Pentair Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
January 31, 2022

Key Takeaways

  • FY2021 financial performance: Pentair delivered over 20% sales growth, 30%+ segment income and adjusted EPS increases, expanded return on sales to 18.2%, and generated $557 million of free cash flow with 100% conversion to net income.
  • The board announced the 46th consecutive annual dividend increase and returned roughly half of free cash flow to shareholders through dividends and share repurchases.
  • For full-year 2022, Pentair expects 6–9% sales growth, 10–13% segment income growth, adjusted EPS of $3.70–$3.80 (+9–12%), and return on sales expansion to around 19% as pricing actions offset inflation.
  • Consumer Solutions (pool and water treatment) saw robust demand in Q4 with 31% sales growth (pool +35%, water treatment +24%) and inventories near historical norms, driven by residential pool upgrades and the large installed base.
  • Pentair faces continued inflationary and supply chain pressures, which compressed Q4 margins by 80 bps, but recent pricing actions and a transformation program (pricing, sourcing, operations, organizational effectiveness) aim to deliver over 300 bps of margin improvement by 2025.
AI Generated. May Contain Errors.
Earnings Conference Call
Pentair Q4 2021
00:00 / 00:00

There are 12 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Q4 2021 Pentair Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I would now like to hand the conference over to your speaker today, Jim Lucas.

Operator

Thank you. Please go ahead.

Speaker 1

Thanks, Stephanie, and welcome to Pentair's Q4 2021 earnings conference call. We're glad you could join us today. I'm Jim Lucas, Senior Vice President, Treasurer, FP and A and Investor Relations. And with me today is 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 Q4 and full year performance as outlined in morning's press release.

Speaker 1

Before we begin, let me remind you that during our presentation today, we will make forward looking statements. Listeners are cautioned that these statements are subject to certain risks We advise listeners to carefully review the risk factors in our most recent Form 10 Q and Form 10 ks as well as today's release. We will also reference certain non GAAP measures. Reconciliations of these non GAAP measures to the most directly comparable GAAP measures can be found in the Investor Relations section of Pentair's website.

Speaker 2

We will be sure

Speaker 1

to reserve time for questions and answers after our prepared remarks. I would like to request that you please limit your questions to 1 and a follow-up in order to ensure that everyone has an opportunity to ask their questions. I will now turn the call over to John.

Speaker 2

Thank you, Jim, and good morning, everyone. Please turn to Slide number 4 titled Executive Summary. We exit 2021 feeling very grateful for the tireless efforts of all of our employees I am humbled and proud of how our employees remained agile and accountable throughout all of 2021. While we faced ongoing supply chain disruptions And inflation that was almost 5 times higher than during 2020. Our 2021 results exceeded our expectations and create momentum heading into 2022.

Speaker 2

Sales grew over 20%, while segment income and adjusted EPS increased over 30% each. Our return on sales expanded 100 basis points for the full year to over 18% despite significant inflation pressures. We had another strong year of free cash flow, generating over $550,000,000 which represented over 100% conversion to net income. We returned approximately half of our cash to shareholders through dividends and share repurchases, while also funding 2 strategic acquisitions. Announced the dividend increase at the end of last year, and the Q1 dividend in 2022 will mark Pentair's 46th consecutive year Of increasing dividends.

Speaker 2

We are especially proud of this record as we are in a small and distinguished group of companies who can say that. Our balance sheet ended the year in excellent shape and is poised to be deployed to drive additional shareholder value. Are introducing Q1 and full year 2022 guidance today, which Bob will highlight in more detail later in the call. For 2022, we are looking for continued sales, income and earnings growth as well as further margin expansion. While Q1 faces a tough comparison to last year Due to the largest price versus cost impact and continued disruptions caused by COVID-nineteen, our full year outlook remains optimistic, and we believe our businesses are well positioned Exposure to new residential construction is roughly 10% for the entire company.

Speaker 2

Our pool business benefits from a large installed base, Move into more autonomous and more energy efficient pools and favorable population migration trends. Our water treatment business has built momentum on the residential side with Smarter Connected Solutions, while a more profitable commercial business, has recovered nicely despite restaurant traffic still not back to 2019 Finally, our industrial businesses exited 2021 with continued growth in orders and backlog, particularly in our food and beverage and sustainable gas businesses. Overall, we believe we are well positioned entering the New Year, Although we recognize that disruptions from COVID-nineteen are impacting the global supply chain as we start 2022. Please turn to Slide 5, labeled ESG Priorities, Our Integrated With Business Strategy. This is becoming a pure play sustainability focused company about 4 years ago.

Speaker 2

We have been focused on integrating our ESG priorities with our business strategy. We believe this supports our efforts in cultivating a long term value proposition for Pentair. It is the right thing to do. It is good business and it is Tied to what our employees, customers and shareholders value. Sustainability is more than an initiative at Pentair.

Speaker 2

It is core to how we operate. At Pentair, we are united in our belief that our products and actions are making a difference. We are providing clean, safe water to millions of people While eliminating plastic bottles that are harming our environment, our products help people use less chemicals and detergents in their lives For our water treatment solutions, we have many products that help reduce carbon based electricity needs through variable speed pumps and LED lighting, And we are building a growing business for capturing CMT gas for reuse. We believe our solutions help make the most of life's most essential resources. We are also focused on decreasing our carbon and water footprint with energy efficient processes and bottle free facilities.

Speaker 2

In 2021, we established formal goals to reduce Pentair's Scope 1 and 2 greenhouse gas emissions and water withdrawals. We are driving inclusive and diverse workforce and leadership team. As a member of the CEO of Action for Diversity and Inclusion Coalition, leading our organization forward inclusion efforts is a priority, and I'm proud of the work we are doing in this regard that contributes to us being an employer of choice. We're also working to build a more sustainable supply chain. We have continued to make progress while we are navigating global supply chain disruptions.

Speaker 2

Finally, we believe we have always had strong governance practices, and we remain focused on ensuring that these are the best practices. We have strong diversity on our Board of Directors, and we also have strong Board oversight of ESG. We recognize that our work will never be done, but we believe we are focused on the right priorities, And we will continue to engage with our stakeholders on focus areas where we can improve. Please turn to Slide 6, labeled Building a Track Record of consistent growth. As we highlighted during our Investor Day last June, we believe we are well on our way to establishing a track

Speaker 3

record of consistent growth.

Speaker 2

We believe that we are in the right spaces for the future. Global Water Awareness is increasing, and we serve large and stable end markets. In fact, our 2 largest businesses, Growing the core is not just about top line improvement, but continued income growth and margin expansion. We know we must focus on all elements of growth, And we believe we are better aligned on this focus today more than at any time in Pentair's history. Over the last few years, we have been investing in building our brand, Our digital capabilities and our innovation around smart and sustainable solutions.

Speaker 2

We have successfully rebranded Pelican acquired in 2019 We're Pentair Water Solutions in the water treatment space, and we believe we are delivering compelling and consistent messaging across all consumer touch We improved consumer engagement with multiple digital properties, such as web, apps, social and digital ads to optimize customer journeys and deliver consistent, Differentiated brand messaging across all platforms. We saw double digit increases last year in new visitors to pentair.com. In fact, this increased engagement led to a substantial number of leads in our pool business. While we are a leader in pool equipment today, we must continue to invest to maintain and improve our position With customers and consumers, a major part of our effort is around building an effortless pool ecosystem. We not only strive to have the most reliable products in the pool industry, But we are also focused on providing the best information about pool ownership, and we believe we offer the highest level of training and education of anyone to the professional channel.

Speaker 2

We are also increasing our services offerings in many of our businesses. The acquisition of KBI last year brought service capabilities to our commercial water treatment business and helped us create Homeowners, the appropriate partner and service provider to take care of their needs in a proactive improvement situation. We're also developing more connected products that provide information about the Performed Server equipment that will enable our channel partners to quickly react to the needs of the consumer. When we talk about strategic growth initiatives to accelerate the top line, this is about prioritizing, sequencing and resourcing The critical few ideas that we can deliver to our customers while also driving shareholder value. This is primarily around investments in our leading pool and water treatment businesses.

Speaker 2

There are other opportunities such as our sustainable gas business in Industrial and Flow Technologies. We are focused in 2 areas today, biogas That can be purified and reused. We are also driving transformation to both unlock value and to fund growth. In 2021, we launched and committed resources to drive transformation across Pentair. This is a multiyear initiative to transform how we do business and how we We are focused on 4 transformational areas: pricing, sourcing, operations and organizational effectiveness.

Speaker 2

Last year was all about completing our planning and assessment phase, and we are moving to the implementation phase in 2022. Pricing, sourcing and operations are big opportunities to drive our gross margin improvement, while we expect organizational effectiveness should help drive efficiencies across Pentair. We believe that transformation will be an important contributor to our goal of greater than 300 basis points of margin improvement by 2025, in addition to helping fund our strategic growth initiatives. Finally, we believe our balance sheet provides flexibility to our long term value opportunity. Pentair has been a consistent cash flow generator, and we have built a successful track record of disciplined capital deployment.

Speaker 2

We ended 2021 with our balance sheet levered at such as KBI and Water Treatment and Pleatco and Pool, which we completed during 2021. We believe that we are well positioned to continue delivering consistent growth, We look forward to updating you on our journey. I would now like to turn the call over to Bob to discuss our performance and our financial results in more After which, I'll provide an update on our overall strategic position. Bob?

Speaker 3

Thank you, John. Please turn to Slide 7 labeled Pentair sales performance. I will also be discussing Slide 8 to help frame how we exited the year in context to our full year 4th quarter sales grew 24% with core sales increasing 19%. Consumer Solutions core sales growth was 23% and Industrial and Flow Technologies delivered core sales growth of 13%. For the full year, sales grew 25% with core sales growing 21%.

Speaker 3

Consumer Solutions delivered We were encouraged to see price readout the strongest of the year in Q4. Nearly half of the price for the year came through in the Q4. We have discussed all year the multiple price increases we implemented across all of our businesses And the fact that there has been a delay in some of the price reading out given the strong backlogs we have carried throughout the year. We believe the 4th quarter demonstrates our ability to have price readout, and we expect that momentum to carry over into the New Year. For the Q4, segment income grew 18%, while return on sales declined 80 basis points.

Speaker 3

The margin degradation reflects further acceleration in inflation in addition to the lower margin contribution of last year's acquisitions. We would note that we experienced inflation in the 4th quarter that was double what occurred for all of 2020. Adjusted EPS grew 24% in the quarter. For the full year, segment income grew 33% And return on sales expanded 100 basis points to 18.2%. Adjusted EPS increased 30 6% for the year to $3.40 Our tax rate ended the year at 15% and our share count was 167,500,000.

Speaker 3

Please turn to Slide 9 labeled Q4 2021 Consumer Solutions Performance. In addition to the Q4 performance for Consumer Solutions, I will also be referencing the full year performance on Slide 10. Consumer Solutions grew sales 31% in the 4th quarter with pool sales increasing 35% and water treatment up 24%. Growth was fairly consistent throughout the year and a testament to the hard work of the teams to meet record demand While facing significant supply chain disruptions throughout the year, the pool industry has received a great amount of attention the past couple of years With the acceleration of demand, where already positive industry dynamics have grown stronger. Pools have become enhancements to residential properties And our desirable features that new homebuyers are searching for in their future homes.

Speaker 3

The population migration to warmer climates is another positive trend for the industry As homeowners are looking to add pools to existing homes or purchase new homes with pools in warm weather states. We believe the signs continue to be strong for pool growth to continue not only in 2022 but well into the future. Channel inventories ended the year approaching levels more in line with historical levels. There are still some product lines and geographies, however, Our channel inventory levels are not back to normalized levels. Our pool team did a great job meeting robust demand while managing supply chain disruptions and expanding capacity at the same time.

Speaker 3

We have also developed capabilities to enhance our ability to better procure products and improve a smoother delivery We completed the Pleatco acquisition during the quarter and this adds to POOL's aftermarket capabilities. Pool made great progress in improving its customer service capabilities and we believe this continues to be a differentiator for our leading pool business, Water treatment saw continued growth in residential and further improvement in commercial. Within residential, we saw growth across all channels and within our legacy tanks and valves businesses. While the teams were battling inflation and supply chain challenges throughout the year, we continue to invest in the future. With Roche and being integrated into Pentair at the beginning of 2021, we made great progress in commercializing the first product That is expected to be launched this year.

Speaker 3

We are excited about the innovation that Roche and brings to consumers around point of use We look forward to updating you on the progress of the launch as the year progresses. The recovery in our commercial business continued, but industry traffic is still not back to 2019 levels. We continue to focus on the integration of KBI and the creation of an end to end solution for our customers and has generated an increasing amount of interest. By offering both products and services, we believe our commercial business is better positioned to benefit from continued recovery in the industry In addition to benefiting from new customers that are showing interest in our solutions. For the Q4, consumer solutions grew income 10%, while RAS declined 4 10 basis points.

Speaker 3

The margin decline is due to 3 areas. First, both KBI and Plitco joined Pentair with lower margins than our segment average. KBI in particular is a services business with lower RAS but strong recurring revenue and cash flow. 2nd, the margin pressure is in the form of higher inflation, which should not come as a surprise. In fact, consumer solutions experienced nearly half of its full year inflation in the 4th quarter alone.

Speaker 3

Finally, margins were under pressure due to ongoing supply chain disruptions that have continued to be a challenge. For 2021, Consumer Solutions grew segment income 32%, while margins were down slightly for the year due to the 4th quarter inflationary pressures that we We believe that this will begin to move back in the right direction starting in the second quarter as price catches up with inflation And we begin to see some pressure taken off of many areas of our supply chain. Please turn to Slide 11 labeled Q4 2020 1, Industrial and Flow Technologies performance. In addition to the 4th quarter performance for Industrial and Flow Technologies, I will also be referencing the full The full year performance on Slide 12. IFT grew sales 14% in the 4th quarter With residential flow up 14%, commercial flow increasing 4% and industrial filtration growing 24%.

Speaker 3

For the full year, IFT grew sales 12% with residential flow up 15%, commercial flow increasing 6% And industrial filtration up 12%. Residential flow delivered double digit sales growth all 4 quarters of 2021. We believe many of the population trends that have been driving demand for pool are also benefiting residential flow. Our broad portfolio of products are found in more rural and suburban areas. We exited the year with strong tailwinds As many of our dealers are still facing low inventory levels, the growth in residential flow is all the more impressive given the strong focus on Complexity reduction that saw the business exit many older or less profitable product lines.

Speaker 3

Commercial flow has been focused Industrial Filtration has benefited from stabilization in some of the smaller product lines, while both food and beverage and sustainable gas Continue to build backlogs and see their businesses rebound. We have seen accelerating interest in our Brew Assist IoT enabled service for brewing And we now have over 20 connected systems. Sustainable gas experienced strong double digit growth in 2021 And exited the year with further increases in backlog. We have had good success in our biogas offerings with a number of wins during the year and the funnel remains strong. We're also seeing more and more interest in our carbon capture technology.

Speaker 3

For the Q4, IFT grew segment income 63%, while RAS expanded 4.40 basis points. For the full year, IFT grew segment income 30% and ROSS expanded 2 10 basis points to 15%. IFP was hit especially hard on the demand side when the onset of COVID-nineteen brought demand to a halt. The business is focused on the elements within its

Speaker 2

These have

Speaker 3

all been contributors to the rebound in margins throughout 2021. IFT saw all three of its Please turn to Slide 13, labeled balance sheet and cash flow. This slide is one we have been proud of all year And it improved as we ended the year. For 2021, we generated $557,000,000 of free cash flow. We ended the year with our balance sheet levered at only one times and our return on invested capital exceeded 19%.

Speaker 3

We returned roughly half of our free cash flow to shareholders through dividends and share repurchases. We also funded 2 strategic acquisitions, KBI and Plitco to further the strategies of water treatment and pool. It is worth noting that Plitco also contributed a little to IFP And fund growth, both organically and through acquisitions. Please turn to Slide 14 labeled Q1 full year 2022 Pentair outlook. Today, we are introducing Q1 full year 2022 guidance.

Speaker 3

For the full year, we expect sales to grow 6% to 9%, segment income to grow 10% to 13% And adjusted EPS of $3.70 to $3.80 were up 9% to 12%. Embedded in our guidance is a continued expectation for growth in all three of our verticals. Residential is roughly percent of our sales with 80% of that serving replacement and only 20% exposed to new construction. While we would expect new construction overall to moderate following 2 stellar years of growth, we believe this will free up labor to serve strong demand in We are encouraged with the growth that commercial experienced in 2021 given that industry volumes are still not back 2019 levels. Industrial is the remaining 20% of sales and the strong exit to 2021 across IFP Informs our expectations that industrial growth should continue in 2022.

Speaker 3

Within our full year sales guidance, we expect consumer solutions to grow mid to high single digits and IoT to grow approximately mid single digits for the year. On the income side for the full year, we do expect price to offset inflation given that the many pricing efforts we undertook in 2021 are reading out and we expect inflation headwinds to lessen in the back half of the year. We also expect that our transformation activities will move to the execution phase and benefit us in 2022 and beyond. As a result, we expect further RAS expansion in 2022 to approximately 19%. While we expect to see continued top line growth in Q1 due to the strong demand in many of our businesses, We do expect roughly 50% of EPS for the year to be in the first half, in line with historical norms.

Speaker 3

Below the operating line, we expect corporate expense to be approximately $20,000,000 in Q1 and roughly $80,000,000 for the full year. We are forecasting net interest to be approximately $5,000,000 in Q1 And between $16,000,000 to $18,000,000 for the full year. We expect the tax rate to be roughly 16% and the share count to be $167,000,000 to $168,000,000 for both Q1 and the full year. Finally, we expect free cash flow I'd now like to turn the call over to Stephanie for Q and A, after which John will have a few closing remarks. Stephanie, please open the line for questions.

Speaker 3

Thank you.

Operator

Your first question comes from the line of Andrew Kaplowitz with Citigroup.

Speaker 4

Good morning, guys.

Speaker 5

Good morning.

Speaker 4

John, you talked in the past about Construction moderating, replacement accelerating, but you've talked about dealers having backlog in the second half of the year In pool, so do you basically have visibility into the end of the year at this point in pool? And I think you mentioned channel inventories are more normalized, but not completely normal. So can you give us more color there? And then why wouldn't price be a big number for pool with 'twenty two, so pool revenue can

Speaker 2

Yes, I'll take the first part. I'll have Bob Chipin here. Yes, I mean, we're exiting the year with a pretty lofty backlog. And while inventories in Channel have moderated to more normal levels. We're still seeing strong sell through, and we're still chasing our backlog And trying to work it down.

Speaker 2

So you've seen that impact in Q1 and Q2. As we think about the year, the way the pool year We'll play out most of the dealers will take stock of where they are sometime around the Q3 quarter And then assess what the 2023 outlook looks like and then adjust either their inventory or their purchasing desires as they head into the 2023 full year. So we have visibility that we feel like there's pent up demand, but we won't know exactly how that's going to play out in Q3, Q4 and next year till we get through Q2. Todd, do you want to add the pricing comment?

Speaker 3

Yes. We expect pool will have another strong year after growing 17 2 years ago and 40% last year. We expect significant growth again from pool. We want to be realistic in our guidance and not get ahead of ourselves. COVID continues to be a Challenge, but we do expect a strong full year led by price.

Speaker 4

Got it, guys. That's helpful. And then can you give us A little more color into the implied margin that you're assuming for 2022 for both of your segments. I know you mentioned the acquisitions diluting Consumer solutions inflation pressure, but are you assuming flat to down margin in consumer? And then can you sustain the strong incremental margins you achieved

Speaker 3

So to answer the question overall for Pentair, The guidance that we've given has the Ross expanding to 19% from the 18.2% that we finished 2021 went up 80 basis points after being up 100 basis points and very much in line with what we discussed at our Analyst Day earlier in 2021. We would be disappointed if Consumer Solutions did not expand its RAS for 2022. And certainly, we see continued momentum with From IFT. So again, helped by price cost favorability for the year and the transformation Both of the segments will expand margins.

Speaker 5

Helpful, Bob. Thanks. Thank you.

Operator

Your next question is from Joe Giordano with Cowen.

Speaker 6

This is Rod Davis on Joe, I just want to quickly touch on like inventories. It looks like there's a little bit of build in the quarter here. Is that just Trying to get yourself set up where you can help meet demand for 2022, just wondering if you

Speaker 2

could provide some color there.

Speaker 3

A little bit of the build is acquisition related around FLEETCO and KBI. The rest is us setting ourselves up for the higher demand in 2022. Overall, days on hand, very much in line with what we've seen historically.

Speaker 6

Okay. And then, sorry if I missed So what's the pool growth embedded in your guidance for the full year? Do you have any breakdown between new versus replacement?

Speaker 3

We've given guidance for consumer solutions of mid to high single digits. So you can extrapolate from that what you think Full might be. And I would say that water treatment will continue to have Another good year, but we've given guidance at the consumer solutions level.

Speaker 6

Okay, that's great. And then if I can just sneak one more in. I appreciate the sustainable gas update that provided it sounds like that business is performing well. I just wonder if you could kind of talk about the growth opportunity there. We've seen a lot of corporations come out with like carbon reduction, Carbon neutral initiatives for 2020, 2030, 2050.

Speaker 6

I'm not looking for guidance, but just how should we think about that growth opportunity Going forward, like in the medium term, do you think that should help accelerate it? What are your thoughts there?

Speaker 2

Yes. I mean, we grew that business roughly 20% last year, and we would think that we can continue to grow expense as we look into 'twenty two and beyond. Clearly, all of those initiatives creating an opportunity for us to Participate in quotes and activity and we're really encouraged about what the potential front log and backlog could look like in this business. That's great. Thanks so much.

Speaker 2

Thank you.

Operator

Your next question is from Mike Halloran with Baird.

Speaker 1

Hey, good morning, gentlemen.

Speaker 2

Hey, good morning.

Speaker 1

Thanks. So could you just talk through some of the competitive dynamics in the pool space right now? I think different players are deciding to go out with price increases at different times, handling backlog changes differently and Capacity, onboarding differently. So maybe just kind of sync all those things together, talk about how Pentair is doing in the marketplace And also layer in some capacity commentary in there, if you don't mind.

Speaker 3

Yes, maybe I'll start with that one and Then let John add to it. Obviously, the demand has Been strong within the pool business. Backlogs were up significantly most Of last year and coming into this year, we, as we looked at the backlog last year, wanted to honor the That we made to our customers, that loyalty was important and will serve us very well in the future. When we look at the backlog entering the year, that backlog has been repriced and will read out fully In the Q2. So we think we struck the right balance around on dealing with the higher orders and the backlog.

Speaker 3

That repricing of the backlog will help us with a strong second quarter. And it's not lost on us that our Q1 started below The guidance, the consensus that was out there, and that's because price does not fully readout in the Q1 And inflation remains high. The good news from our perspective is that Q2 will rebound quickly. And so we're not asking for investors to wait for the back half of the year. You'll see a strong first half from Pentair As that backlog re prices in the 2nd quarter.

Speaker 3

That would be my response to your question, John. Is there anything that you'd want to add?

Speaker 2

No, Mike. I think Bob answered that. Great.

Speaker 1

And then second question, Just on the complexity reduction initiatives in IFT, where do we stand as far as that journey goes and what are the next steps as you look forward from here?

Speaker 2

Yes, I think we made tremendous progress and I want to compliment I mean, you know this business well, Mike. I mean, these are 100 year old brands, 100 year plus brands, right? So there's a lot of SKUs and a lot of part numbers. Been doing a really good job of reducing and trying to aggregate into more common buys and more common part numbers and products. So I'm excited about where we have progressed from to.

Speaker 2

But that being said, there's still so much substantial opportunity in front of us. Just the way that we think about our global supply chains, think about the way that we bring our product through distribution, And I'm really excited about the momentum, but I'm more excited about the opportunity.

Speaker 1

Appreciate it. Thank you.

Speaker 2

Thank you.

Operator

Your next question is from Jeff Hammond with KeyBanc Capital Markets.

Speaker 7

Hey, good morning guys.

Speaker 3

Good morning. Good

Speaker 7

morning. So just back on price, how should we think about price in the guide? I mean, I think you got In 2021 and maybe it looks like a mirror image in 'twenty two, but just how much price is kind of built in?

Speaker 3

The best way to think about it is the growth guidance that we gave This is primarily price. So price is a significant impact to our overall revenue growth.

Speaker 7

Okay. And then just on supply chain, can you maybe just speak versus Q3, what you see is starting to get better or stabilizing and what's still maybe most challenging?

Speaker 2

Yes, I'll start and I'll have Bob chip in. I mean, I'm actually proud of the fact that we made sequential progress every year or every quarter within 2021, Which means we expanded our capability and processes. So we still got the same global supply shortages that everybody else is dealing with And we're still balancing around the freight disruptions and needs about getting the product to the right locations at the right time. Yes, I think the team has done a great job of moving through all that. As we started 2022, COVID reared its ugly head again in the form of Omicron, And we saw some fees rates increase in our factories for the first time in a very long time, but we also saw those same increases Across the entire global supply chain.

Speaker 2

And so I think as we think about it getting better, which it is better now, we still have to think that we're not through this, And we need to be cautious and realistic about what Q1 could look like.

Speaker 8

Okay. Thanks guys.

Speaker 2

Thank you.

Operator

Your next question is from Nathan Jones with Stifel.

Speaker 2

Good morning, everyone. Good morning.

Speaker 5

Good morning.

Speaker 6

Just a question on some of the volume. It sounds like volumes Roughly flattened the guidance with Bob your commentary there that it's primarily price a little bit of acquisitions. I know you talked about expecting new construction to moderate a little bit. Can you talk about which pieces of the

Speaker 9

business that you're Thinking are

Speaker 6

going to see volume growth and which pieces are likely to see some modest volume declines?

Speaker 2

Yes. I mean, I think it's prudent to enter 2022 still optimistic and excited about the contributions That we're making, especially in water treatment, residential integration flow and pool across the residential channel. And I think if we were thinking about the first half versus second We think we have volume, price and acquisition contribution in the first half. And I think we have a little bit of volume moderating as far as The facts around the new housing builds and or the way the channel reacts to those expectations for 2023. So while we still feel really good about Where these markets are going?

Speaker 2

I think it's prudent at this stage to assume that we'll see a little bit Moderating in the back half

Speaker 3

of the year as it relates to people taking stock

Speaker 2

on the 2023 build season.

Speaker 6

I guess that's reasonable. So a little bit of just caution on the back half given some uncertainty there at the moment. 2nd question I wanted to ask was one of your prepared comments, John, you said you were looking to build a more sustainable supply chain. Can you talk about what that means to Pentair and how you measure those things to try and ensure a more sustainable supply chain?

Speaker 2

Yes. So we are spending one of our top transformation initiatives is sourcing. And like many other companies, our Global sourcing, just the whole entire supply chain is from 10, 15 years ago.

Speaker 5

And you can see that there's been

Speaker 2

more of a demand in the United States from long shoring. And we've got to make sure that our supply chain It's related to the lead times that we need for our customers and is optimized, which is not just a cost But it's a total landed and total end to end cost as well as making sure it has the right availability. So You can measure through our West expansion and you can assume that as far as our transformation initiatives over the next several years, we believe sourcing is a significant contributor to that

Operator

Your next question is from Brian Lee with Goldman Sachs.

Speaker 5

Hey guys, good morning. Thanks for taking the questions. Kudos on the strong quarter. I guess a couple of questions just again around the guidance. Q1 revenue guidance, it's

Speaker 3

Encouraging about our guidance is we see growth throughout the year even as we bump up against those tougher comparison In Q3 and Q4, obviously, it helps having the stronger price that's built in and the price reading out fully in the second Quarter. But overall, pretty good balance. We mentioned that there'd be 50% of our EPS in the first half of the year and 50% in the back half. That's more in line with historical norms. John touched on the fact that we've given realistic guidance that we've backed on ahead of ourselves on volume for the back half, but hopefully we'll be pleasantly surprised there with the positive trends that we talked about in our prepared remarks.

Speaker 3

So our view is that we'll have a very Strong and balanced, 2022 that will enter 2023, with lots of momentum, around demand And also the transformation. And the only

Speaker 2

thing I'll add to Bob's comments because I think he answered that very well is that Q2 is historically our strongest quarter and we think 2022, that is how it will play out again.

Speaker 5

All right. That's super helpful. And then I guess Shifting to profitability, I know you alluded to this a few times throughout the call, but Segment income is flat in Q1. You are expecting EPS and income growth to be ahead of revenue for the year off of 19%. And I think you've quantified kind of the price, but there's a few other moving parts that get you kind of that leverage as you move through the year.

Speaker 5

Can you give us a little bit more quantification outside of price as to what some of the big levers are To get earnings and income growth above revenue for the year and for that ROSS to get to that 19% expansion level? Thanks, guys.

Speaker 3

The expansion in margin from the 18.2% that we did in 2021 to will be primarily us being ahead from a price cost perspective. So overall, we feel very Confident that price will exceed inflation for the year. That will help expand margins. And then the transformation. We talked about pricing opportunities, sourcing, operations and then organizational Efficiencies that we would drive, 2021 was very much a planning year for transformation.

Speaker 3

We're moving into the execution phase in 2022, and that's going to significantly help our Ross expansion as well. Thank you.

Operator

Your next question is from Brian Blair with Oppenheimer.

Speaker 9

Thanks. Good morning, guys.

Speaker 5

Good morning. Good morning.

Speaker 9

Just hoping you could offer a little more color on Plitco integration and how How Flico is performing relative to your deal model in the early stages? I think you would frame something in the range of $100,000,000 of revenue and Ross, approaching 20%, is that still the outlook?

Speaker 3

FleetCo is performing Very well. It was included in our for a couple of months in our Q4 results. Very strong aftermarket business, Great cultural fit with our pool business and very much in line with the numbers that you talked about. So For us, just a great strategic acquisition and performing very well.

Speaker 9

Appreciate Detail. As a follow-up, is there any nuance or anything unusual on how the asset is being managed? I believe it's About 2 thirds pools are more B2C alignments and 1 third industrial filtration, more B2B type exposure. Just curious how you are managing that now being in the consolidated portfolio?

Speaker 3

Really, we talked about and you are right in terms of the twothree, onethree split, and we talked about The filtration business fitting nicely with our IFT portfolio in terms of that onethree. So really not operating it much differently than how Pleatco ran it. They had a separate they have a separate manufacturing facility in Louisville, both factories, Factoring facility in Louisville, both factories are running well. And again, They benefit from having being part of our consumer solutions portfolio and also our IFP. So really no significant difference From how that business was run-in the past?

Speaker 2

Yes, it's being run as the unit itself is being run the same way in the past, And then we're scorekeeping the IFT related revenue and IFT and the pool related revenue in consumer solutions.

Speaker 9

Understood. Makes sense. Thanks again.

Speaker 2

Thank you.

Operator

Your next question is from Deane Dray with RBC Capital Markets.

Speaker 10

Impressive growth in pool for 'twenty one And also your the implied guidance there. So, like seeing that. Just a couple of cleanup questions on pool. Just this got discussed last quarter, but just to verify, there was no early buy This quarter, it was not needed. Just what's your perspective on that?

Speaker 2

Yes. I mean, there was modest early buy to what we'd call non warm weather states, Dean. So, but it was managed very, very modestly in the extent that we're just positioning them to have the inventory they need for Their particular business when it ramps up in Q2 and obviously not running the program was really more about that we're still in catch up mode from It made little sense to put more backlog on top of existing backlog. So I think as we head into next year, we're planning that We'll have some level of that as we take stock at the way the channel may or may not need to Position itself for 2023.

Speaker 10

Good. And as a resident of one of those non warm weather states, I appreciate your comments about the migration trend that's happening into warmer states. So that would suggest the demand will be there, but how about the capacity either dealer pool build capacity, Do you think that will take time? Is that increasing in proportion or will that take some

Speaker 2

Yes. As Bob was saying, I mean, the channel has historically, and we think it played out exactly this way in 2021 as well, Puts their energy towards the new pools and then begins when that starts to moderate, moves To the remodel pools and then get serious about the aftermarket upgrade opportunity. So it's generally worked in those three tiers. That's why we're excited that as it moderates the new pool builds, we get that focus again on getting those variable speed pumps, the LED, The more autonomous pools back into either the remodel pool or the aftermarket upgrade side to the service channel. This is a great industry.

Speaker 2

It's a great set of products and we want to come back to what I'd call a more normalized Pattern, which gives us that better predictability to manage our supply chain more efficiently.

Speaker 10

Got it. And then just last one for me is, We have seen already seen this earnings season of companies giving what constitutes lower first quarter guidance and Certainly, effects of price cost is and inflation, omicron, etcetera, is it's sector wide. So really not surprised to see that. But I did like seeing a point estimate in your guidance, which would suggest there's pretty good visibility For you to give that to be that specific. So just maybe talk about the visibility for the Q1 where How is January?

Speaker 10

How did that read out? And that would all be helpful. Thanks.

Speaker 3

Let me take that one. The it was important for us to indicate that 50% of our EPS would come in the 1st half in line with historical norms. We have strong headlights into the 2nd quarter primarily because of The repricing of the backlog, we will have that benefit in the second quarter more fully. So The improvement in the second quarter is driven by price. Our view is that Inflation will continue to be high, but, we'll get better in the second half of the year.

Speaker 3

So we've not gotten ahead of ourselves with regards to inflation. So good, good headlights into Q1 and Q2. January for us was, to be honest, a little bit slower because of the COVID-nineteen impact on our And our own production facilities. So good news is we've seen improvements in the last week or so, And we're ramping up to achieve our commitment, but we did see a slower start in January. And that's one of the reasons why we've been able to then have better headlights into the 2nd quarter.

Speaker 10

That's completely understandable. Thank you.

Speaker 5

Thank you.

Operator

Your next question is from Scott Graham with Loop Capital Markets. Mr. Graham, go ahead. Your next question comes from Steve Tusa with JPMorgan.

Speaker 11

Hey, guys. Good morning.

Speaker 3

Good morning. Good morning.

Speaker 11

Just on that 80% of the pool business that You identify as being remodel. What did that grow in 2021 in total?

Speaker 2

North of double

Speaker 5

digits.

Speaker 9

That's pretty clear. I guess a little more specifically, did it grow above the Aquatics average?

Speaker 2

No, it didn't. I mean it was a significant contributor to the 40 ish percent growth that pool had, but We saw the new pool increase. If you think of that 20% and you think about what size that was up, it would probably be like half and App contribution from each of those two quadrants. But Steve, what I was also saying though, there's an aftermarket and there's the remodel, right? So The remodel piece is the best opportunity to talk to the homeowner around the upgrades because you're replastering the pool or you're doing some other types of things that allow to add more penetration.

Speaker 2

And then the third element is really more the service and or the break and fix piece. And we think there's an opportunity to upgrade the channel and the break and fix that was kind of not focused on in 2021. And that's where we think upside is on the aftermarket side.

Speaker 11

And so just to be clear, you guys are guiding like the pool business volume to be like down low single For the year for 2021? Just trying to kind of

Speaker 2

keep that down. We're not down, Steve, I mean, because we see a pretty strong Q1, Q2, and then we feel like we've got the price in the back half of the year. And right now, we're being cautious about where The dealers and distributors will be repositioning their inventory levels as they look into 2023. And I think what's captured in this particular guide is, the most realistic case of assuming that there'll be some type of pause as they reset And look forward to what they're going to do in 2023. And I think it's very important we don't get out ahead of ourselves and anticipate That growth continues and then we're here talking at the end of the year about adjustments in the channel in Q3 and Q4.

Speaker 11

Yes. No, no, that's totally fair. Do you so you've been talking you talked

Speaker 3

a lot about your opportunity. I mean,

Speaker 11

are you saying that you think that the, Let's call it the non new construction, everything not new pool construction. The consumer spending on Like everything but new construction and pools will be kind of your adjustable market, I would call it. But that will be kind of flattish and that you'll outperform because you'll be able to kind of execute on these opportunities you're talking about. Is that the way to think about it?

Speaker 2

Yes, I don't think that's a bad way to think about it. I think we believe we see the thrust of the new pools being finished, Right. And there's still going to be we think new pool demand continues to increase. As we head into 2023, we think the market will continue to reposition The labor to serve the remodel side and then we'll move into the aftermarket side of the equation. And then Steve, not to really confuse you, but I think we see product lines like heaters moderate, which has been a huge product line growth Play for us, right?

Speaker 2

As people moved into those states and extended their seasons, there was a big eater penetration. And then we think things more on the autonomous, the automation, chlorinators, those types of things start to see more Penetration and accelerating and those two things start to offset each other.

Operator

Your next question is from Brett Linzey with Mizuho.

Speaker 2

Thank you. Good morning, all. Hi,

Speaker 8

Brett. Wanted to come back to the price and repricing, obviously, outsized versus history given the operating backdrop, get that. Are those actions list price increases or are you seeing some surgical surcharges around logistics? I'm just thinking if we do see a pullback here in Commodities or other inflationary pressures, do you see some of that price recede? Or what's been the historical precedent there?

Speaker 2

We are focused on list. So what Bob is sharing with you is list price increases. And ultimately, we care most about realized prices, Right. So we don't want to just raise list pricing and then negotiate it away. So we believe that we're in what we're sharing with you today is Our realistic view of what we're going to realize in 2022.

Speaker 6

Okay. Got it. And then

Speaker 8

Consumer, very strong pricing in Q4, 10 points. Is that actual like for like Price or is part of that mix up on the higher ASP given the industry shift from single speed to variable speed Or is that just simply all pure price?

Speaker 3

That is price.

Speaker 8

So there's no mix. Okay. Great. And then just last one, if I could sneak one in here. Just in regards to the DOE efficiency change over last year, A fairly significant step up in the cost of the replacement pump as we enter the selling season.

Speaker 8

Do you guys see or Any negative demand response there to those higher prices? Or do you actually think the ASP starts to gradually come down That becomes the base offering. Any thoughts there?

Speaker 2

No, I think we think that that it continues to be the heartbeat of the pool pad. It is where You need that product to run your pool and there's been a significant interest level in upgrading and Even within 2022, we're launching a new version of that, which is even smarter than the current version. And we think we'll continue to see The interest level there from the trade channel and the consumers. Okay, great. It lasts longer, it's better and then it's ultimately Chosen because of its variable speed and the energy efficiency, but it's just a better overall product.

Speaker 8

Makes sense. Okay, thanks a lot. Appreciate the color.

Speaker 2

Thank you.

Operator

Your next question comes from Joshua Pokrzywinski with Morgan Stanley.

Speaker 8

Hey, good morning, guys.

Speaker 3

Hi, Josh. Hey.

Speaker 11

John, I want to follow-up on Steve's question regarding kind of this remodel versus So everything outside of new in the pool space. What's kind of the typical level of visibility that you would have, I would guess in remodel because break fix sort of implies that you don't see it coming. What do you normally have at this time of year? Like maybe some context on what you have this year? It just doesn't seem very consumer like to plan this stuff out too, too far in advance.

Speaker 11

But I guess that maybe there's some deferrals or lack of availability From last year. So like how does that look and how would you kind of numerically score it?

Speaker 2

Yes. I mean the pool season plays out through Q3. So it starts in Q4 and it goes out to Q3 of 2022 as an example. And we feel like we've got really good visibility And we partner really well on that particular part. There's the dynamics of how they do against their volume And then we start all over again in Q4 of 2023.

Speaker 2

And we're not signaling anything other than we have visibility this year and we're pausing as we think about working with the channel to see what they see for 2023. What gets confusing is it's the same dealers who do the news, it's the same dealers that do the remodel and most of those same dealers also do service. So it's where they spend and focus their time that we're always working with them. So we see their visibility of their buy, but we want to be a little bit more surgical on where they're spending And then give them the tools and capability to begin to work with consumers on getting those upgrades on the aftermarket pads.

Speaker 11

Got it. That's helpful. And then dealers are obviously very integral with the business kind of across the various product lines. Any place where you're watching for Bottlenecks on kind of the installer side, so not a Pentair employee per se, but kind of further down the chain where Yes. The industry just can't grow faster because there's not enough warm bodies turning wrenches?

Speaker 2

Well, we've seen it this year. I mean, it's not just The labor, it's also the supply availability of all the products that go into the pool around the pool, right? And it's getting better. I think the supply chain is better, so it's probably taking a little less time to build those pools. But that's delayed the remodel efforts, which has then Delayed some of the aftermarket efforts.

Speaker 2

So I think this is going to be a great pool season, and I think we're going to continue to see the sustained demand into 2023. I just think right now we're making sure that we call 2022 pool season accurately and then we'll deal with 2023 when we're done with 20 20

Speaker 6

Thank

Operator

you. We have reached the allotted time for questions. I would like to turn it Back over to John Stout for closing.

Speaker 2

Thanks, Stephanie, and thank you for joining us today. We have delivered on commitments in 2021, Whether measured by sales, income, EPS, cash flow or ROIC. The good news is we believe there's still significantly more value to deliver at Pentair. Since becoming a pure play sustainability focused company in 2018, we have been building a track record of consistent growth, while also driving our commitment to creating long term We are proud of our pool business, but Pentair is more than just a pool equipment provider. Our water treatment, Flow and industrial solutions offerings are all proving to be sustained value contributors within our portfolio.

Speaker 2

When we combine our growth momentum With our transformation efforts and our balance sheet, I'm excited about the future value creation opportunities for our shareholders. Stephanie, you can conclude the call.

Operator

This concludes today's conference call. You may now disconnect.

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