Pentair plc (PNR) Earnings Call Transcript & Summary

And we're back. Sorry for a little bit of a delay there with the clock fix, but very -- yes, it's working. It's working. So we're very happy to have John Stauch, who is CEO of Pentair. He really dressed up for us today. It's like...

You like my fur coat?

Yes. At least, you ironed your shirt. It looks nice.

It's good to know.

But want to give everybody a visual.

So maybe we could just start with what you're seeing so far here since earnings on the Pool business and then the other stuff. So any near-term update? We always start with that and get that out of the way, and then we'll operate into it.

Yes. We just had an Investor Day last week, so we just recently confirmed guidance for both Q1 and full year, so not a lot to update from that perspective. I would say the new event really would be since guidance at the end of January, Steve, is that everybody in the pool space has generally come out with their guides. I think the good news is that we all recognize that the inventory is working its way and has worked its way out of the channel, and that we're looking at a year that for the equipment manufacturers, at least, has the tailwind of the inventory corrections. So in 2023, it's a big inventory correction down. So we have the tailwind of that as we head into 2024. And then I think we're all predicting that the market is slightly down on new pools, moderately down on remodels, and then the aftermarket will be a little sluggish as people wait for interest rates to settle out. But overall, we're still expecting a high single-digit pool growth given primarily that tailwind, and we expect that to drive strong margins on our Pool segment.

And I guess, when you think about what happened at the end of the season relative to prior years, any changing -- I know we used to talk about the early buy and things like that. What are you seeing in this market now relative to what normally would have happened, the behavior?

Yes. It's just relatively a modest early buy in the sense that I think since inventories, we're generally in good shape and the pricing came back to more normal pricing. So for us, that would be like around a 4% list price increase in pool. Ultimately, we didn't see a substantial early buy participation. Steve. So I think I would say it's relatively normal, which puts us in a really good spot as we head into the 2024 calendar year. We expect to have the last of our headwinds behind us in Q1 because Q1 last year was still inventory destocking -- or I mean, building period, and then the destocking happened in earnest in Q2, Q3 and Q4 of next year. So we have one more quarter of modest declines in pool, and then we'll see significant growth in Q2, Q3 and Q4.

And that's really just the comp on the destock from that.

That's correct, that's correct.

Maybe break down what you're seeing from an end market behavior perspective, what you're hearing about the consumer and how they're behaving around these purchases. And maybe some context about how they behave before pandemic, during and what you see today.

Yes. I think the word I'd use across the entire landscape is resilient in the sense that, even though we're still seeing modestly sluggish inflation numbers, as you saw today, ultimately, we're not where we want to be in the residential space. I mean, we're not seeing new builds at any higher performing level. But things are kind of moving around sequentially about flattish. And so when we start to get to the second half of this year, and we're anniversary-ing some of those headwind challenges that we had, Steve, overall, there's still infrastructure investment happening. Overall, there's still industrial investment happening. So overall, from an end market perspective, things are okay and very consistent with the way that we predicted they would be.

And the spending on the pad and...

Yes. If I go back to pool, I mean, I've been very clear that I think and we're going to see discretionary pushouts on certain high-end products where the middle market maybe can't afford or is looking for a different interest rate. These would be on high-end heaters or maybe lighting upgrades that you might see someone feel like they want, but they don't need. That will be different than what will happen on the pool side on pumps and filters that will get replaced because nobody wants their pool to turn green as it will.

Right. And on technology, what are you seeing -- where are you seeing interest on the technology side of pool?

Yes. On the new pool side, especially on the high end, you're generally seeing a cash buyer. And most of those cash buyers are buying a pretty expensive home, which is probably double the cost as it was 3 years ago. It's not a joke, that's generally true with all the cost of inflation. So when it gets into their choices on how they want their equipment stacked up, they're not walking away from the investments in automation, Steve. A matter of fact, I think they're leaning in primarily around how it controls the spa and also the remote aspects it gives them to monitor second homes from afar. And as you know, a lot of that technology is continually getting upgraded in homes. And it doesn't matter if it's security technology. It doesn't matter if it's remote lighting. All of that place is on automation theme, where people want to continue to add automation, and that's good for the Pool business.

And then what about competition? I think there are a couple of players. I know Rheem come out with a heater, maybe a new entrant and pool perhaps in a -- on the pump side. What are you seeing competitively from these guys?

Yes. So across the various product lines, it's always a different competitor. And by the way, Rheem has always had a good heater in the markets of where they have moderate changes in temperatures. And so if they don't want that product line anymore, I think it would fit nicely into the Pentair portfolio. But ultimately, competition is better today than it was 3 or 4 years ago in the sense that these are public companies now. I think they're more sophisticated in their investments and their ability to build out the channel, but we still feel like we're the innovative leader in pool. We still believe we have the largest sales force. We have doubled the dealer network than anybody else has, and we're now able to meet our 5-day commitments on supply chain. And our biggest strength has been how we support that sales channel and how we get behind them when there's a challenge and fix problems for them. So those are the things that are continue -- going to distinguish us.

How are you positioned versus when we look at a Hayward, who would like -- how do you -- where are your products is? And just remind us of how you compete on technology, if you look at how the market is segmented.

Yes. I mean, we were the first to market with the variable speed pump back in 2002. We were first to market with an app on the iPhone for automation. We're first to market with LED lighting, which we placed incandescent from an energy efficiency standpoint. So we've always been the innovation leading player of the brand. Now everybody is generally caught up with technology plays over the last several years, but our dealers still recognize that we have been the one that's been on cutting edge. We expect, over the next couple of years, we'll have a cutting-edge filtration capability that we'll bring to market, borrowing from our expo membranes and industrial wastewater, so kind of bringing that wastewater filtration capability of pools, which is another body of water. And so we've got to continue to lead on innovation. And by leading on innovation and quality and dealer reliability, we generally can continue to create our advantage in this space.

And are -- you guys are at a premium price point when it comes to these products, do you think on a...

Slightly, slightly from these prices.

Okay. And as far as pricing is concerned, I mean, what is the strategy here into the season? Is there another round that comes perhaps? Or are you guys pretty much set with what you have?

Right now, we're not anticipating an incremental amount of pricing given where inflation is right now, Steve.

Can you just remind us where that price number stands?

Yes. It was a little price around 4, which we think will realize about net 2.

Okay. Got it, got it. Okay. Any regional dynamics to speak of that pool differences by states that you're seeing out there at all?

So 75% of our revenue in pool comes from the Sunbelt states. And really, there's 5 states that make up the majority of that, which is Florida, Texas, California, Arizona, half of Nevada. And ultimately, then the Sunbelt along the Southeastern seaboard. Those markets continually be -- are fueled by migration to those areas, which is good in the long run. And we're seeing pool pads down. New pools are down modestly. Roughly 70,000 built in 2023, probably heading to 65,000 to 67,000 to 2024. Historically, that would be around 90,000 new pools per year. So we're significantly below historical averages as we talked about the housing build slowing, but those states continue to add. And they have tax advantages associated with them, and they have weather advantages associated with them.

And the installed base is, what, like $5.5 million.

$5.4 million.

$5.4 million. And that's been growing...

By the new pools that go in.

Yes, yes. Okay.

A lot of pools are being filled in these times.

Yes.

People used to fill in pools.

Yes, yes. Dangerous. Water Solutions, can you talk about Manitowoc? Obviously, a good start for that one, pulling back a little bit this year. What's the risk that, that is worse?

Yes. So as a reminder, Manitowoc is about -- if we exit 2023, take about slightly less than $450 million of sales. That business grew at 20% last year, 23% the year before. Those numbers -- or that number would have been our 2025 expectation when we brought that acquisition forward and shared those perspectives of growth to the Street. So yes, we expect a small, modest, low mid-single-digit decline this year, really, just because we're dealing with difficult compares. But the industry dynamics are really still solid. A lot of quick-serve restaurant openings, a lot of focus on beverage as a sale point. Did note that you have a competitor ice machine product in this building, which we're going to work on. We're going to change [indiscernible] to be like 1,000 units nearby hospitality center here.

It's the new building.

Yes. But I mean, 2024 will be a focus on the filtration play, right? We've been working on a couple of synergies. One is that we integrate that filter more easily into the Manitowoc machine, so that's ever pure that we make. We sell that to the leading coffee chains, the leading hamburger chains around the world. It is a distinguished product. It has a great brand presence. It also gets sold to the other price manufacturers and really just getting the higher penetration of filtration behind ice as a play. And also the clean and purified drinking water trends are in our favor for filtration as well. So that's part of that Water Solutions commercial play, Steve. And so net-net, even with a small headwind in Manitowoc, we think we'll grow that platform this year.

What drove the strength in that business? Why was it so good for a couple of years?

Significant downturn during COVID, and hospitality and hotels around the world being closed. And then as you reopen them, you needed to refresh the filtration across those platforms. Different owners came in, different demographics of what you're trying to serve. So you think of a hotel today. It's not any more filling an ice bucket. It's filling a water bottle. It's combinations of ice and water dispense, Steve. It's also making sure that gyms and fitness centers are well stocked with ice and water. So those are the trends that are really driving the business.

Got it. I mean, low to mid-single after that kind of run seems light, to be honest. I mean, your orders are really -- the backlog really liquidated last year, right?

Right. We'd say mid-single digit.

Mid-single.

Yes. And I think if you take a look at the ice, the filtration part of that segment, we'd say mid-single digit with maybe half of the plus sign.

Okay. Got it.

Maybe a full plus sign.

I don't know what the plus sign means. Got it, got it. And as far as the order rates you're seeing now in the first quarter, does that -- is that down mid-singles? Just talk about how that maybe works over the course of the year.

No, I think they...

It's pretty stable throughout...

I think it's pretty stable as it came out last year, and I think we're still seeing all the industry trends around beverage drive-thrus. As a reminder, even warm beverages now have ice machines attached to them, as they think about providing those beverages cold, and drive-thrus are big. And so they've got the combination of the ice and the dispense, and they send it on your way. And all of those changes to that restaurant scene have been very productive for both our ice and our filtration businesses. So things are off to a good start there.

And as far as synergies are concerned, you mentioned some revenue synergies on the filtration side. But anything on the cost side of the equation there? I know it's a pretty profitable business.

Yes. I mean, this is -- we have a big transformation program in Pentair that I'm sure we'll talk about a little bit here, Steve. But just -- this is totally coincidental. Manitowoc was part of a large company. And so they've gone through their own transformation, and they used the same pricing partner that we're using, and they used the same sourcing partner that we're using across the entire enterprise. So they were really the early adopters of some of the transformation. And most of the other opportunities are really just the org side of the G&A, and we'd have to move ERP platforms, their financial systems to do that. So modest cost savings, participation on the enterprise portfolio for sourcing and, in some cases, especially around compressors, they're really helping the rest of the company more so than helping themselves. But the synergies have been pretty exciting, but then it was brought to us.

And this is a pretty profitable business.

Very profitable, yes. 30-ish percent EBITDA margins, yes.

Got it. And the rest of the segment there, what are the kind of some of the trends and drivers?

Yes. Partially from our standpoint, we do about $400 million of residential. Half of that would be on the filtration side and half of that would be more on the components that get sold with the water softeners. We have generally deemphasized that business a little bit, as we've really partnered around being more effective with our trade partners on what we do. That is buoyed by financing, and that financing market is really soft right now. So we still see challenges in the water softener side, and we would expect those challenges to consider -- or to continue throughout the year. I'd put that more in a modestly down category, 2%, 3%, 4% down overall for that piece of the portfolio this year.

Okay. Got it. And then IFT has been a pretty steady performer. What are some of the trends there?

Yes. I'm really happy with our Flow segment in the sense that they have really focused on where they should win and how they should compete by product line and by brand. And because of that, I think they've been able to project execute better than we have historically. When we go and we quote now, we know what we should win, and we're very aggressively quoting that product. So for us, that's fire and that's wastewater, our strength of our portfolio. And then we're very careful in bringing other product lines into that project, where we would have to lessen the margins across the entire scope. And so we had a lot of conversation in our Investor Day around that. Could it grow more? And my short-term answer is in the -- and for the next several years, I'd like it to not grow more. I'd like it to stay in the low single digits because we've had a significant uptick in margins. And I think by doing that, we can continue to keep our costs more variable and not build fixed cost structure. So if you have a little bit of cyclicality, we won't suffer on the downside. So I've been very happy with their performance, and we generally had a lot of margin, a lot of cash in this business.

What are you most excited about from a growth perspective in a business like this?

Well, I mean, the infrastructure investment has been definitely a good uptick. Any time we see upgrades, municipality, lift stations, wastewater stations, we've had a lot of great success with our eccentric impeller, which takes things that are flushed out in the toilet other than toilet paper and is good at grinding that. So you don't have to go clean the systems. That's been very successful. And I think ultimately, Steve, if we can just stay in that mid-single digit, low single-digit growth range, driving profitability, that generates a lot of cash. And that cash will be invested back into the Water Solutions business and the Pool business and to shareholders distributed...

Which are the course. Any data center exposure to talk about?

It's benefiting from data centers. I mean, when you think about our particular business, we sell fire pumps, which go into any building or any industrial or commercial building that's built. And then all of those buildings also have to be attached back to the water grid in some capacity. And that's where I was talking about the fire pumps and the wastewater pumps, and that's been a good boost for us.

And what are you seeing on the macro there as far as those fire pumps as an indication of what's going on in commercial construction? Anything...

I've see a lot of slowing, I've seen a lot of slowing. I mean, I think large commercial buildings in urban centers have probably slowed. But I think net-net, I'm not so sure people are doing the segmentation perfectly, and we're still seeing a lot more industrial warehousing come back to the states as manufacturing has come back. We've also seen the data centers come, as the migration of the investment into the AI has been here in the states. So still seeing some good growth in that space.

Anybody have any questions on the businesses before we go into capital allocation? Or we're O for on the client questions.

We'll answer capital -- we expect to generate a lot of capital, and we expect to allocate it.

We'll move on to that next. So when it comes to capital allocation, talk about cash flow, first of all, and then where your balance sheet is and what you expect to do with that capital.

Lucky to have a business model that inherently throws off a lot of cash. So when you think about our EBITDA, about $1 billion of EBITDA at midpoint this year. We'll expect 60% drop through of that to cash flow. And that's even inclusive of higher interest rates that we're all seeing hit the interest line and also transformation spending of about $50 million to $70 million, which we expect to continue through '24 and then taper off in '25 and '26, as we drive our transformation efforts. So strong cash flows. We expect to pay down debt in the near term. We're a user of cash in Q1 because of those early buys that we talked about earlier in pool. And then we would expect to start to significantly drive the cash down and the debt down in Q2, and then decide what to do. I think certainly not worried about underleveraging at this stage of interest rates being higher, but I think we would start to balance maybe some modest buyback with some thoughts around more of bolt-on M&A is the way I would think about it, smaller, compounding, nice tuck-ins, fit our business models. And the 2 areas we'd look to do it is commercial water solutions and maybe some technology plays around the Pool business.

Commercial water solutions, what exactly? That's kind of a broad description obviously.

Yes. I mean we have -- we're building a really good franchise between Everpure and Manitowoc, and we have KDI services. We're really service the beverage and the cold side of restaurants. So it would be the extension and the continuing expansion of anything that gets sold through cold-side distribution into the foodservice side. Some of those assets are just not available. They're tucked into private equity world. They're tucked into privately owned world. But I just want to be cognizant if something were to surface there that would be good for our distribution and dealers, we'd want to participate in it to help drive continued synergies through that channel.

What do you consider the maximum size for a bolt-on?

Well, perfect would be like $100 million of revenue and $20 million, $25 million of EBITDA. Those are fine. Those are like unicorns. But that would be the ideal bolt-on in my view.

And what are the prevailing multiples of these things these days?

Don't know. Nothing has traded recently. Pre slowdown in the M&A market, we had a private equity competitor out there, still there, still private equity that was paying 16, 18, 20 times on the water side. I think given where interest rates have settled in and generally were equity infusions to private equity are, I think we're going to see multiples generally in the low teens is where I would say is where they should settle in at, Steve. That's my hope. That's not fact.

Low teens.

Low teens. And I would say that's on the peak side.

Yes, yes, yes. Do you think there is -- you're not thinking about anything transformational, but I know that there's kind of a convergence of HVAC and water, at least, heat comp water heaters, things like that. Water heater is really not something that you think would fit with your solution. Or is that a bit too far?

There's a company that has a great water heater franchise. And I think for them, it's a really good revenue generation or cash generator, and that would be good to have it. It's certainly not something you'd want to get into to be an incremental entrant in that space. So I don't think the dynamics would be very...

Yes. I don't mean to start from scratch.

No, no, or buy into it, no.

But -- or buy into it. It's not really something that fits in that portfolio of that continuum of water you talk about in the home.

No.

Okay. Got it.

I mean, Steve, we mentioned this at Investor Day, so I'll just bring this up. I think of learning for us in the residential water treatment space is that the majority of people in that space don't value real filtration. . You've heard a lot of talk about PFAS. I mean, clearly, Pentair has filters today that can treat PFAS to the current expectations. Most of your foodservice providers, you should be thankful, invest heavily in high-end filtration. That takes most of those contaminants out, and they're really interested in not just the safety of the water, but also the taste and the profile of the water. So we filter and then we mineralize to get to exact specifications for coffee, pizza dough, bagels, et cetera. In the residential space, people think that if it's filtered, it's filtered enough. And that could be a $4, $5 filter that they're buying, a gravity pitcher or just on their sink. And it's just not a profitable space to be in. I think if industry dynamics would change and people would value a higher quality water, similar to what you'd see at a high-end restaurant, then it would be an interesting profile. I do think there's a convergence of that between light commercial and what will be a really super high-end home and then ultimately bringing that down into more of an HVAC plug-and-play unit that would go into households that could be IoT-enabled and dialed in. That's what we're working on in the very high-end side. But I don't see it in the short run here, and I was very disappointed that when PFAS was announced as a big concern, people weren't lined out -- lined up outside their home improvement stores dying to have high-end filtration to take care of their family. It just isn't the way it generally got solved.

We bought some new pans.

Boiled water or just pans.

Just pans so that -- because of the teflons.

Okay. There you go.

So just lastly, the big punch line from the Investor Day was the margin target. Just maybe you want to go through your spiel on how you guys are executing on this cost program and productivity program.

Yes. We ended 2023 around 21%. We said we're very confident at 24% in the next 3 years, which will be 2026. We're getting that through 4 big work streams, sourcing being the largest. It addresses about 40% of our spend, about -- materials 40% of sales today. We're getting substantial progress, somewhere around 10% or 12% savings from the efforts that we've done in wave 1. We'll start to realize most of that wave 1 in 2024. It's taken a lengthy bit of time to get qualified, to get tested, to get vendors reapproved and then to work through the inventory that we currently had previous. Wave 2 is starting. It has been negotiated, and we'll start to implement wave 2 for sourcing this year as well. We'll get a small benefit of that this year. We'll get the rest next year. So sourcing and pricing are work streams we've been at for a while, and we feel really good about their contribution. And then the upside potential we laid out was that we'd get to 26% margins possibly, if everything would go right and not a lot of things would go wrong. And I still believe we're going to identify a lot more as we work through the transformation efforts. And hopefully, midway through this effort, we can give you a better realistic update on which one of those is more accurate.

And I guess, just blocking and tackling wise, how mechanically are you getting these savings? I mean, those are pretty big numbers. What is the approach? And how are you being so successful because you just don't come up with this type of margin expansion out of nowhere?

Yes. I mean, I think I had a -- my operations and supply chain leader has been doing sourcing majority of his life. I think the best move we made was going external for a partner to help us with the process. Tons of people hours and training, tons of people, both from the engineering side and the sourcing side, put to the program. But the real magic was that we had a disciplined external partner to help us 84 steps that we have to follow in the process. But what they brought with them was their extensive database. So if you've been doing sourcing work for 20-plus years, if we need to go out for injection molding, if we need to go out for castings, if we need to go out for electronics, you should assume that their database has all of that in it and knows generally what their last quotes were to the last partners that they supplied those quotes to. So that direction to helping us find those suppliers that were going to drive substantial benefits early in the program, Steve, really became the catalyst to people believing that things were going to be different, right? If we would have went out and say, "We saw a 2% to 3% or 4% savings and had to go through all this effort," I don't think the energy would have been behind going into wave 2 with the enthusiasm we did. And that's what I would share is that, sometimes, those outside partners bring a tool. And that tool this time was the database of particular places where we weren't going to look ourselves without their help.

And is that like a larger company that is a brand name we all know about? Or is that like a -- like kind of a niche group of guys that got together and figured this thing out? Like what's the...

It's people that have been doing this for a long period of time that have -- I would put them in a niche category. They've worked with a lot of the large automotive players, lots of good industrial. The name of the company is Gibson Consulting. And so I'll give him a little shout out here. But they're the real deal, and they were able to really drive substantial savings to us early. We said we did a trade show in Vegas in a $40 hotel room in the heat of August was the first one, and we brought 1,000 suppliers in. And this is an aha moment when you lay out all your components across the whole entire company and you think about how many PC boards you have across the company designed by engineers who thought they invented the perfect board, right? And then you realize the challenges associated with that and the legacy electronics and the emergency -- emerging electronics, right? So you have to reengineer to the new standards and then you have to go out and quote those new standards. But then, again, finding the right suppliers who are willing to quote our volumes competitively, I think, was a big, big win for us, Steve. There was a lot of effort. For me, it's one line, it's one cell in Excel, and I count on it. But a lot of people behind the entire organization working really hard on that.

You're a great CEO. One cell in the Excel sheet, that's it. EPS, yes, that's what I look at it. Something happens to get there, but I don't really know what is -- getting there, though. I mean, that's pretty impressive. I mean, and these suppliers, do they dislike these consultants? Or are they being a part of the conversation? If they weren't part of the conversation before, what is...

I think it's the latter. I mean, being part of the conversation, being able to get a little bit of diversification of the industries you might serve. So think about lighting, you're probably serving automotive and you have the opportunity to serve specialty lighting offering and pool, right, around LED, those are the -- but also you bring with it engineers and capability to help companies like us get there faster because they're willing to pay for the engineering changes that have to occur to get to the tested and qualification.

And this -- what catalyzed this was everything that happened during COVID or like...

Well, I wanted to do it before COVID, but I think the challenges, especially for pool during COVID, where they thought they were well positioned and then they stumbled, created an opening for people to think differently that maybe we aren't as good as we thought we were.

Right. I mean, it's truly impressive as you guys pull this off. It's been pretty dramatic margin expansion for sure. Any questions out there on these productivity programs or capital allocation?

Can I throw one advertisement out for pool as an industry? I've been sharing this, Steve, you and I have talked about this before, but I'm not suggesting that any other industries are bad at all. But what's really unique about pool and the margin profile we have is the way we make a pump is completely different than our competitors. We have different drives. We have different motors. We have different configurations, mainly that's because of the IoT platform that we're driving those from. So when you take a look at a Pentair heater versus a competitive heater, you take a look at a Pentair pump versus competitive, you think about LED light versus everybody else, we don't share common components. So part of that led into the differentiation of suppliers we had, and you have to break through that construct to say, "But what if I opened up the sourcing avenue to my uniqueness, partnered with the other suppliers in the industry who can deliver what we deliver?"

Right. And I guess, that point would be that versus something like, say, HVAC, where everybody is sharing the same components, and it's like a brand on the side of a metal box.

Correct.

It's probably...

Still a good industry, by the way. But I mean, it helps to understand why our margin profile might be double what that industry is.

Right, right. And you guys are trading at a discount to those guys. I guess, I'll ask the kind of generic -- d*** generic questions. First of all, election, how are you thinking about that? Any thoughts whatsoever on...

God, I don't want to look at social media for the next 9 months or 8 months. How about you?

That's not a good -- you're running a company. That's not a good strategy. I don't think so.

I'm going to stay focused. I'm going to deliver what I have to deliver.

Well, at some stage, what administration seems to be influencing increasingly whatever, whether it's tariffs or subsidies or anything like that? Are you guys discussing this at all in the boardroom? And are you prepared to make any changes whatsoever if there's a change in administration?or not really a topic?

Well, I mean, it's definitely on the ERM roadmap and price [indiscernible] roadmap. I think we all got to be aware of what could happen under different administrations. I want to have -- you got talk of significant taxes and more legislation and more SEC layers and environmental climate change layers. On the other side, you've got talk of deep nationalism and in huge tariffs on global trade. That was extremely disruptive the first time it was implemented. I think it took us all a while to work out of it, right? I think part of that was it made us think through our supply chains. But I don't think anybody has the perfect supply chain, yet, right? I mean, getting out of China was a path that most of us took because of the cost of freights, the tariffs, et cetera. But it's hard to get everything out of your Far East supply chains. Because of the regulatory environment, we have about not being able to make certain products here. For us, it's carbon, charcoal goes into carbon, right? Carbon is only available from the Far East as a filtration capability. So we've got our supply chains whittled down, but we still are not perfect. And so those would be concerns if you hear themes like 60% tariffs or whatever. Now I think we'll all have to do that math closer to the way it's going to end up. But I think we should all be recognizing that under any scenario, there could be changes to the landscape of business.

And then one last one on AI. How much are you talking about this? Are you testing out some use cases and business models and anything that you're looking at on that front that's of note and that's materialized as of yet?

Yes. We've begun to really significantly digitize most of our upstream sales and marketing and sales force data. Most that is all cloud-based now, and you've got a lot of great analytics that you can run off those cloud-based platforms. That's one way that we're benefiting from it. The second one is with more of our products and pool, IoT, this new I3 pump, every time you hook it up, we know exactly where it is on the map, and we can monitor that and see how we can more fruitfully penetrate those particular areas. You're going to see a huge impact, though, against this -- across the sales and marketing, G&A, all of the different support features. And I think that's where it's going to have the most short-term impact on us, Steve, just making us much more efficient in effect.

What inning do you think you're in?

First. We're talking about it.

Right. And so you'll be implementing some of this perhaps next year type of thing.

I think throughout the course of this year and next year, we'll start to see the benefits of it, yes.

And is that reflected in your IT budgets and a little bit more on-prem tech spending? Or...

Yes to the budget, nothing in the savings side yet. But yes, into the budget, yes.

Okay. Got it. All right, all right. Thanks. Sorry, we got one -- you can take it offline. You can take it offline, sorry. We're kind of done. Sorry.

Thank you.