Pentair plc (PNR) Earnings Call Transcript & Summary

Yes. So Josh, the facts are obvious. I mean the search engine, search words around water filtration, water treatment, but most of that has really resulted in more of a point-of-use sale or a picture or I'm going to put a new filter on my refrigerator. It's been more of that type of sale to date with ultimately maybe also a point-of-use underneath your sink. And we're very optimistic that those types of leads can result in a consultive experience for you, that takes a look at your whole home and begins to take you to where you need to be, which is what do you really want better water for? Do you want better skin or better -- softer skin? Are you wondering about your vegetables and rinsing them with what type of water? Or is this a drinking water application? And how do we get you the best tailored solution for you? So first of all, we're excited that we're starting to see that demand and the interest level pick up. And then we've got to migrate to be able to give you a solution. And you mentioned the in-home experience. Yes, it was slowed a little bit. But it's back, and we're starting to have those consultant-based experiences. And we want to curate that for you. Our goal would be to make sure that you know Pentair exists, make sure you know that Pentair has the best products and systems for you. And then ultimately, have you come work for us and then have us give you the best channel expert in your zip code to be able to give you that proper answer. And we want to do it in a consistent way across the nation, which is hard to do today across all these different individual dealers. And where we think we have the insights is we know what the water quality is in every zip code from the types of water solutions we provided some of our restaurant partners, and we generally know what has to happen in your particular neighborhood or your street. And if we can get a more tailored solution from you that maybe doesn't oversell you or doesn't undersell you, we ultimately think we can get people to be more excited about a branded offering in their residential home. That's our goal, Josh. That is a longer-term strategy, and I'm excited about that strategy, but it's going to play out in a series of singles probably over the next several years.

Understood. And then just switching to the other side of the house with IFT, I guess a couple of thoughts. In the 2Q deck, I think the segment was called out as requiring more attentive strategic prioritization. And I guess if I'm using your lexicon, John, I think it was betting all the horses and then high fiving when one of them came in. Are there signs that you kind of move past this? And where should we think about as the biggest areas of focus and really checked as far as milestones for results there?

Yes. So we have 3 businesses in IFT. We have our -- kind of our residential irrigation or the smaller pumps, and a lot of the residential trends are helping that business as well. And I think we've got good offerings around wastewater and water supply that we feel good about. And I do think that those have been under nurtured, if you will, over the last several years, run as a larger pump organization. So we carved it out, and there's some good spaces that I think we can go win in, and we've got some good partners and some dealer channels. So we feel like that's a GDP-like grower, but it's a consistent GDP grower with expanding margins. I think the rest of it has been how do we focus the larger pumps into where we have our niches and we have the right applications, more of an aftermarket break and fix business. As you recall, sometimes we chase some large projects there. And maybe we won because nobody else wanted it. And then a year later, we regretted having won that project. And so I think that's all out of the system, and I think we can really grow market rates. Our focused growth actions really would be around our sustainable solutions. We have a lot of partners that we produce brewery membranes for that we also capture their CO2 and biogas and turn that into food grade CO2. And then it's quickly become about $100 million business for us. And we think there's a lot of momentum between private and public funding to make the world better regarding that, and we're getting a lot of looks, and I think we're going to see an accelerating growth play out in 2021 and 2022 around that, Josh. And then we have IoT solutions that are really smart enabled that help our customers maximize their membranes in the food and beverage space. And that allows them to feel good that they're getting their money's worth out of the membranes they're buying for us, and that's more of an aftermarket play for us. But we really feel like those IoT solutions are adding value. So that's the focus growth. And then outside of that, how do we reduce complexity? I was -- got my new leader there and we're getting ready to do our strategy longer term. And we think about this business, think about 10% of its revenue needing about 60% of the SKUS. That's a lot of cost. And I know you're going to say, well, why not just get out of it? It's not that easy, but that's the rationalization of SKUs that we need to drive to migrate to other alternatives and maybe letting some revenue go but really reducing the complexity, which allows us to really partner with the supply chain to really take out meaningful cost. So Josh, I have the right leader here. He didn't invent this portfolio. He's is a great strategic Pentair partner. He's been with us a while. He's global in nature, and he's really leaning in. And I'm proud of the momentum he's got and the focus he's driving. And I feel like there's a lot of value to add in IFT.

Got it. That's helpful. And then I guess one of the areas that's probably not one of the horses that gets bet on and probably more on the rationalization and cost side is, I think in second quarter, you mentioned kind of a muted outlook for the commercial and infrastructure pump business. Just given some deferrals there, is that a business where you're probably carrying a little bit more backlog into the next year than maybe you otherwise would? Or are those just orders that haven't been placed and maybe there's some pent-up demand in the marketplace?

I think we had orders, Josh, and continue to have backlog as we work through Q2 and Q3. And then we're monitoring what that project funnel and the backlog looks like as we head into Q4 and beyond. And that's one of the areas where I would be very cautious about chasing projects. And if we get our normal order patterns in the aftermarket, we'll be well positioned. And if not, we'd probably lean into the cost curve there and rightsize our cost positions to align with the new volume. I don't want to fill the funnel with low-margin projects that create more complexity. I'd rather come up from where we think we are and have a richer set of portfolio with a lot more value contribution over the next several years.

Understood. And I guess just pivoting over to an area that's gotten a lot of attention across the space but -- probably for Pentair as well as the topic of ESG, extremely topical with investors. Some folks in the water space are highly synonymous with it. I think there's probably still some room for evangelization, I'll call it, for Pentair stake. What do you think has been kind of the gating factor there? And where are your focuses in terms of elevating the ESG visibility for Pentair, just given efficiency and water quality are kind of the -- some of the keystones in the portfolio?

Josh, I really appreciate you asking that question because I think we're now poised to really lean in. I think we understand that all companies have to be socially responsible. But we're starting with a really good culture. We've had a win right culture for many, many years. And yes, we have an amplified focus on diversity inclusion, but our culture is really solid. The product portfolio we have and the solution portfolio really geared towards sustainable solutions. And our tagline under Pentair is smart sustainable solutions. And it's broader than just water, as I mentioned, in our sustainable gas applications and how we do beer membrane filtration. But we believe we're building out a portfolio that makes the world better. I also feel like we don't have the legacy of pension, asbestos, environmental. None of those liabilities exist at Pentair. So we have a good platform to speak to. You asked what kind of caused this pause. It was really probably separating from nVent. Nothing against them, but any time you have the oil and gas exposure that you have in a business, it's hard to really pound the table to where you're going. But if you look at what I have left in my portfolio, all of our products are well positioned to really be able to drive -- make the world a better place, and that's where we're focused. And we have to do a better job at telling the story. I think about some of our RO solutions and you focus on that we're making water better, sometimes waste water, we used to waste 15 gallons every 1 gallon produced. Today, we're down to 1:1 in most of our applications. We'll never get that to 0. You need a gallon of water to make water. But at the end of the day, we got to tell the story of how much water that's saving versus focusing on that last technical solution. Look at all the bottled water we've eliminated, not just in our own sites but everywhere else. So there are some platforms here, Josh. You're going to see great sustainability report come out. That's the start and progress against our last one. And I think over the next couple of years, we're really going to lean into this, Josh.

And is there an M&A strategy that pairs alongside that where there are obvious areas to shore up? Or is this mostly an organic story? And just kind of cultivating it and telling it better?

I think from the sustainability, it's mostly organic because I think we have most of the technology to solve that solution. But I think there's an M&A governance framework that wouldn't allow us to enter something that wouldn't fit a sustainable framework.

Got it. That's helpful. And then just maybe a question for Bob. Bob, you've been in the role now for, I guess, almost a couple of quarters. Anything in terms of your priorities and your big focus that has been identified? And I guess, where are you spending most of your time given that the world is probably a bit more of a complex place than when you started earlier in the year?

Yes, certainly so much different than the April, May time frame when I started. So that focus was very much on free cash flow and liquidity and looking at our balance sheet. And when I quickly became convinced that we did have strength in all of those areas, it was moving to more to support a number of the strategic initiatives that John discussed. So the nice thing as the CFO, we're able to partner very closely with the businesses. So John talked about consistent revenue growth, whether it's every business contributing or whether it's driving that accelerated growth in Consumer Solutions and the focused growth areas in IFT. So we've developed a tracking system around product categories. So think of we have Pentair, 2 segments, 5 business units. And then, call it, 20-plus product categories really trying to drive the growth at that level and providing the information that those category leaders need to contribute to growth initiatives. And that's been a big piece of what we've been doing. And the second is really around the cost structure, understanding what's fixed and variable, very important in the businesses where the volume is under pressure, to take costs out in line with that. So I think we've done a nice job there as well. But more importantly, also looking at G&A and then supply chain and manufacturing. So supporting those initiatives. We had a third party come in to assess our G&A in the company. And frankly speaking, our G&A is probably more sized to a company with twice the revenue that we have. So we have opportunities within G&A. Call it, 150 to 200 basis points of improvement over the next 3 to 5 years. Think of things like spans and layers, think of areas of centers of excellence and efficiencies that we can not only make the spend more efficient, but more effective as well. So I would say trying to drive that consistent revenue growth and looking at margin expansion opportunities is where I've been most focused over the last couple of months.

Understood. That's helpful. And then I guess a final one for both of you, whoever wants to take it or in pairs. Obviously, you've seen some inflation come through recently outside of oil and maybe to a lesser extent, steel. I know that you guys are more on a pricing cycle than kind of continuous price and there's a lot of cost actions that happened in-flight for many companies this year. Putting all that together, how would you kind of initially look at next year in terms of normal incremental margins versus kind of above or below that just based on what you know for temporary cost actions and price costs?

Bob, you can take that one.

Yes. So for us at Pentair, and I don't think next year will be much, much different, our price increases of, call it, 1% to 2% across the whole business, higher in some pieces, those would then offset the cost of inflation. So think of us as offsetting that. And then the productivity improvements that we talked about being able to drop to the bottom line. Or to John's earlier point, to reinvest those productivity initiatives into the digital side of the business to enhance the customer experience, to make the lives of our dealers and distributors easier and to drive better data analytics. So again, I think a very similar pricing environment that then allows the productivity improvements to be reinvested back into the business.

Josh, I'd just say like some of the other companies that you follow, I think the thing that Bob and I are partnered on more than that is we've benefited a lot from deferring costs associated with travel and outside sales and those types of things. And really, the -- making sure that those just don't come back as they historically were. But we take advantage of how we did business this year more productively and more effectively, and we add back only the cost necessary to drive that incremental revenue that we're going to go get. I think that one is probably the one that's on top of my mind and Bob's mind more than anything else, is that people just don't say, okay, we did something in 2019, we've learned a lot in '20, we go back to '19 spending rates. I think that's the inflation I would worry about more than the items that you mentioned for Pentair.

Got it. Understood. I see we're out of time, so we'll leave it there. John, Bob, thanks to both of you for making the time. Pleasure as always, and hope to see you live next year.

Josh, thank you so much. Yes, thank you, Josh, appreciate it.

Be well.

Thank you, Josh.