Pentair plc (PNR) Earnings Call Transcript & Summary

All right. Winding down the day here. A couple more to go. We, next up, have Pentair and CEO, John Stauch; and Head of Investor Relations and whatever other titles we want to give Jim, Jim Lucas. He's a jack of all trades there. Guys, thanks for joining us. I appreciate it. I think like we've done with all these others, we'll jump right into the Q&A. But if anybody has a question, please feel free to log on the conference website or shoot me an e-mail or an IB and we'll be sure to get that nailed down.

So John, state of affairs, how are things going so far in the businesses since the last time we talked, which I believe was early February or late January, whatever that was?

Yes. So Steve, thank you. First of all, I appreciate being part of the conference. I look forward to doing this in person again. So...

Yes, someday.

Definitely, we all have Zoom fatigue. But anyway, as we sit here now, I mean, I think the things that we talked about, we gave guidance on January 28, I think it's fair to say maybe we were looking at our markets differently than we're looking today, but ultimately, we see strength in residential continuing. I think we see recovering commercial, and we see, what I would say, is improving industrial outlook for ourselves on the end market side. Feel good about the price/cost situation as we speak today overall and generally feel good about Q1 and the full year. And we haven't given out Q2 or Q3 guidance yet, and we're going to deal with those and tackle those when they come along.

What gives you -- let's just kind of start on resi. And I know it's kind of early in the season, obviously, but any indications of kind of the early spring buys here and where we stand on channel inventories or anything else that you can talk about on that front here late in the first quarter?

Yes, Steve. I'd say we ended the year strong demand situation in residential. We had lower inventories in the channel than certainly anyone would desire. The residential trends have continued, and we've had incidences like Texas, which have created incremental demand, certainly on our pool business. So I think demand-wise, we're in a strong position and we feel good about the supply chain here for Q1.

What do you think the prevailing kind of market growth rate is for that business for 2021 off of what was a -- kind of clearly a funky 2020, if you will?

I would say strong. Jim, do you want to get more specific than that?

No. We commented when we gave our -- on our Q4 earnings call that mid-single-digit-plus is how we were thinking about pool. And I think based on what's John said, the plus seems to be more likely. And we'll have more to say in April when we report the Q1 earnings.

Did you see anything in terms of market share trends last year? I know that one of your competitors is out there making the rounds a bit. The investment community heard puts and takes, like they're seeing better growth, which is, I guess, positive for the market but maybe better than you guys are guiding to. So is there anything from a share perspective or at least a comparison to that company, Hayward, that we should kind of keep in mind as far as differences in the businesses as they come through with a bit more of an optimistic view?

Yes. Steve, I'm aware of what you're saying, and certainly, I've spent the time reading the reports as well. But I really feel like we're in a good position for the geographies we're in and where we serve. And we don't have like-for-like businesses necessarily. They're in different regions. They have a different offering in certain areas. So you'd really have to get really specific to see if there was any share change. But I think we did well last year. I think we continue to believe we'll do well this year. And we welcome the fact that there'll be a public company now. And you guys will have the transparency of information. You have Leslie's, you have POOLCORP, you have us, [indiscernible] and Hayward. That's a pretty good set of financials to make your determinations from.

Right, right, right. What is kind of the major difference from a product type there? Is there more of a heavy skewing for you guys in 1 area versus another?

Yes. We don't play in the aboveground market, which they do. And we also don't necessarily play in the retail channels that they do. So when you take a look at the in-ground professional installed channel, that is where we continue to focus, and we continue to think we have significant runway left in that space.

Got it. When it comes to kind of inventories, are they still building in the channel? Are you back to normal? How do we think about those as we stand today?

Yes, Steve, I assure you I'm still trying to catch up, and we're running faster to catch up, given what we talked about with that plus on top of the demand cycle.

Got it. Are you seeing any supply constraints, whether everybody is kind of talking about logistics challenges? Clearly not the types of challenges you had last year, but anything that stands out with you regards to kind of being able to fill -- with regards to being able to fill that channel and fulfill that demand?

Yes. Nothing that impacts Q1, and I don't think anything that impacts Q -- or the full year. We're watching some of the challenges around the Gulf and the petrochemical side, the plastics impacts, the port issues that everybody is talking about, and we'll assess what impact they have in Q2 when we get there.

Right. But as far as the Q1 on this side of the coin?

No, we feel good about Q1.

Okay. On what we're going to see this with this whole variable speed regulation, any updates there on what to expect?

No, we're making progress. I think the DOE changeover is in front of us. We're doing our best to try to change that over and convince everybody they should change over. It'll never get to 100% because there'll always be some areas where there'll be some allowances for single speed. We're probably 60% today is our penetration between variable speed and single speed. And we're trying to close the gap on getting probably what close to like 80-ish, Jim, would probably be...

Yes.

The best case scenario there. And we expect to do that over the next 3 to 4 quarters is what I would tell you, Steve.

80% of the total on that front.

That's our best guess. It's not a precise number, but we think there'll always be some loopholes here and there and some alternative opportunities for the single speed.

But that should continue to be kind of a nice lift for you guys, I would think, especially in kind of the second half here?

Yes, I think second half and into next year, yes.

Into next year, got it.

It was an example -- this is an example of improving the content, Steve. It is -- but you have to remember, at the same time, these pumps do last longer. And so that's part of why you want to continue to skew up.

Right, right, right. But that's kind of the next -- that's a concern a little bit down the road.

That's just evolution.

Yes, yes, evolution. What -- any update on kind of the filtration side of resi and commercial? Demand there seems to be a bit of a tale of 2 cities. Can you maybe discuss what you're seeing there?

Yes. So in the water treatment side, the other business within Consumer Solutions, still seeing very strong demand in residential, both in the form of our services or direct services to consumers and as well as, Steve, our selling components and systems into the independent channels. So really strong growth in line with what we had shared earlier. And commercial is getting better. As a reminder, our commercial foodservice goes into fast food, but it also goes into full-service restaurants, hospitality, universities and commercial office water applications. So all of those have different degrees of recovery. Big steep decline last Q2. So on our last quarter of really anniversary-ing that. But sequentially, it's been getting better. But I don't think we'd get back to '19 levels by the end of 2021, just given how COVID's dragged on a little bit. And I don't think we cross over that point until 2022.

But as far as Resi Filtration is concerned, I mean, that's -- is that kind of a steady grower this year? How do we think about that?

Mid-single plus, it's in the plus category. Yes. It's doing really well. And as a reminder, we had some stop and starts last year when COVID came about where we had strong demand, but we weren't able to go into people's homes or the people trying to sell the water treatment weren't allowed in people's homes. That's now leveled its way out. We've got processes to do that, and we've got some pretty steady demand coming through that's being served.

Can commercial -- I mean, while it doesn't get back to '19 levels in '21, at least with the easy comps, does commercial grow nicely this year? Or should we just think about it as stable at a low level?

I think it will grow in the back half, Steve. We took a pretty sharp decline last Q2, so it's hard for me to see us getting back to levels for the year. Is that fair, Steve -- or Jim, is that right?

I think the way you said it, Steve, in terms of steady, last tough comp here in Q1. We're up against an easy comp in Q2, and then we'll see how the second half plays out.

And the comp in Q1, that business should be down, what, in Q1, roughly?

Well, if you look, I mean, it was obviously down substantially in Q2 when shelter-in-place and everything locked down. And as we've talked about, in Q3 and Q4, we saw it sequentially improving. Into Q4, it was down low teens. Industry was down a little bit more. And I think that directionally, we're expecting it to still continue to modestly improve sequentially. So...

Right. So I mean, you guys should have a pretty -- I mean, when all is said and done, at least it will kind of bounce a little bit off the bottom, I would think.

Yes. But we just want to remind people that going back to prepandemic levels this year, don't foresee that.

Well, that would be a -- I mean, then you'd have to change your mid-single-digit-plus to maybe double-digit-plus or something. On the long term here around these 2 businesses, I kind of get where you're going on the -- I mean, people kind of understand where you're going on the pool side. With these businesses, how do we think about like the growth strategies for Residential and Commercial Filtration taking them separately?

Yes. So if we split water treatment in Commercial and Residential on a go-forward basis, let's call that normalized, I think the foodservice business or commercial will be more mid-single digit. And a reminder, only about 20% of that would be an original install of the system, and then 80% of that would be the recurring filtration replacement cartridges. So the reason we're more cautious is the profitability of that piece of the portfolio is very high. And we want to get it right when we call the recovery, Steve, because that has a meaningful impact to the income generation as that business goes forward. On the Residential side, I would think high single digits would be a normalized growth rate.

Is that as -- that's not as profitable as pool though, is it?

It's pretty close.

I mean, foodservice is really close. Yes, it's really close overall. It's a much smaller business, though, right, normally, a couple of hundred million, but it is very profitable. And on the residential side, we've got a services, direct-to-consumer and a component and systems business. I think that's, like I said, high single digit, with each of those kind of contributing differently. And that is more mid-teens-ish kind of margin profile as we go forward. But that's inclusive of this incremental investment that we're driving to build geographies and to build the consumer brand and to create the consumer pull for the services.

And these businesses can be, in total, I mean, 4% to 5% type growers over time? Or you think...

I would be disappointed if we're not high single digits on that residential services and components side, Steve, right? So mid-single digits on the commercial side, and I would be very disappointed if we weren't high single-digit-plus on the other side.

On the systems side, but just to clarify, components grows a little bit lower, right? So there's resi components, resi systems and commercial systems. So...

We also have the services side, Jim, that I expect to grow...

Systems and services.

Got it. Can you give an update on the Aquion and Pelican deals and how those performed, maybe COVID influenced those a bit, but how those performed since you bottomed?

Yes. I mean, both are really good deals that I'm really happy to have, and both are huge pillars to our growth strategy, Steve. So as a reminder, Pelican was a direct-to-consumer digital engagement platform with the in-home services and direct-to-consumer sales. We've been spending time taking that platform, making it both compliant and contemporary so that we can make that a part of pentair.com and sell you directly and engage you directly as a consumer. And it's meeting its commitments and its goals. We've accelerated investments there. And so I think we're ahead of schedule for what that business was planned to be. Aquion is a systems. So it makes water softener systems and then has an affiliated channel. And we're very happy with its progress as well. It had 2 things that impacted it last year. We were not allowed to go to people's homes with that channel, if you recall, and it's Home Depot-enabled through Aquion. So we're probably slightly behind our external commitments but feel really good about it, the fact it's going to catch up here in 2021 because it's a very strong market and we've got a really good strong position.

Right. Moving on to Industrial Flow. This business seems to be more focused on margins. But what -- how do we kind of think about the longer-term drivers here? Any impact or benefits from stimulus or anything out there that people are talking about on this side?

Yes. So Steve, this is one of those ones we go back to January 28 and said when we gave guidance, maybe we didn't give you our best case scenario here. I do believe that the overall market demand is going to likely be stronger than we suggested, so call it on the plus side. What I'm going to make sure we do this time, though, is I don't want to chase volume here. These businesses had a history of going after the original installed projects. And so you get the revenue but you get lower margins. And then the next year, you're trying to explain what's happened in the overall market dynamics. We're going after a richer set of GDP-plus opportunities and really, therefore, trying to mix up with our offering and then drive substantial progress around the cost side of the equation to really accelerate margins in the cash profile. I think if we can build that discipline within these IFT businesses, they become more consistent, predictable earners, and they become the investment vehicle or a cash vehicle to fund the investments in Consumer Solutions. I talk about that externally and I talk about that internally. It's the same story, and I do think they have a tremendous value to play in Pentair. We've also got some cross-pollination, right? So the membranes on IFT feed the consumer side. And we also have some of the consumer-related experience dynamics around the app that feed the R&I Flow side. So I feel good about its positioning. I feel good about its outlook. And we need to demonstrate real progress improvements around the [indiscernible] side, Steve.

So I mean, what are, though, the kind of the top line drivers here? What do you see as the ones that stand out the most? And does that mean that, hey, we could have done 5% growth, but we're only going to do 3%? Does it mean we could have done 3% to 4% so we're only going to do 0? I mean, like how disciplined does that mean you're going to be?

I mean, long term, I'd say GDP-plus and we could debate what GDP is, but call that like low mid-single digits, right? We are coming off of a pretty big downturn, so I have higher expectations in 2021 than I would longer term. We're going to see good ongoing performance in R&I Flow this year, which is residential-exposed. We're also likely to see a little bit better ag environment than we've seen in the past. Those will be -- and we're expecting to build a much richer and more accelerated order portfolio or book of business around F&B and sustainable gas, which is our CapEx-dependent businesses. So I expect that recovery to come later in the year, but I think we're going to see a better order inflow this year.

Nice to hear ag. I think we've been hearing about ag declines for like the last, I don't know, 5 years. The nozzles, the spray nozzles, is that what -- a very high margin stuff.

Yes. Berkeley goes into pivot spray, and then we got the nozzles that go into the large OEM in the [indiscernible].

Right. You've talked about 200 to 300 basis points over a 4- to 5-year period. I would assume that, that's your -- that's really the focus here. So GDP, maybe GDP growth, but you're really going to kind of torque the margins here?

Yes. And I think if I was doing CEO speak out loud, I think if you did that math over 4 years, you're only talking 50 basis points. So I think just to be clear, I think we've got the ability to accelerate margin performance beyond the range that you said by looking at how are we doing around 4 or 5 key components, which is why we built the transformation office, Steve. Net pricing realization is critical. So we talk about headline price increases. That doesn't matter as much to how you realize that price. Did you get the right SKUs? Did you get the high runners? Were you as effective with your dealer channel as possible? We think we got a big sourcing opportunity by getting SKU rationalization and SKU complexity out so that we can get more scaled buys on our products around sourcing. We think we got operational runway just in 4-wall lean and maybe tweaking some of our processes to be more automated. And then I think we've got a big opportunity on the leverage cost of G&A and sales and marketing and making sure that we don't add more costs as we grow on the G&A side. And so I think we've got a significant runway ahead of us. More of that's going to be on the IFT side, but we still have opportunity on the CS side and the enterprise as well.

Got it. And I guess when you think about what you're going to deemphasize, I mean, like what are the types of businesses that specifically you're going to kind of not do here?

They're more product line, Steve. I think our -- natural resets in any business happens. And just making sure we're disciplined and not chasing some of the volume on the upside is really what it's about. Pool and water treatment are obviously going to get the disproportionate amount of funding. And then our residential, commercial exposure in IFT will get the disproportionate funding. And the rest of them, we got to be more opportunistic. And really, as there is that dead cap balance or that bounce-back off the bottom, we got to make sure we don't fall in love with markets that haven't historically been our friend. And that's really what we're going to manage better this time.

Right. Okay. So I mean, you should be leveraging -- just on a core basis, I mean, what do you think you can do from a kind of incremental margin perspective, reported incrementals with this kind of backdrop, if you have a couple of years of what seems like it's going to be pretty good growth?

We feel really good about somewhere around the mid-30s being our expected drop-through all-in, which means we're offsetting inflation, we're getting a little bit of price and we're driving productivity, and then obviously, some of that will go back to investments, Steve. But ultimately, that is a Pentair number. Certain businesses drop through more. Obviously, we'll be on the high end and IFT being a little on the lower end of that spectrum.

Right. But I mean, it's interesting because if you're really emphasizing margins at IFT and you have this growth in pool and growth in -- commercial is rebounding at a reasonably high margin, I mean, I would think that the drop-through would be pretty darn good if you're being disciplined about growth in IFT.

And I'm hopeful we'll see that, yes.

On the price side, how much do you -- how much is embedded today? And any kind of change in commodity costs that we have to call out for the year? I mean, Emerson said a little bit earlier today, they were taking a little bit more commodity cost, but they would be able to manage it. Maybe just talk a little bit about price/cost for you guys and what your assumptions are for this year.

Yes. So just to provide a view, I mean, I think we feel we're balanced for the year. We did go out in certain areas with an incremental price increase just recently to offset some potential incremental inflationary issues that we might expect. And I'm expecting most of that to stick, Steve, and get through. I think we were modest in those incremental asks. What we're doing is actually what you're talking about, taking advantage of the situation, being proactive and making sure we give us room and contingency to manage through what might be a tighter supply chain for the rest of the year.

Right. And I guess, what is the amount of -- what is kind of the price number you're expecting for the total company now for this year?

Well, we would expect to realize somewhere around a couple of hundred basis points is where we would be. And then we think inflation's relatively in line with what we previously shared, maybe a little to the higher end. And then we want to be anticipatory that it might even get worse from here and therefore go out with a little bit more of an increase. And we have always have the ability, again, to balance that between net realization or allowing some price pushback to come back to us if we got it wrong. And that's why we wanted to go out again.

Right. And I guess, when it comes to productivity, anything that stands out here for you guys?

Other than the fact that volume is a good guy, Steve, we need to make it a good guy. That's where I would lean in. We talk about those drop-throughs as I shared with you, but the more volume you get, you should get more drop-throughs, to your point, because you're leveraging your existing cost basis.

Yes, yes. So you guys have -- and obviously, that kind of, once again, plays into kind of what you're trying to do with IFT?

Yes.

One last one on price. I think you guys had -- I had a question here about -- you mentioned some of your kind of at capacity in certain businesses. Is that -- was that a comment made around pool or something? Somebody was asking to follow up on that, that you were capacity constrained in pool. Are you capacity constrained anywhere, I guess, is the question?

We need more capacity in pool, let's put it that way, and so we're adding capacity. The word constrained, it confines it to the 4 walls or the 8 walls because we have 2 big factories there that we have. I'm not as worried about that as I'm worried about labor shortages, right? Our ability to secure labor, train labor and get labor to be retained is our only constraint right now. You mentioned earlier potential supply chain constraints. Those are outside of our control right now, but we'll monitor that. And so what we don't want to do is have extra capacity, not be able to have the supply chain. So I put these in good news things. Demand is strong. And when demand is strong, you got to manage your capacity and you got to manage your supply chain to meet that demand. And we've got some time to work that through, but that's what we're working on right now, Steve.

And then on the pricing front, I mean, you guys had some challenges in 2018. Maybe talk about why this year is different than that.

Yes. I think what we did differently in '18 was we didn't price the later half. So we didn't take the next click that we've just talked about with you right now. And I think that was the learning. By not going off on an extra click, we absorbed a lot of that price. We put a larger price increase in the back end of the year. The channel bought ahead, and then we had the double whammy of the buy ahead plus the wet season in '19. And we don't want to repeat that dynamic again. So we put the incremental price out there now. And if we're wrong, we always have the ability to go back to the channel and not put it through, meaning they can come back and say, your prices are too high and we can offset that, but at least we got the prices now in the channel.

Right, right, right. Okay.

That's a broad statement. That's IFT and CS. That wasn't just a pool comment I made. It was a Pentair [indiscernible].

I was just going to comment that when it happens earlier in the year, seeing inflation like this, then you'd have more time to make it up.

Right. Yes, makes a lot...

Which did not happen in '18.

Yes. And you'd said -- and you're kind of saying that whatever you're going to go with another click would be like now as opposed to something mid-season?

We went already, yes.

Got it, got it. Okay. So what you've done is already -- already kind of covers what's moved?

Yes.

Okay. Got it. On capital allocation, what's your latest and greatest on -- you guys have a really good balance sheet. You obviously generate a good amount of cash flow. What's your latest and greatest year on what you're doing with the cash?

Yes. So we're -- Steve, we know we're a cash user in Q1 historically and probably will be again this year. And then we start to significantly generate cash as we collect some of those shipments from Q4 and Q1 that were more early buy in nature. And then Jim is going to ask me what I'm going to do, and I'm out seeking acquisitions the best I can. I'm not going to overpay. There's nothing that's a must-have. And we're looking for tuck-ins and bolt-ons around 3 particular areas, smarter and connected water treatment solutions and then expanding our services channels in Residential and Commercial. We'd be opportunistically in pool but obviously not a lot available in that space. And so that's where we are. So we're probably going to likely continue to nibble at our stock here and believe in our organic growth strategy and be opportunistic on the M&A front when opportunities come along.

What are the prevailing multiples out there for these types of assets? And how do you kind of look at the financial returns?

Yes, Steve, I'd put them in 2 categories. And again, I'm talking about more sweet spot deals of a hundred to a couple of hundred million. I think multiples are elevated, and expectations might be creeping towards a 2 in these spaces because the market's hot. I think people want to sell on forward earnings. And I'm not even so sure that we're always going to be the preferred buyer because it's a lot easier to sell to private equity today than it is to sell those strategic. And so I think that's good news, bad news, right? We're in a good space. It's a highly sought after space, and that's why I'm glad I don't need anything, and therefore we have to be disciplined. I do think there'll be smaller private owners who are willing to do some deals in this time frame, but I think we've got to be patient.

Is there somebody out there that's kind of looking to roll all this up, HVAC, pool pumps, filtration?

Not that I'm aware of, Steve. And I'm not so sure there's any core synergies across those platforms. But I think we got capability synergies between water treatment and pool. I don't think there's really any market synergies yet. We haven't proven that to be true anyway. So you've got a capability around home app. You've got capability around a web interface. You might have capability around customer service. You might have some learnings to the dealer channels. But they're completely separate dealer spaces today. And you mentioned the third one, HVAC, has its own separate space, right? So I don't really see that yet. And I'm sure you're speaking to [ SPAC ] type of ideas.

We should start in [ SPAC ] and do it. Why not?

But I think we got to compete independently in each of those differently and continue to just dive into the organic space and continue to invest where we're at. I feel good about our progress, but I want to make sure I'm demonstrating you that consistency, that predictability that deserves what I believe is the value we can create.

Right. When you think about those like more product adjacencies, within kind of the -- in and around the home, what kind of seems most interesting to you?

Well, I think the biggest single product offering...

Whatever you're working on organically as well.

Yes, yes, yes. So I mean, we think the biggest road map is connected solutions, right, having more and more things that become smarter and help you engage in your activity around the home. So we launched the Salt Sensor this year. We've got an under-sink Easyflow POU. The Rocean would be an over-counter POU unit that would also be Internet-enabled and interface, which allow you to do still filter and carbonated filter and carbonated flavored filter. So we think that's a good application. That also has the ability to migrate into commercial into what was a trial space hotels and have a unit that you can filter your water in a hotel, then not have to water bottle. And feel good about that water. So that's kind of what Rocean introduced, and I think that's a good focused portfolio. Salt-free sensor -- or salt-free, I'm sorry, water softener, absolutely the forefront of what we're doing, Steve. We're probably a couple of years away from that launch, but we're really excited about what that would do to the residential space. And beyond that, we've got the smart filter we just introduced in pool, which creates a higher level of clarity with less chemicals, which is the first time we've really introduced anything new to a filter in a long period of time. And we used the membrane from IFT to do that. And we're really happy with the early responses to that product.

Got it. From an R&D perspective, I mean, you guys have been -- it's been kind of like ticking up here. Any headwinds on that front going forward?

No. I want to continue to invest. I mean, Jim always reminds me, it's -- when I use the word 5%, that CEO math, I think it's 5% on Consumer Solutions, and we've got a long way to go to get there. It's probably lesser on the IFT side just because the vitality or the vitality index of how we change products aren't as high. But I mean, I do want to push the needle on R&D. Alternatives and more environmentally-friendly products are definitely a space we're looking into. And then making sure we've got the ability to source products more consistently around the globe. Some of the things we buy today are only sold from China, which created a challenge for all of us when the market grew so fast and China was behind. So R&D is both to produce the new products and the connected solutions but also as a way to think about alternative sources that create easier sourcing opportunities for us to provide value to our consumers.

Right. I guess, looking more closely, and I'm not sure you addressed, but anything on kind of the infrastructure side with stimulus that would influence your business? I know people think of you guys as a sometimes like a muni water play. I mean, I don't -- it's a very small part of the business, but anything that would stand out?

Yes. I haven't read the proposed infrastructure bill or the ideas, Steve. I had a line last time that I won't repeat. But I do think some of these bills have a way to find themselves into more pavement of parking lots than sometimes the actual real water infrastructure of the United States. I think if we got really serious about upgrading the water infrastructure, then the United States would be helped by that bill, but I'm not as hopeful as I probably should be around those particular conversations.

Right. And that business for you is how big?

$100 million-ish on the infrastructure side and then -- so I don't think it will be meaningful for Pentair.

Right, right. Let's see here. Maybe just a couple of more around tax. You guys have a reasonably low tax rate. There's buzz that the corporate tax bill could go up, raise it back up 28% here in the U.S. What kind of impact would that have on you guys? How do we look at that if the -- if in isolation, kind of the U.S. corporate tax went back up to 28%?

Yes. I don't know, Steve. Obviously, we're foreign domiciled, so we would not see that full headwind at all. Yes, we'd probably benefit on the -- we'd have a little headwind and others would have a larger headwind. The other advantage we would have is the access to our cash no matter where we move it, which is the strength that we have today in our balance sheet that doesn't always get the attention is that our tax rate is generally a cash tax rate. And we don't have to do any really funky things to have available -- availability to our cash. So we can keep minimal cash on the balance sheet is what I'm saying, Steve. So I think we'll be in a decent position as far as the actual details. I mean, way too early to decide where this thing comes out and way too many things to think about to jump to the hoops to try to make it as minimal as possible.

Right. Okay. One last one on balance sheet, maybe. How far would you guys go on the balance sheet from a leverage perspective? How far would you -- until you feel less comfortable? What's kind of the degree of leverage you could tolerate?

Jim, you want to take this one as treasurer?

Absolutely. It's -- we talk about 2x as the sweet spot where we are because of our focus on the investment-grade rating, which is very important to us. A broken record on this topic. And we talk about a half turn in either direction in general, so obviously would be at the lower end of that. We have historically, on occasion, gone up to around 3x on the right acquisition, if it's a strategic fit, financially, the right price, with a road map to bring that leverage down quickly. So I think 2.5 is comfortable. If it was the absolute right fit, then maybe 3x, but we would have to make sure it is the right fit.

Okay. So Steve, I mean, just in summary, I feel like we're well positioned right now. I know it's only early March or mid-March, I guess. But coming off of the COVID year and we've got some easier comparisons in the first half, I think we're feeling relatively good about overall demand for the year. I think we're managing price/cost the best we can. We'll keep an eye on the supply chain challenges and make sure we're transparent in updating people if there's anything there. But right now, I think we're feeling pretty good that the residential health is going to continue and that we're managing through what looks like sequential improvements in both industrial and commercial.

Yes. Okay. Makes sense. Thanks, guys. I really appreciate it. I think that's what we got. So thanks again. Enjoy the rest of your day, and thanks for attending.

All right. Thanks for having us.