Welcome to the Pentair Third Quarter 2024 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Shelly Hubbard, Vice President, Investor Relations. Please go ahead.

Thank you, operator, and welcome to Pentair's third quarter 2024 earnings conference call. Joining me today are John Stauch, our President and Chief Executive Officer, and Bob Fishman, our Chief Financial Officer. We will discuss our third quarter performance as detailed in this morning's press release. You can find our earnings release and slide deck on the Pentair Investor Relations website, which is intended to supplement our remarks during the call and provide a reconciliation of differences between GAAP and non-GAAP financial measures. The non-GAAP financial measures should not be seen as substitutes for or superior to GAAP measures. They serve as additional clarifying items to help investors further understand the company's performance and the impact of these items on financial results. Before we start, I want to remind you that we will make forward-looking statements today about future events. These statements are subject to certain risks and uncertainties, many of which are hard to predict and generally outside of Pentair's control. These risks and uncertainties could cause actual results to differ materially from our expectations. We encourage listeners to review the risk factors in our most recent Form 10-Q and Form 10-K. After our prepared remarks, we will invite questions. As a reminder, you can access our Pentair investor overview and Investor Day presentations on our IR website. Please visit the Pentair Investor Relations website and click on Events and Presentations to find these materials. 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 4. We are very pleased with the strong performance of our balanced water portfolio, the success of our transformation initiatives, and solid execution in a dynamic global macroeconomic and geopolitical environment. Our resilient strategy across our Move, Improve, and Enjoy Water segment was evident in our ability to diversify and mitigate risk as we drive long-term shareholder value. For example, in the third quarter, we delivered double-digit adjusted operating income and adjusted EPS growth year-over-year, along with triple-digit margin expansion despite slightly lower sales. Adjusted operating income was up 13% and adjusted EPS was up 16%, while ROS expanded 310 basis points to 24.1%. Both Flow and Pool delivered triple-digit margin expansion, and Pool grew sales by 7% in Q3. We achieved record free cash flow so far this year, totaling $629 million. This sets a record post the nVent spin-off from Pentair in 2018. We continue to follow a disciplined and balanced approach to capital allocation and are very proud of our dividend aristocrat status, marking a 48-year streak of rising dividends. For our over 10,000 Pentair employees, I want to thank you for your dedication to deliver for our customers and create value for our shareholders. Your tireless hard work led to another quarter of impressive results. Thank you. I also want to extend my heartfelt sympathies for those affected by the recent hurricanes. I can only imagine how scary and devastating that can be. Moving to guidance, we are raising our full-year adjusted EPS guidance to around $4.27, representing an approximate 14% increase year-over-year. This is due to our strong performance year-to-date and confidence in our ongoing ability to operate effectively in a changing environment. Bob will provide more details later in the call. Let's turn to Slide 5. As noted last quarter, when we look at each of our three segments and the verticals within each, we have seen areas of great opportunity and some that have remained slightly pressured. For example, in Flow, our commercial vertical reached another new sales record. Higher interest rates in a slow housing market continued to impact our residential vertical, and our industrial vertical has experienced the effects of delayed CapEx spending from customers. Within Water Solutions, our commercial filtration business remains strong, and our Manitowoc Ice business performed well amidst the normalizing environment and difficult year-over-year comparison. Higher interest rates continue to impact our residential business, and global economic pressures have affected international business. Our first commercial PFAS certified filtration product that was launched in Q2 had a solid start. We now have 10 products that meet the new NSF certification standard of 20 parts per trillion. Given the increasing focus on water quality and the rising interest in point-of-use filtration systems, we are enthusiastic about the long-term growth potential of these products. Lastly, in Pool, while sales grew year-over-year for the second consecutive quarter, sustained higher interest rates and a slower housing market continue to impact pool demand, predominantly in new and remodeled pools. As mentioned last quarter, new in-ground pool builds in 2024 are expected to be near the 60,000 range compared to roughly 72,000 in 2023 to 78,000 in 2019 per industry data. That said, our aftermarket business continued to perform well in Q3. We believe the pool industry is highly appealing with favorable megatrends and unique competitive advantages for Pentair. For instance, with climate change being an important issue, we believe Pentair is in a strong position to meet the growing demand for smart, sustainable products. We have led the way by pioneering variable speed pumps that conserve energy and reduce costs, and we are continuing to innovate with smart, sustainable products. And we expect to continue to benefit from a favorable housing migration to the Sun Belt states, which represents a large mix of our pool sales. Despite the near-term economic challenges that we expect for new and remodeled pools, we remain confident in Pentair's ability to drive long-term growth and margin expansion. In general, we are very pleased with the success and diversification across our Move, Improve, and Enjoy Water segment as we believe it enables us to manage risk effectively. Let's turn to Slide 6. We have made steady progress with our transformation initiatives. As mentioned during our March 2024 Investor Day, we anticipate that the most substantial productivity savings for us will come from sourcing and operational excellence. To date, we have successfully completed and integrated a majority of Waves 1 and 2 in sourcing. We are also optimizing our global footprint to better align with our focused and balanced water portfolio. We have implemented strategic value-based pricing across our portfolio, and we have taken actions to drive efficiencies across the organization to meet our strategic objectives. We've also made progress on 80/20 even though it is still early in the stages. During Q3, we completed the 80/20 analysis across most of our revenue streams and we trained additional employees, bringing the total to over 1,200. We are executing action plans to achieve quick wins, such as exiting unprofitable and less profitable revenue in Quad 4, while focusing on driving profitable core sales growth in Quad 1 and 2. We are greatly motivated by the early insights of 80/20 and the proactive measures our teams are implementing to drive sustainable, profitable growth. Before I turn it over to Bob, let's turn to Slide 7, which highlights our third quarter key takeaways. Importantly, transformation continued to drive strong margin expansion, adjusted operating income and earnings growth despite little benefit from volume growth. Early insights into 80/20 are driving further confidence that it can accelerate our transformation initiatives to drive more focused and profitable growth. We increased our full-year 2024 adjusted EPS guidance to approximately $4.27, reflecting an approximate 14% increase year-over-year driven by solid execution and strong year-to-date free cash flow. Lastly, we believe we are well positioned to address opportunities for favorable secular trends, which include concerns about access to clean, safe and reliable water; increased awareness of human-made contaminants impacting water composition, taste and quality; growing environmental concerns driving consumers' desire to reduce their carbon footprint; aging commercial, public and municipal infrastructure; interest in outdoor healthy living with people gathering at pools for exercise and fun; and favorable housing migration of the Sun Belt states, which represents a large mix of our pool sales. I will now pass the call over to Bob will discuss our performance and financial results in more detail.

Good morning, everyone. Let's start on Slide 8. We achieved another strong quarter of quality earnings with triple-digit margin expansion and double-digit adjusted income and EPS growth despite lower volume. Sales outperformed our expectations as did margin and adjusted earnings. In Q3, sales were $993 million, down 2%. Adjusted operating income increased 13% to $239 million. ROS expanded 310 basis points to 24.1%, driven primarily by Transformation and adjusted EPS increased 16% to $1.09. Core sales were down 1% year-over-year, driven by 8% growth in Pool, which was offset by a 7% decline in Flow and a 3% decline in Water Solutions. In the prior year period, both Flow and Water Solutions were able to ship orders from a larger backlog as the supply chain improved. In 2024, our backlogs returned to more normalized levels. Similar to John's earlier comments, our results continue to highlight the power of our balanced water portfolio, the success of our transformation initiatives, and the dedication and hard work of our entire Pentair team globally. Please turn to Slide 9. Flow sales declined 7% year-over-year compared to a near record quarter last year. Residential sales declined 11% as higher interest rates continued to pressure residential end markets. Commercial sales rose 3%, marking the ninth consecutive quarter of year-over-year sales growth. Industrial sales were down 10%, driven largely by delayed CapEx. As we noted last quarter, we were starting to see signs of economic uncertainty causing the delay in projects that we had scheduled for the second half of 2024. Segment income grew 7%, and return on sales expanded 280 basis points to 22.2%, marking the first time Flow's ROS has reached or exceeded 22%. The strong margin expansion was a result of continued progress on our transformation initiatives and favorable mix. Please turn to Slide 10. In Q3, Water Solutions sales declined 3% to $290 million, driven by declines in both commercial and residential. We expected our commercial business to be down in 2024 in light of a record prior year, which was driven by Manitowoc Ice's ability to deliver on significant backlog orders and a larger commercial services project rollout. Manitowoc Ice continued to exceed our expectations by achieving our acquisition business case target two years early in 2023. Within Commercial Water Solutions, filtration sales grew again in Q3. Segment income declined 6% to $64 million and return on sales contracted 80 basis points to 22.2% as higher productivity was more than offset by higher inflation and lower volume. ROS has expanded 820 basis points over the last three years. Please turn to Slide 11. In Q3, Pool sales increased 7% to $331 million. Segment income was $113 million, up 24% and return on sales increased 470 basis points to 34%, driven by sales growth and Transformation. Please turn to Slide 12. We are very pleased with the success of our transformation initiatives. We are committed to a goal of 24% return on sales by 2026 year-end as mentioned at our March 2024 Investor Day. We are off to a fast start after increasing our initial 2024 ROS guide of 22% to our current guide of 23%. We have achieved $70 million of transformation savings year-to-date on our way to an expected $100 million for the full year. These 2024 savings are part of our aspiration of $260 million of savings by 2026 year-end, which would drive a ROS of approximately 26%. Please turn to Slide 13. On the left side, the four quadrants illustrate how we are prioritizing our business through the lens of customers and products. Those that fall in Quadrant 1 are our highest revenue customers and products, while those in Quadrant 4 reflect the opportunity to reduce the complexity and cost to serve across our portfolio. As we take actions across all four quadrants, we expect 80/20 to accelerate our transformation efforts and drive core sales growth and further margin expansion in the years ahead. As John mentioned, we are in the early stages of 80/20 and making good progress. Please turn to Slide 14. In Q3, we delivered strong free cash flow of $234 million, driven by higher net income from continuing operations and significant improvement in working capital. Year-to-date, we achieved record free cash flow of $629 million post the nVent separation. We also deployed capital through reinvestment to drive future growth, repay variable rate debt, repurchase shares, and pay quarterly dividends. Our net debt leverage ratio is now 1.4x, down from 2.1x a year ago. During the quarter, we repurchased $50 million of shares for a total of $100 million this year. We have an additional $500 million available on our share repurchase program. Lastly, our ROIC was over 15%. Long term, we are targeting high teens ROIC. We plan to remain disciplined with our capital and have the flexibility to strategically allocate additional capital to areas with the highest shareholder returns. Moving to Slide 15. For the full year, we are increasing our adjusted EPS guidance to approximately $4.27, which is up roughly 14% year-over-year. Also for the full year, we expect sales to be approximately $4.75 billion to $4.85 billion or roughly flat to down 1%, driven by a challenging economy. This is unchanged from our previous guidance. We expect adjusted operating income to increase approximately 11%. We continue to drive approximately $100 million in transformation savings this year. For the fourth quarter, we expect sales to be approximately $965 million to $975 million, down approximately 1% to 2%. We expect fourth quarter adjusted operating income to increase approximately 13%. We're also introducing strong adjusted EPS guidance for the fourth quarter of approximately $1.02, up roughly 17%. This guidance reflects continued global macroeconomic challenges and strategic actions to improve our water portfolio's profitability and growth opportunities. We're excited about the progress we have made this year on transformation, which has been a significant cultural change for our company. We're also very pleased with the early stages of 80/20 and expect the long-term benefits of both transformation and 80/20 to drive long-term shareholder value. I'd now like to turn the call over to the operator for Q&A after which John will have a few closing remarks.

The first question comes from Deane Dray with RBC Capital Markets. Please proceed.

Thank you. Good morning, everyone.

Morning, Dean.

Maybe we can start with value-based pricing because this can really be a needle mover for you. Can you give us a sense of how much of this is automated? Can you size the impact? And just to confirm, is this now enterprise-wide the implementation?

Thank you for the question, Deane. First, I want to emphasize that it has the potential to be a significant value driver. Regarding your second question, we are still in the early stages. It's important to note that with all these transformation efforts, I often refer back to the 80/20 principle. It's much simpler to implement value-based pricing in Quadrant 1 and ensure we're optimizing those products that our customers desire most, focusing on our best customers, instead of spending time on Quadrants 4, 2, and 3. Initially, when we began the value-based pricing initiative, we were applying it across all quadrants. We have launched this playbook across every business, but some areas like Pool and certain global sectors are progressing more slowly. There is definitely a significant opportunity ahead.

It's great to hear. Can you provide some insight regarding the delays in capital expenditures by customers? We're not surprised; perhaps it's related to the election. Can you connect this to the overall demand sentiment and the postponement of projects?

Yes. I mean this primarily relates to our Flow business and some of the larger projects on beer membranes and some of our larger beverage customers. And I think that we still feel optimistic that we're going to see those projects come through. But I think the investment profile isn't at the level for our customers that they're comfortable with yet. So I think they're delaying them several quarters. That's really what it relates to, Deane.

Great. Thank you.

The next question comes from Andy Kaplowitz with Citigroup. Please go ahead.

Good morning, everyone.

Hi, Andy.

John, could you talk about what you're seeing in Pool after your price increase in early September and how you would assess the channel inventory headed into '25 in Pool? And then obviously, you mentioned strong price in Pool overall. I think in the past, you've been a bit concerned regarding price versus inflation, but would you say pricing is holding up well versus inflation at this point?

Yes, I'll take the first part. I'll let Bob chime in here a little as well. I think, first of all, I think the market and the industry is playing out generally the way we expected it to after we tweaked it slightly after our Q2 earnings. We're seeing some of the stronger key states continue to have sell-through, and we feel like the inventory is pretty well balanced. And then I think we're going to see a little bit extra demand coming out of Florida here with hurricanes, and we got to make sure we're ramping up and able to facilitate that as well. On the pricing side, they have, as I mentioned earlier, have been further along in the value-based pricing, and we also have pretty good mix that we're able to pull the levers on to help optimize the pricing overall, which is really just the overall receipts of the revenue and making sure that our customers and customers' customers are buying the higher-end solutions. So overall, I think the year is playing out where we wanted it to, and we're still very optimistic that next year will be an even better year since we think the overall pool builds are at a lower end. And we're going to see a recovery in the aftermarket and the remodeling next year. So we're feeling pretty optimistic about 2025. Bob, I don't know if you want to add?

Yes, just on price and inflation, I would say we've done a pretty good job of forecasting price and inflation. We had said roughly 2 points would read out at the company level. And that's about what we saw. We saw 3 points in Q1, 1 point in Q2, 2 points in Q3, and then, call it, 1 to 2 points in Q4. Some of that movement is due to product mix in the quarter. Some of it is due to the compare versus the previous year. But overall, it's been pretty level pricing at that 2 points. From an inflation perspective, we had guided to 2% to 3% of the total cost, and that's roughly how it's playing out as well.

John, I know it's early, but can I ask you a follow-up on the hurricane impact, like maybe what you've seen in the past, give us some perspective on what it could look like? I assume there's a delayed sort of remodeling impact or something like that, that maybe impacts next year? And any sizing might be helpful.

Yes. First of all, hurricanes are devastating for those involved. So we certainly don't root for weather events. But we're servicing a channel and servicing dealers, and it's all hands on deck to make sure that our customers are being able to serve their customers. So we usually see pumps, which are the main demand product that could be affected, certainly from water damage. And people, if they can, want to get those pools up and running and make sure that they stay clear. So every hurricane is different; there is no playbook and model. Florida is a pretty important pool state for us, and I'm sure we'll see a little bit of demand here that we factored into our guide.

Appreciate the color.

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

Hi. Good morning. Maybe just first off, I wanted an update on the productivity savings outlook. I think before you guided about $100 million for the year, so maybe 30 million or so left in Q4. It's a strong run rate entering the new year next year. So maybe help us understand kind of what sort of productivity we should expect in '25 when you're taking the aggregate of 80/20 and the base Transformation plan, please?

Yes. Thanks for the question, Julian. Again, we were very pleased with the transformation readout in the third quarter. To your point, we are tracking towards that $100 million of Transformation savings this year after doing roughly $70 million last year, which means another $30 million in Q4. Overall, back at the March Investor Day, we had talked about driving to an aspirational 26% ROS, which would include $260 million of savings in '24, '25, and '26. By doing $100 million this year, I would say we're off to a good start. So think about $160 million spread over the next two years, call it, $80 million, $80 million would be a good starting point from a Transformation perspective. And again, we're not committing to the 26% right now; we're still on that 24%. But overall, this fast start to the transformation savings is giving us a lot more confidence.

Thanks very much for that color. And maybe just my follow-up would be around the pace of sort of revenue turnaround in Water and Flow. Understanding Flow, you've got these project delays and maybe a low visibility on where the projects start to move more freely. And then Water, you had the sort of the tough comp in Manitowoc Ice, for example. Maybe just help us understand kind of the confidence in either of those seeing a positive sort of sales trend year-on-year in the next 12 months?

Yes. First of all, I think that we're very pleased with the way our commercial revenue streams have held up, and even though we had some more difficult year-over-year comps, we're still seeing sequential movement that gives us an encouraging outlook for those businesses. We are still 50% exposed across the portfolio to residential. And that's where we've seen almost six to seven quarters in a row now of year-over-year challenges. And clearly, as a company, we're rooting for interest rate movements and hoping that mortgage rates decline and overall get a little jumpstart in the residential movement, meaning people removing houses or people building houses. And we still think that's several quarters away. And so we're continuing to work the transformation levers. We are encouraged by the prospects of growth next year, and we do see early signs that, that will be achievable. And as a reminder, to add to Bob's transformation, growth will help productivity. So we've been doing a lot of this without the contribution of growth in the transformation. So if we can continue these programs and get growth on top, we're pretty encouraged on what we can achieve.

That’s great. Thank you.

The next question comes from Steve Tusa with JPMorgan. Please go ahead.

Hi, guys. Good morning. Can you just clarify maybe how much of the revenue decline in Flow and Water the non-pool stuff was? Is that all market? Or is that some of this 80/20 initiative? And then just on the pool pricing, I mean it did accelerate quite a bit here. I think quarter-to-quarter; what do you expect for Pool pricing heading into the fourth quarter and into next year?

I'll respond to the first question, and then Bob will address the second one. Generally, I would say we are observing challenges primarily in the residential and agricultural markets. We expect to see signs of recovery in the second half of the year, but as we've adjusted our outlook, we are not anticipating immediate improvements. The team is managing costs well and progressing through these challenges. Comparisons will become easier as we move into next year, but currently, the residential and agricultural markets remain difficult.

And on pricing for Pool to get to the 2% for the total company, Pool will be somewhere for the year between 2.5% to 3%. And again, they've gone from 4% in Q1 to 1% in Q2 to 4% here in Q3, and then that moderates a little bit in Q4. So that lumpiness, again, is attributable to value-based pricing, the mix of the products, and those types of things and the compare versus the prior year. So overall, feeling good that 2.5% to 3% price reading out for Pool this year after such large increases in the previous years.

Great. Thanks a lot.

Thank you.

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

Thank you. Good morning. To level set on Transformation, Bob, you mentioned the $160 million remaining, $80 million, $80 million or thereabout in terms of the 2025, '26 outlook? Is it fair to say that you're pacing ahead of the initial plan and perhaps there's as much as you've been referencing the 26% and the $260 million contribution toward that is aspirational that you're perhaps going to see runway above that in terms of Transformation savings and an even higher ROS target in time?

Certainly, that's our goal. I mean, again, we're looking to return to growth and drive transformation. The $260 million that we gave back at Analyst Day got off a faster start. We had guided to $75 million at the beginning of the year and are now at $100 million. So the transformation savings were led by sourcing. If you'll remember, Waves 1 and 2 are complete this year. Wave 3 will complete next year, and then we'll start that process over again. What I really liked about the third quarter, though, is we had balanced really across sourcing, manufacturing, and operational spend below the line. So good balance across those three areas from a transformation perspective. The other thing that's really increasing our confidence is 80/20 and that being an enabler to the transformation. While it really is a growth play, we are very focused right now on Quad 4 and reducing a lot of the complexity within Quad 4. There's a number of techniques now that we've rolled out the 80/20 training to over 1,200 people in the company. There's different techniques that we're using in Quad 1 versus Quad 4. And again, think of Quad 4 as being our B customers, our B products, roughly 4% of our revenue. And we're looking at things there like reducing the number of SKUs, being able to price, providing a standard size, minimum order quantities, extending lead times, and offering fewer but standard options. So those are the techniques that the teams are using there. Again, our goal is to treat all of our customers fairly but differently. So there is an opportunity to reduce the complexity in Quad 4. As a reminder, the cost to serve in Quad 4 is somewhere between 15% to 25% of our overall costs. And so that creates an opportunity as well. And we have lots of really great examples so far now that we've rolled it out to the team; we've freed up capacity in a number of our manufacturing sites. We've reduced the resources to support. We've reallocated dollars from Quad 4 to improve the customer experience in Quad 1. So it's really starting to take traction and improve our overall transformation story. And again, once we eliminate that complexity in Quad 4, we can start to spend more time on improving the customer experience, which we've already started in the first quadrant. And so again, think about 65% of our revenue sitting in that Quad 1, where we have the opportunity to improve product availability, lead times, on-time delivery, and provide better service to our channel, either through automation, training, insight into their businesses, product information. So again, it's a major cultural change as we embark on 80/20. And we think that's going to be a huge accelerator for the transformation plan.

That all makes sense, and trends are very encouraging. Given the operational cadence that you now have, if we do have a stronger growth environment in 2025, you're obviously well positioned to lever that. In addition, your balance sheet is now in pretty good shape. I can't imagine that being any pushback there. How is your deal pipeline looking at this point? And is your team focused on capital deployment over the near term to hopefully further lever a stronger demand environment going forward?

Always looking. Right now, I think we are very mindful of making sure that anything we look at has to drive returns. And I would say the pipeline is a trickle. It isn't gushing and so we're mindful of how precious our capital is, and we're putting it to the best use possible given all the global and economic environment that we're working within.

And to answer your question, we are very pleased with the leverage within the company. When we closed on the Manitowoc deal back in July of 2022, we had leveraged up to 2.7, 2.8x. A year ago, we were at 2.1 and now we're at 1.4x. So it really is a testament to the EBITDA that we've driven, the EBITDA will be over $1 billion this year and driving that free cash flow to repay the debt and overall, improve our leverage multiple. The balance that we had in Q3 from a capital perspective was very strong. We were able to continue to invest in growth. We paid down some of the debt, continued with the share repurchase and obviously continued with that dividend streak.

Thanks again.

Thank you.

The next question comes from Saree Boroditsky with Jefferies. Please go ahead.

Good morning. This is James filling in for Saree. Thank you for addressing my questions. I wanted to revisit the 80/20 strategy. I understand it is still in the early stages, but you've conducted an analysis of most revenue streams. Can you provide more insight on when you anticipate seeing the benefits from the 80/20 approach? Additionally, what percentage of revenue do you plan to discontinue due to the unprofitable nature of certain products?

Yes. As Bob said, I mean, if you look across the portfolio, what mathematically a normalized environment would be in what we call Quad 4 would be roughly 4% of the company. It's very improbable and unlikely that you could get out of all of that revenue in any 12-month period of time. You have contracts, you have obligations. You have certain requirements of how you serve distributors and where those dealers can buy. So this would be in a best-case scenario from an existing standpoint, probably half of that would be the opportunity. And then mostly over a 12 to 18-month period, you'd expect to recover most of that lost volume that would be transferred into the A customer streams. So overall, 80/20 should not be a revenue reduction. What it should allow you to do is prioritize your resources and efforts, as Bob said, to take care of your best customers around your top products and really allow you to free up resources to drive innovation and drive higher long-term organic growth. So I think where we're really got to get paid, right? So the way we expect to get paid is by reducing that complexity in Quad 4 and ultimately then being able to reinvest in the future growth of the company. So I think in a 12-month period, the amount of revenue lost is nominal, but it is a transfer and you should see it in the margin and the transformation pipe from the efforts that we're driving through 80/20.

Got it. Thanks for the color. And a follow-up on the Pool business here. So can you discuss more on the demand you saw from the prebuy and when you kind of expect to ship those orders?

Yes. We generally implement our price increases to remind everyone that the purpose of early buy is to balance our factories and avoid the disruption of hiring and then letting go of our labor teams. We collaborate with the channel to ensure minimal shipment requirements in the fourth and first quarters, which helps us retain our skilled workforce. With this in mind, we set prices in the third quarter and announced the increases for new products. Our channel then places early buy orders at the previous prices and receives payment terms that allow them to pay us later. Typically, this represents about a quarter's worth of revenue that we ship in the fourth and first quarters. During these quarters, we continue to accept standard orders for the open states and necessary products, which helps smooth out the revenue streams for both quarters.

Got it. Thanks for taking questions.

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

Just maybe go back to the 80/20. One, you mentioned this 15% to 25% cost on the 4% of sales. I'm just wondering as you kind of go through that assessment, maybe cut half of those sales, what do you do with that 15% to 25% of cost? And is there a cost savings number over and above the 260 to think about with 80/20?

First of all, I don't believe everything is addressable since there are fixed costs like overhead depreciation, factory expenses, and insurance. However, I see at least a 10% cost saving opportunity in Quad 4 linked to our efforts, including compliance and sustainability, as well as shipping, packaging, and various work streams that are currently less efficient for the B products we're expecting to streamline. Our goal with these costs is to eliminate them, which will contribute to our transformation savings. As Bob mentioned, our initial transformation guidelines did not include 80/20 expectations. Eventually, as we assess the value of these initiatives, we will need to revise our long-term productivity targets to reflect the anticipated benefits of the 80/20 model. It's important to note that we are executing this in phases, similar to our transformation. This year, we have addressed about 50% of the revenue from an action standpoint, which we anticipate will yield results next year. Additionally, we plan to train everyone on the 80/20 model, likely in the second half of next year.

Okay. And then just a couple of quick ones on Pool one, back to the early buy. Just how should we think about the balance of early buy timing between 4Q and first half '25, I know you were pretty balanced last year. And then just any green shoots on new or remodel as we start to see at least some rate cuts, I know that the mortgage rates have been slower to move, but just any green shoots? Thanks.

Yes, Jeff. First of all, I would say that this early buy is quite typical. I believe we're returning to a more normalized perspective. Consequently, growth next year will depend more on new pool builds and the remodeling and aftermarket activities. We don't have precise predictions and forecasts at this time. We conduct monthly dealer and customer feedback sessions, along with dealer and channel checks, to stay informed about current sentiments, ensuring we can adequately prepare our supply chain. We will be ready to share this information during our guidance for next year at the Q4 earnings announcement. It's too early to make any definitive statements now.

Okay. Thanks, guys.

Thank you.

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

Thanks. Good morning, everyone. I was hoping to get some help on the implied margins for 4Q this year. I'm getting around 23%, down about 100 bps sequentially. Just can you walk us through, I guess, how the kind of the moving pieces on why you're expecting margins to be down sequentially? I think normally, they're a bit more flattish quarter-over-quarter? Thanks.

Well, first of all, you're directionally close. So I mean, I think that would be an appropriate view. We tend to see a drop from Q3 to Q4 historically and traditionally. Q2 and Q3 are our peak quarters; that's when we're fully utilizing our factories and our teams and applying the revenue off the full cost base. So typically, we take a little drop down from Q4 or Q3 to Q4 in revenue, and that's generally why the margins become a little softer. A couple of that is the holidays and also the way that the schedules work, by the way we work with the dealer and the distribution channel tends to ease off on its purchases towards the end of the year due to the holiday season, and a lot of their customers don't want people servicing their houses during those holiday periods.

And from a year-on-year perspective, we do expect the ROS to be up significantly in the fourth quarter, similar to how it was in the third quarter. Good news in Q4 is we're going to see better balance across all three segments, Flow, Water Solutions, and Pool, all contributing to that ROS expansion story.

Great. Very helpful. And then going back to the transformation savings and the final $30 million or so you're expecting for 4Q. Any help by segment, which could benefit more or less? Or should we think about them being pretty evenly spread among the three?

Yes. From our perspective, because the ROS will increase for all three segments, you can expect transformation really benefiting all three of those segments in the fourth quarter.

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

Good morning, everyone. I guess I'm going to ask a bit more of a philosophical question about interest rate cuts. You've got a few businesses that you called out has negatively impacted, residential flow, new pool construction, that kind of stuff. Can you talk about typically what kind of lag you see to interest rate cuts before it begins to start impacting those businesses?

Yes. I think it's six to nine months to see meaningful impact, Nathan. Obviously, just a feeling that they're going to continue to head down would start the encouragement of people being able to think that they could go out, for instance, get a variable rate mortgage, maybe refinance later. But we're not yet seeing the credit markets reflect the lower rates, and you probably saw that even mortgage rates ticked up and borrowing rates did not necessarily go down. So I think while we're encouraged by a single larger movement, we're still going to need a few more before we've got a bunch of consumers and customers that are confident that their borrowing rates are going to be lower in the future.

So maybe it starts to impact second half of next year and into the first half of the year after?

Probably a good assumption. Tighten that up as we finish Q4 and have better understanding, but that would be a reasonable way to look at it.

There's a couple of the pillars on your transformational initiatives that we haven't talked too much today, around operational excellence, organizational effectiveness. Can you just give us an update on the initiatives there and the expected impacts you're looking for?

Yes, I mean, there are two big work streams. I mean the organizational excellence is one that we're really working as more of an offset, right? We want to drive some of the nonproductive activities out of the organization and reinvest in innovation and sales and marketing and certainly supporting our customers more effectively. So we haven't talked a lot about being a significant positive to the P&L, but it's important because it'll free up resources to invest. On the operational footprint, we've made great progress, but growth will help a lot, and we need to get leverage across the factory footprint. And then while we've overdriven a lot of the activities, we've seen some headwinds, as I'm sure most companies have, from insurance, utilities, property taxes, those types of things that actually negatively impact the operational piece of the P&L. So while we probably haven't highlighted enough, we're making great progress there. And we're just trying to get ahead of some of those inflationary elements that have hit the manufacturing side harder than they probably hit across the overall P&L.

Thanks very much for taking my questions.

The next question comes from Mike Halloran with Baird. Please go ahead.

Good morning, everyone. Two quick ones here. One, on the commercial side on the Water Solutions, just any variance between the Everpure and Manitowoc Ice businesses? And then maybe just talk a little bit to how cross-selling is going on that side of things?

Yes. From our perspective, we are pleased with the performance of commercial filtration this year for Manitowoc Ice. Just as a reminder, we previously guided down roughly mid-single digits after their record $4.45 billion year last year. We anticipate a return to growth next year. Overall, these businesses continue to perform very well from a return on sales perspective. We are satisfied with commercial filtration and Manitowoc Ice. In general, the portfolio faced some pressure in the third quarter, particularly in Water Solutions. This is due to the comparisons we faced last year, as well as some challenges in our selling efforts within commercial filtration, where we start with the system and then benefit from recurring revenue later. So, there are several factors at play, but we are generally pleased with the performance in commercial water for the quarter and the year.

And then to your question on cross synergies, I couldn't be more pleased. And that's what you're seeing a lot of the filtration revenue this year is the synergies we talked about in the Manitowoc Ice side. It was Manitowoc pulling Everpure. It wasn't really going to come the other way around. So when we look at that deal model, we're ahead of our expectations and expect 2025 to be on or above those expectations. So really feel good about the performance of this business and the synergies that we committed to.

Thanks for that. And then following up on a question earlier on the capital usage side of things. I certainly understand the M&A piece. In light of that, what's the equation from your perspective on how to approach buybacks from here? Are you doing something consistent as it sits here today. What would it take in your mind to lean in a little bit more and maybe walk through that thought process?

Yes. I think Bob and I are most pleased that we're starting to really generate cash at the levels that we expected to. As a reminder, we still have a lot of transformation headwinds and restructuring that we still see as an opportunity in '25 and '26 as we ramp that down. And that's going to give us more confidence in our ability to continue to pay off the debt and have a lot more flexibility as far as what we want to accomplish. $1 billion EBITDA, we always want to have a little acquisition powder for the strategic acquisitions. We are a collection of acquisitions, some of those completely strategic to what we want to be as a company and some that weren't. And so I think what we want to do is when we look at the acquisitions in the pipeline, we want to make sure that they're synergistic to things that we do today and we want to make sure that we're giving our customers more product that they want to buy from us. So being really disciplined in what we're looking at. And we want to make sure it has the type of returns that our shareholders expect. So in the meantime, we're continuing to buy back shares and pay down the debt. That's where the focus has been.

Thank you.

Thank you.

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

Thanks guys. Good morning. You highlighted in the slide some of the PFAS products that you guys have developed. And I'm just curious, like what's been the early uptake there? Like who's buying? Has it been more like industrial customers, municipalities, and maybe if you can scale the opportunity there?

Yes, the growth on a percentage basis is significant, although we are still in the early stages of generating revenue, which is over $1 million. What encourages us is that we have multiple groups of customers who are showing strong interest. Our distributors and dealers are particularly excited to partner with Pentair, as we’ve introduced a product line that meets their needs and gives them new talking points for their own customers. The primary interest has come from the commercial and hospitality sectors, where there is a strong focus on water quality for their clients. Additionally, we are seeing some positive responses in the residential market as well. Overall, we are excited about this initial phase and hopeful that it helps raise awareness about water quality, stimulating conversations about investing more for significantly better value and assurance in the water they consume.

And then just last for me. You mentioned like the delays on the industrial side and CapEx projects. And you mentioned it could be several quarters like I guess when we talk to other industrial companies, no one's talking about cancellations, but everyone is talking about significant pushouts. And I guess like one does one become the other.

Yes. I think when it goes several more quarters, I think you should think about it leaving the funnel and not being in the funnel. I always look at front log, which is the types of things and projects that we're quoting. Usually, that's not a good indication because engineers always stay busy in the project front line side. Backlog is meaningful. And what you'd expect is that you're starting to grow that backlog because people are still placing those projects and then they're timing them maybe. This isn't that meaningful for us. It's just more of a relative comment that there's a piece of our business that could have been double-digit growth that's now coming back to flattish growth.

Thanks guys.

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

Hi, everyone. Good morning. This is someone filling in for Brett Linzey. I have a question regarding the 80/20 approach. After reviewing all the revenue streams and product lines, how are you assessing the opportunity by segment? Thank you.

As Bob mentioned, we always have a favorite segment at the moment, but the opportunity is equal across all three segments. It is really a combination of longevity, global P&Ls, our desire to chase adjacencies over time to sign up customers who we thought would be bigger than they are today. Those opportunities are equal across all three segments. And we're working through the playbooks, and we're very confident that all three of our segments are going to get an equal participation in 80/20. Some will be more margin-focused, and I think that will slide to flow into Water Solutions, especially on the residential end and others will be a growth capability, which would be Pool in probably areas like Manitowoc and Everpure but all of the businesses have an equal opportunity.

Awesome. Thanks guys.

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

Hi. Good morning. Thanks for taking the questions. So implied from your third quarter guidance, there was a fourth quarter implication that it looks like your new fourth quarter guidance is a little bit lower than on the sales side. And I was wondering if that's because of both the prebuy and the industrial project pushouts? So again, the implied slower sales, are those the reasons for the fourth quarter?

Our guide remains the same. I will acknowledge that consensus might have been slightly higher, but our guide that we put out, and this forecast is equal to what we had in the last forecast, Scott. I think we're managing through the growth and transformation opportunities we have. And I think the way that the year is playing out is consistent with the way we saw it last quarter.

Okay. I'll check that math with Shelly. I follow it up, no problem. For Pool, so the full year guide of sort of mid-single would imply a slightly down fourth quarter. And what I'm wondering is if this year's prebuy is largely equal to last year's prebuy in terms of the mechanics we took it in the level loading into the fourth quarter. Why would fourth quarter sales in Pool be implied down?

Yes. Within our guide for the fourth quarter, we actually have Pool slightly up and Flow and Water Solutions slightly down to get our overall guidance for the quarter. So Pool is up in the fourth quarter.

Okay. I guess, thank you. The last question there is, so both Water Solutions and Flow had productivity, which if you x out some Transformation benefit dollar number would imply that the productivity was actually maybe negative in those areas. Was that simply all from the negative volumes?

No. I mean we were more challenged in the productivity side of Water Solutions this quarter. That business is extremely global. And we've been working really hard to get some of the global costs out, but it generally takes longer to attack the cost bases outside the United States. So we still expect those to be opportunities in the future. And as Bob said, we had a year-over-year compare in Water Solutions last year, which was record, and those margins were challenged. I think you'll see margin improvement return in Q4 there, and we're confident about what it can do in 2025.

And Flow really did have a nice Q3 from a ROS expansion story. The price that they were able to drive along with transformation will more than offset the inflation.

And I understand there is time for a last questioner, and that will be Damian Karas with UBS. Please go ahead.

Hi, morning guys. Covered a lot of ground. Just a quick question related to free cash flow. It's been pretty strong year-to-date. I'm just wondering for the fourth quarter, is there anything beyond the typical seasonal factors that you'd kind of expect to happen? It just seems like you're well above the 100% conversion guide for the year. Thanks.

We expect a pretty typical Q4, and to the point you made, seasonality does play in, in Q4 and Q1 with Q2 being our largest free cash flow quarter.

Terrific. Thanks, guys.

All right. Thank you for joining us. In closing, I wanted to reiterate our key themes. First, solid execution across our balanced water portfolio drove significant margin expansion for the tenth consecutive quarter. Second, we are increasing our 2024 adjusted EPS guidance which reflects continued confidence in our strategy and our ability to mitigate risk where we can and maintain agility in a dynamic environment. Third, we expect our transformation initiatives in our 80/20 to continue to drive strong margin expansion and adjusted EPS growth. And finally, we believe our focused water strategy and solid execution are building a foundation to continue to deliver value creation beyond the 2024 fiscal year. Thank you, everyone, and have a great day.

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