Flow performance.

Okay. Great. Helpful. And then second question, just when I look at Pool, again, I know quarter-to-quarter, this can kind of fluctuate, but productivity sort of reversed in Q1, 200 basis point headwind versus the tailwind you saw last quarter, which was about the same 200 basis points. Is this all investment? Can you kind of break down or quantify how much it was this quarter? It seems like it might have been a big send quarter and should we expect this drag for a few more quarters or does ROS go right back up positive year-on-year? I know you're saying growth is sequentially better throughout the year. How about, I guess, margins in ROS, in Pool specifically, as we think about the cadence? Thanks guys.

Yes. In my prepared remarks, I did mention that ROS and Pool will increase year-on-year for the balance of the year. So comfortable that we'll see ROS expansion within the Pool business. I think Q1 was a little bit unusual in that the volume was declining, but we have significant growth in Q2. And so some of the costs, the ramp-up of cost to service the strong Q2 obviously put a damper on the margins in the first quarter. We also are continuing to invest to drive growth and transformation, which wasn't where we needed it to be within the Pool business. But those investments will pay off and further ROS expansion down the road. So again, comfortable with the ROS expansion in Pool for the remainder of the year. And again, as we ramp to significant growth in Q2, that will become a big manufacturing leverage play as well.

Thank you. The next question comes from Damian Karas with UBS. Please go ahead.

Hi. Good morning everyone.

Good morning.

My first question is on the Pool business. You had mentioned in your slide that remodel inquiries are up. Could you give us a sense for how much we are talking here? Is that kind of across the board or was that also just like on the high-end side of the market? And is your expectation for remodels still kind of down low-single-digits for the year in your guidance?

Yes, to the second one. But we do feel there's some encouraging trends that will give us feeling that our dealers will start to take more orders, which would extend into '25 and '26. I think with all the new Pools being built, there probably wasn't as much attention being spent to getting the remodel sequenced and completed. And I think we're encouraged that we're now seeing that part of the market get some demand from our customers. Again, this is primarily in the key Sunbelt states and more on aged Pools.

Okay. That's encouraging to hear. And then could you just help us think about the Water Solutions and that 9% comp year-over-year? How are you thinking about the second quarter for the segment kind of both in terms of top line and segment margin?

From a top line perspective, it's important to remind everyone what a large quarter Q2 was last year, especially within the Ice business. So we do see a decline year-on-year within Water Solutions as they bump up against that tough compare. So think of the Ice business and services having a bit of a headwind and then the filtration business continuing to grow nicely.

Thank you. The next question is from Andy Kaplowitz with Citigroup. Please go ahead.

Hey, guys. How are you?

Good. How are you?

Good. John and Bob, I wanted to follow up on Water Solutions. It seems the guys are managing a bit better than expected. Clearly, the comparisons are challenging as you mentioned. I believe your guidance for commercial water was a low single-digit increase for this year. Is that still accurate? Additionally, what occurred in services? Do you anticipate that segment will rebound as the year progresses?

Yes, on Ice. I think Ice is going to play out right now the way we expected it to. And as a reminder, as Bob said, tough compare in Q2. But overall, I think it's going to come in line with our expectations. And still has resilience in the end industry, and we're feeling good about our filtration penetration, combined with that BU to drive it. We are going to dial our services business into more profitable annuity-based services as we exited some of the larger programs that we were doing with some of the large fast-food companies, and some of those were not very profitable. We want to refocus the business into a simpler mix of service, more geared to the products that we install, and so we will see that be a little lumpy throughout the year as well.

It's helpful guys. And then, Bob, are you still thinking $75 million in productivity this year even with the slower start in Pool and the $4 million in total in productivity for Q1?

Yes. Again, we were pleased with the transformation readout in Flow and Water Solutions, but it was offset somewhat by the negative productivity and Pool as we ramp up for Q2, still feeling very comfortable with the $75 million number and think of that as being fairly linear over the next three quarters.

Thank you. The next question is from Steve Tusa with JPMorgan. Please go ahead.

Hey, guys. Good morning.

Good morning, Steve.

Hi, Steve.

Just a follow up to that bridge question for the year. Can you just update us on what you're thinking on price and then just the spread on price cost and price and inflation for the year?

Yes, I think we're still hopeful we can get price to offset cost. I mean we did see a little incremental inflation start to enter Q1 into Q2. I think it's primarily around what we'd call freight and probably specifically copper. So we're monitoring that, Steve. If needed, we would go back out and see what we could recover from a price standpoint. Our goal is to, for the full year, try to offset price and cost.

Okay. And 2%-ish price for the year. Is that still kind of in there or what you did 3% in the first quarter?

Yes. We're still in that 2% for price and think about 3% inflation on the cost base. Those two would roughly offset from a dollar perspective.

Thank you. The next question comes from Bryan Blair with Oppenheimer. Please go ahead.

Thanks. Good morning, everyone. Solid start.

Good morning.

A quick follow-up on productivity and transformation read-through. You said step up somewhat ratable for the next three quarters to get to the $75 million. Given the moving parts of Q1 and divergence in segment contribution, how should we think about how that drop-through shakes out for the segments going forward?

We expect Pool to have a very significant contribution in Q2, given its rate of growth and the fact that we, as Bob mentioned, had some incremental investments to get the product prepared to ship in Q2. So think about that as labor being roughly flat from Q1 to Q2, but getting a lot more revenue in Q2. So that would be a huge contribution. Corporate is always a timing issue. Also, Bob didn't mention that, but we have higher corporate expenses that run in Q1 typical in the industry and so that usually comes down as it heads into Q2 as well. But I think the rate of contribution will be the same for the other segments and then we get the step-up in Pool.

Yes. I appreciate the detail. And I understand that debt reduction is the priority near term with regard to capital deployment. Although with your second quarter cash flow, suspect by June, July timeframe, you'll be under two times levered. Any color you can offer on your M&A pipeline and whether we may see any deal for the second half of this year, or should we think of incremental repurchase as more of a '25 event?

I agree with the comment that the cash flow is providing strong optionality for us. What was interesting is we started the year thinking there would be three rate cuts. We've now built into our guidance of $100 million of interest expense, no rate cuts. So we think that's prudent. We were able to keep the interest expense the same as our previous guide, primarily because the free cash flow is happening earlier in the year. So we look forward to a strong Q2 in free cash flow. To your point, we're right within our target range. We think there continues to be a debt reduction play to help the EPS. We'll restart the share repurchases to offset dilution and then there remains optionality in terms of what drives the highest shareholder value.

Thank you. The next question comes from Julian Mitchell with Barclays. Please go ahead.

Hi. Good morning. Maybe just wanted to put a finer point on that second quarter sales guide. So in total, it's up one to two points year-on-year. Based on your comments, Bob, is it right to think about Water Solutions may be down mid-single digits, Flow is flattish, and then you've got Pool up 10% plus. Is that the right sort of framework for Q2 sales?

I would agree with those numbers, Julian.

That's very helpful. Thank you. And then just my second question would really be around sort of the inventory situation. I think your own inventories are flattish sequentially in March, down a lot year-on-year. Maybe help us understand kind of how you're assessing inventories on the customer and channel partner level? And how do you assess your own sort of inventory rate versus kind of history for where we are in the year?

From our perspective, inventory from a days on hand is still significantly higher. We go back to 2019 and see each of the segments has room for improvement. That being said, year-on-year, we were down roughly 10 days from an inventory on hand perspective. So we're moving in the right direction. To bring down those inventories, the volume will certainly help in the second quarter, but we're not quite where we want it to be.

And then on the channel side, I think we're at normal levels. I think right now, we're working with our channel partners, and we're generally shipping through in the same quarter with being bought. So I feel like all that's behind us here in Q2.

Thank you. The next question comes from Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Hey, good morning guys.

Hey, Jeff.

Hi, Jeff.

Just on Pool, I mean, John, you seem a little more confident in how things are shaping up, at least from the survey work. And I think you talked about kind of having these added costs to ramp. And so just wondering what it takes for you guys to kind of lift expectations there? And then just also any early read on the start of the Pool season here, I know weather was pretty disruptive last year.

Yes, Jeff, I appreciate the question. Just as a reminder, pool markets and sell-through on a normal market basis are still down mid-single digits, so we're benefiting from easier year-over-year comparisons as we ramp up and no longer face those inventory challenges. I believe we have better insights into sell-throughs and have improved our ability to ship products within five days by tying shipments to sell-through data. It does feel better and more normal, which is why we describe this period as normalized. I feel positive about that. Interest rates remain a concern and are impacting financing, including dealer financing and the sources of working capital loans, which will continue to pose challenges for the industry. Additionally, higher interest rates discourage people from selling their homes and buying new ones, which is beneficial for our business. Lower interest rates could signal brighter prospects down the line, and this is reflected in our current full-year forecast. We are confident in our initiatives for transformation and cost reduction to address any potential gaps as we move into the latter half of the year.

Okay. Home Depot is acquiring the second largest player in the pool industry, and I’m curious if you believe this will lead to any changes in customer behavior or make it more difficult to engage with customers. Any thoughts on that?

I think this year, short-term, no. Clearly, the deal is going to take a while to complete. I mean I think all we can do right now is take Home Depot and SRS Heritage on their words and what they're saying right now is they expect to run that independently and continue to service the pro channel. And for now, that's the way we would see it unfolding and therefore not a short-term impact that we anticipate.

Thank you. The next question comes from Nathan Jones with Stifel. Please go ahead.

Sorry. I take off mute. Good morning, everyone.

Good morning.

Question on Water Solutions. You talked about some verticals there that are expected to improve as year-over-year challenges moderate. Is there an expectation that demand is actually improving sequentially here? Is that just a comment that you run into some easier comparisons as the year goes by and those comparisons just get easier in the second half of the year?

From an overall end market perspective, I would say it's more the latter, Nathan, in terms of, we can't with interest rates the way they are and people not buying new homes get too much ahead of ourselves on the residential side. So pleased to see that the decline year-on-year is improving for the last four or five quarters. But again, it's not as robust as we would like it to be.

Okay. And are you seeing any parts of those channels? I know we've talked a lot about the Pool inventory channel. Any parts of the channel at Water Solutions that might still be reducing their own inventory? I mean you guys have talked about reducing your inventory further. So potentially is there any destocking still continuing in any channel, whether it's Water Solutions or across the portfolio?

Not that we're aware of, Nathan. I mean right now, we would say that sell-throughs matching sell-in generally across the industry.

Thank you. The next question comes from Deane Dray with RBC Capital Markets. Please go ahead.

Thank you. Good morning.

Good morning.

Good morning.

Can we circle back on the opening comments? You talked about that you're halfway through value-based pricing. Would love to hear some of the early read on the traction and whether any disruptions? And then I guess it's a related question, the same thing on 80/20. Just any success stories there? And any kind of product shakeouts, product lines that might be deemphasized? Any color there would be helpful. Thanks.

Yes. So we're doing a good job utilizing the pricing playbooks that we have, and I'm really proud of the businesses utilizing those tools to affect outcomes strategically in their business. And again, this is just more strategic pricing and more thoughtful value-based pricing. That being said, I said this in Investor Day and have now gone through a full session of training. I kick myself for not having done 80/20 sooner. Because what we're learning from 80/20 is the complexity in the portfolio is all being treated equally. And what we need to do is think of our A parts or our top parts to our top customers getting differential treatment, and that's where we can be more innovative. That's where we can spend our energies for sourcing and pricing effectively. And then we get, like most companies, you get all the complexity that you introduced over time, either the secondary parts of those top customers or secondary parts to what you call the lower-end customers, that drive the complexity in the organization and drive too many resources where there's very little impact that you can have. I mean, Deane, I'll give you this. I mean, think about any regulatory change and thinking about how you treat that equally, it should really just be focused on your top parts to your top customers to your top regions, right? So we're going to get a lot of value from that. And I think it comes from the complexity reduction, but I think it's really more of a growth tool because it's going to allow us to double down and really focus our innovative efforts to the top products that we have into the top end markets that we have with our best customers.

That's real helpful. I think we talked about it at the Analyst Day; it's less about cutting lines, and it's more about optimizing growth. Is that right?

That is correct.

All right. Good. And then just I've asked about this before because I just kind of the voice of the customer on the Pool side is, all this interest in automation, the extent to which you can automate testing and any sort of updates on the Pool chemicals and so forth, operation in the equipment? Just where does automation stand in terms of the take rate of your customers?

I mean it's still about where it used to be, Deane. And I think we think this year will be a higher level of penetration as people have time to think. And our dealers have time to get caught up and learn and then be more productive in how they help the end customers get what they need. I think we have to make it simpler and we have to take the complexity out of that portfolio as well. And then I think we also have to think about how do we bring the right value proposition for the overall pad, and I think those two things will help us really change and accelerate that penetration rate.

Thank you. The next question comes from Brett Linzey with Mizuho. Please go ahead.

Hey, good morning everybody.

Good morning.

Hey, I want to come back to Pool. So just some of the preordering activity received, has most of that shipped out in the fourth and first, or do you have some feather into the second quarter, just try to think about any revenue visibility there?

It's strongly in the second, to be honest. I mean, it balances out between Q4 and Q1, but most of this is about servicing the Pool channel in the season, which will be Q2 and then adjusting within season, which would be Q3 for us.

Okay. And then just back to capital allocation. Certainly, deals are episodic, but I guess at what point if deals aren't coming into view, do you lean a little bit heavier into repo? Is that an H2 event, or do you think you assess M&A for the course of '24 and we should think of incremental repurchase as more of a '25 event?

Well, we're going to have strong cash flow in Q2, we expect, as we normally seasonally do. And then as Bob mentioned, I think our first step is we just got to reinstate buyback kind of to offset dilution and get that back as part of the capital allocation strategy. And then we're always looking at potential bolt-on M&A, and pleased that we're at least seeing some things now, and if we can transact them or get them over the finish line, that's yet to be determined. We got valuations; we've got performance that has to be looked at. But ultimately, I think we're excited that we're at least looking at things again.

Thank you. The next question comes from Andrew Buscaglia with BNP Paribas. Please go ahead.

Hi, good morning guys.

Good morning.

Good morning.

I just wanted to check on the Flow side. You had mentioned resi weaker than expected of down about 12%. Can you just remind us what's behind that, kind of what's driving that? And then any concerns that your markets are different, but that leads into other areas?

Two particular markets. It's water supply, water disposal. North America, which specifically is in-ground well pumps and what you'd say is pivot spray irrigation. That's it. I think it was just clear to us within the quarter that it's not worth running any promos or specials or thinking about dealer stock outs that we really just have to understand that the market is going to be softer and work within that softer market to drive the transformation levers that we need.

Yeah. And then on the topic of areas of weakness in resi outside of Flow, Pool sounds strong, but I guess.

Pool has experienced year-over-year inventory advantages, which is beneficial, although it's still down in the mid-single digits from a market perspective. Residential water treatment had a tough outlook last year and is currently relatively stable as they progress through the year. While this stagnation could be viewed positively because they aren’t experiencing significant declines, there are no signs of improvement either, particularly as some of the higher-end systems depend on financing for sales.

Thank you. The next question is from Saree Boroditsky with Jefferies. Please go ahead.

Thanks for taking my questions. So you made the comment that was positive on remodels and aftermarket in Pool. Could you just update us on how you're thinking about new Pool construction for the year?

Right now, we're thinking about exactly the same as in our original guide. And it's down versus historical standards. But I think overall from an industry perspective, we're working within that context and no update at this time.

And then guidance implies you realized about 50% of your earnings second half, but I guess I would have expected to be slightly higher given the Pool recovery and transformational benefits. So what's kind of the offset to that that's driving second half earnings to be similar to the first half?

Yes. We are pleased that on our last earnings call, we mentioned EPS being down slightly in the first half, and now we're at a point where it's about 50-50. The strength of the first half is coming through, and we are confident that the momentum will carry into the second half, consistent with how the business has typically operated around 50-50.

Thank you. The next question comes from Andrew Krill with Deutsche Bank. Please go ahead.

Hey, thanks. Good morning everyone. Just wanted a quick follow-up on that EPS kind of seasonality question. I think it makes sense on the 50-50 split. Just wondering for 3Q versus 4Q, I think historically, those are somewhat similar. Should we be expecting that, or is there any reason maybe it's a little more 4Q heavy as more of the transformation benefits flow through?

I think I would just say the normal cadence of our business would be generally the same or if not more skewed a little bit more to Q3 versus Q4. Most of our dealer trade businesses, which is 75% of what we do, don't see a very strong close to the year. Most people don't want them inside their homes or during the holidays. And then we don't have that normal industrial cycle where there's a push to ship everything by the end of the year. The things that will skew that is depending on what the Pool season is for the subsequent year, and then that sometimes leads to stronger earlier shipments in Q4, and we have no idea what that's going to look like at this stage.

Okay, great. Very helpful. I have a quick follow-up regarding the backlog. I understand your business typically operates on a book-and-ship model, but with regard to the costs and the more normalized cycle patterns, do you think it’s reasonable to expect that the small backlog in the segments will be lower as we exit this year, and that this should represent a more typical run rate into 2025? Thanks.

We would agree with that, that the majority is the shorter cycle and that backlog would be lower at the end of this year as the more normal operating conditions continue.

Thank you. The next question comes from Scott Graham with Seaport Research. Please go ahead.

Hey, good morning. Thanks for taking the questions. I have two of them. The first one is on strategic pricing; maybe a little bit more finer to the point. With the pricing guide that you've given on the call here earlier, suggests a little bit of a bleed off in pricing for the rest of the year, notwithstanding if you increase prices, of course, what is strategic pricing due to the pricing number? In other words, let's say that bleeds off to 2% for the balance of the year. Does that sustain 2% into next year, the pricing initiatives?

Yes. Strategic pricing would do two things. First of all, it helps you have confidence that the price you set is the right value that you should expect, meaning you looked at the features, and you priced accordingly. The second thing it allows you to do is hold firmer on your rebate structures. So that's usually where the net pricing benefit comes on. So there's list pricing, which is usually higher. And then what did you net or what did you realize? I don't know if we have next year's dialed in yet, but we usually drive it to be, as Bob said, price offsetting cost. And when we take a look at material inflation and costs, we're going to try to drive enough pricing actions to at least be neutral along those two elements.

Thank you. For my follow-up, I would like to discuss the margin guidance. I understand the margin is set at 22%. The first quarter showed strong margins, but there was minimal benefit from volume, with only a slight advantage from mix, which didn't specifically contribute to the Pool segment. Looking ahead, you have ongoing strategic savings and transformations, as well as an improved mix in Pool that could significantly impact volumes. I am curious if the 22% margin target seems easily achievable or if you're considering a potentially higher figure.

I would start by noting that the midpoint of our guidance indicates we are slightly above 22%. Overall, for the reasons mentioned, there is room for upside in that ROS expansion. I appreciate the idea that pricing will counterbalance inflation, and the transformation will lead to that ROS expansion. Additionally, mix can impact it positively or negatively. In Q1, we observed some favorable mix, but the slightly lower Ice business, which is a profitable segment, is worth mentioning. Therefore, with price offsetting inflation, considering the mix, and the potential positive effects of transformation, we could see an improved ROS expansion narrative.

Thank you. The next question comes from Joe Giordano with Cowen. Please go ahead.

Hey, good morning, guys.

Good morning.

Good morning.

I think most questions have largely been asked already. But just kind of curious like bigger picture, EPA comes out with regulations on PFAS. This is something that you guys were thinking about doing, like potentially like an in-home product. I'm just curious how those kind of strategies, kind of how you weigh those against kind of the 80/20 and the simplicity and wanting to focus on things that you know have a real market? And how does that dynamic play out in your thought process for thinking about that?

I think it's a great question. I think 80/20 helps optimize the current revenue streams you have, but it also needs to apply to your focus on what you think you can do to make a larger impact in the future. I think we're getting better at choosing fewer, more impactful innovation projects. And I'm still behind what we're doing with the whole home system that we're working on. I do believe that there's a strong progress around that, and the more awareness we get in water and homes, and the more people are concerned about what they're consuming and drinking, I think that's better for us. The reason I don't get all pounding the table on the movements on the regulatory side is we just don't see people running out right now to buy the current products that we have that actually create or solve the problems today. So there has to be something else that occurs to get the consumer focused. And as you look at the longer term, I think we're very energetic. I think the shorter term, we're less optimistic that we're going to see a shorter-term impact.

Fair enough. Thanks guys.

Thank you.

Thank you. Today's final question comes from Steve Tusa with JPMorgan. Please go ahead.

Hey, guys. Sorry. Just one last quick one. On the 2Q, do we just assume that basically that entire, call it, I don't know, $25 million to $30 million that's effectively from the transformation for the 2Q?

Yes. In terms of reading out, we've captured $4 million of the $75 million. And then our view is that the remaining $70 million is fairly linear over the next three quarters.

Right. So that basically accounts for all the year-over-year profit improvement like roughly for the second quarter?

Yes. With Pool's incremental volume growth being offset a little bit by the year-over-year impacts in Water Solutions, but you're not far off. Thank you for joining us. In closing, I want to reiterate our key themes. First, solid execution across our balanced water portfolio drove significant margin expansion for the eighth consecutive quarter. Second, we are reiterating our full year 2024 guidance, which reflects confidence in our strategy while continuing to monitor uncertainty across the macroeconomic and geopolitical landscape. We are mitigating risk where we can and being more agile as we expect to achieve new performance records in 2024 and drive long-term shareholder value. Third, we are pleased with our progress on our transformation initiatives, which we expect to continue to drive strong margin expansion. And finally, we expect to continue to deliver value creation beyond the 2024 fiscal year. Thank you, everyone, and have a great day.

The conference has now concluded. Thank you for your participation. You may now disconnect your lines.