Yahoo Finance Pentair plc (NYSE:PNR) Q1 2024 Earnings Call Transcript
Pentair plc (NYSE:PNR) Q1 2024 Earnings Call Transcript April 23, 2024
Pentair plc misses on earnings expectations. Reported EPS is $0.798 EPS, expectations were $0.9. Pentair plc isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello and welcome to the Pentair First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] 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.
Shelly Hubbard: 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.
John Stauch: 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 is 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. And 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?
Bob Fishman: 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 decline 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 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 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 a $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. Operator, please open the line for questions. Thank you.
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