Welcome to the Pentair Second Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your telephone keypad. To withdraw your questions, you may press star and two. Please also note that today's event is being recorded. At this time, I'd like to turn the conference call over to Jim Lucas, SVP, Treasurer, FP&A, and Investor Relations. Please go ahead.
Thanks, Jamie, and welcome to Pentair's second quarter 2022 earnings conference call. We're glad you can join us. 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 second quarter performance as outlined in this morning's press release. 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 and uncertainties, many of which are difficult to predict and generally beyond the control of Pentair. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors in our most recent Form 10-Q and Form 10-K and 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. We will be sure to reserve time for questions and answers after our prepared remarks. I would like to request that you limit your questions to one and a follow-up to ensure everyone an opportunity to ask their questions. I will now turn the call over to John.
Thank you, Jim, and good morning, everyone. Please turn to slide four, titled Executive Summary. Pentair delivered another strong quarter with sales, segment income, and adjusted EPS all up double digits. We are particularly encouraged with our margin expansion, both sequentially and year-over-year, as price more than offset continued inflationary headwinds. We're also excited to have received all of the necessary regulatory approvals related to our acquisition of Manitowoc Ice, and we expect to close the acquisition later this week. With the significant growth of Pool since 2019 and our Water Solutions business expected to exceed $1 billion in sales on a pro forma basis, including Manitowoc Ice, and to be predominantly a commercial platform, we'll be moving to three segment reporting segments starting January 1st, 2023. The three segments will be Pool, Water Solutions, and Industrial Flow Technologies.
I'll provide more details on the new segment structure shortly. We are also introducing Q3 guidance of $0.93-$0.95 and tightening our full year guidance to a range of $3.70-$3.75. Bob will give more details on guidance later in the call, but we are seeing headwinds from FX translation as well as higher interest expense with the rise in rates over the past several months. We continue to believe we are well-positioned in attractive markets. Transformation is helping strengthen our performance, and the addition of Manitowoc Ice and our new segment structure positions us to continue delivering for all of our stakeholders. Please turn to slide five, labeled Building a Stronger Commercial Water Solutions Platform. We introduced this slide in March when we announced our plans to acquire Manitowoc Ice.
Manitowoc Ice is an iconic brand and a great business that we expect to help our Commercial Water Solutions business to deliver scaled end-to-end water filtration and ice solutions for food service customers, along with predictive services that identify and address customer issues before they arise. This combination will transform our current water treatment business, which historically has been roughly 2/3 residential and 1/3 commercial focused. With Manitowoc Ice, we expect water treatment $1 billion on pro forma basis, with commercial representing nearly 2/3 of the business and improved profitability in addition to even greater growth prospects. Please turn to slide six, labeled Aligning Organization for Accelerated Success. To further expand on our announced segmentation move, the addition of Manitowoc Ice will provide us with an expanded and scaled end-to-end commercial water solutions platform for important global customers.
It will also reshape our water treatment business to be more commercial, focused by both revenue and contribution income than our residential business. In addition, our Pool business has nearly doubled in revenue and income since 2018, which further supports a change in our Consumer Solutions segment structure. As a result, Pool and Water Solutions will each become individual segments, and each will be focused on the respective growth and transformation plans in line with our expectations. Our existing Industrial Flow Technologies segment will remain the same. As a result of this new structure, we have also announced a number of management changes effective January 1st, 2023, when the new structure will take effect. We believe this new segment structure will help us accelerate our efforts to improve customer service, differentiate our products, and drive profitability for our shareholders.
Please turn to slide seven, labeled Transformation to Enhance Value Creation. As we have shared over the past several quarters, our transformation strategy is taking shape. We are creating new tools for our toolbox, and each business is identifying their own respective opportunities to transform their business models for future success. Overall, we are focused on four areas: pricing, sourcing, operations, and organizational effectiveness. The team's been working hard to build funnels in all four categories, and we have gained significant traction within sourcing. During the second quarter, we held a supplier show and gathered over 800 attendees representing over 450 suppliers. We have identified additional suppliers as we evaluate the entire supply chain. This event showcased the diversity of our product offerings and many suppliers, both new and existing, have gained a better understanding of how to partner with Pentair going forward.
We are well underway in our efforts of evaluating the larger supplier categories and are looking forward to sharing more on our progress in the future. We believe transformation is a key value created for Pentair longer term, and we look forward to updating you in more detail and sharing our detailed targets and expectations for 2023 and beyond early next year. I would now like to turn the call over to Bob to discuss our performance and our financial results in more detail. Bob?
Thank you, John. Please turn to slide eight, labeled Q2 2022 Pentair Performance. We delivered second quarter sales growth of 13%, with core sales increasing 12% with strong price contribution. We were particularly pleased with the top-line performance given the tough comparison to last year. As we indicated last quarter, we expected to see price outpace inflation starting in the second quarter, and it played out as anticipated. Consumer Solutions delivered core sales growth of 15% against a tough comparison, and Industrial & Flow Technologies grew core revenue 7%. Segment income increased 18% and return on sales was 19.3%, which represented a 70 basis point increase year-over-year and a 210 basis point improvement sequentially. We were pleased to see the strong price contribution more than offset inflation.
Many of our businesses continue to face supply chain inefficiencies, and we expect this to impact productivity in the near term. Below the line, net interest and other expense was just under $5 million. Our share count was 165.5 million, and the adjusted tax rate was 16%. Adjusted EPS grew 21% to $1.02 and exceeded our guidance for the quarter. Please turn to slide nine, labeled Q2 2022 Consumer Solutions Performance. Consumer Solutions delivered another strong quarter, with sales growing 19% and core sales increasing 15%. Segment income grew 18% and price more than offset inflation in the quarter. Pool sales grew 20% in the quarter, and we continued to see solid momentum as we continue through the 2022 pool season.
There is understandably a lot of focus on the pool industry given the significant growth over the past two years. The pandemic changed consumer behaviors early on, and whether it is moving to warmer climates, investing in the overall backyard, or the emergence of new traveling like Airbnb, consumers are using pools more and more. The industry is estimated to be roughly 60% serving the installed base, 20% major remodeling, and 20% new pool construction. New pool permits have historically run 10% of single-family starts and have been a little ahead of that lately, but pool dealers remain constrained by labor availability. Remodeling activity has been strong, but the focus on new pools has kept some of the remodeling activity from occurring, leading to healthy backlogs for dealers. Further, pool attrition has been lower as pool owners have a renewed interest in maintaining their pools.
There are roughly 5.4 million pools installed, and the average age of the installed base is approaching 20 years. The near-term focus for Pool is managing the supply chain, keeping up with demand, and improving the inventory health of all product categories. While some categories like heaters, lighting, and cleaners have improved inventory positions leading to elevated growth, other categories like variable speed pumps, automation, and sanitization still have healthy backlogs given the limited availability of chips that has impacted deliveries. We continue to believe in the long-term prospects for the pool industry and will provide further updates when we report third quarter earnings in October regarding channel inventory levels as the pool season ends in September. Water treatment grew sales 19%, which included some contribution from KBI. Residential water treatment continued to be focused on complexity reduction and improving margins.
Sales were up mid-single digits for the residential business with positive contribution from both affiliated dealers and components. Commercial water solutions continued to see a healthy recovery in its end markets, resulting in healthy double-digit sales growth once again. The overall industry continued to improve, and KBI has strengthened and created new relationships for the business. Please turn to slide 10, labeled Q2 2022 Industrial & Flow Technologies Performance. Industrial & Flow Technologies grew sales 4% in the quarter, with core revenue increasing 7%. Segment income grew 4% and return on sales was flat at 15.7% as supply chain and plant inefficiencies continued. Residential Flow grew sales 6% as demand in its channel remained solid and backlog returned naturally to historic levels as component availability improved.
Price has read out quite well so far this year and capacity constraints into plants have slowly improved as labor challenges have been addressed. We expect more normalized seasonality to end the year, but are encouraged as sell-through in the channel remains healthy. Commercial flow sales were down 6% as the timing of shipments impacted the quarter. Backlog remained healthy, and we expect improvements in the supply chain should result in these delayed shipments occurring in the second half. The business continued to make progress in driving complexity reduction. Industrial Solutions saw sales increase 9%. Backlog continued to be strong and orders were healthy in this longer cycle business, particularly within the sustainable gas solution business. Although this is a longer cycle business, it was encouraging to see healthy price read out in the quarter. Please turn to slide 11 labeled Balance Sheet and Cash Flow.
The balance sheet ended the second quarter exceptionally strong with leverage at 1x and return on invested capital just under 19%. Cash flow improved sequentially and was impacted some by higher inventory levels as supply chain inefficiencies continued. This is a combination of opportunistic raw material purchases and products that have been close to being completed while awaiting final components that have been delayed. Resins, drives, and electronics continue to be the categories impacted by availability challenges. We expect inventory levels to come down through the second half. During the quarter, we completed our financing for the pending Manitowoc Ice acquisition.
Given the rise in interest rates that occurred since we announced the transaction in March, we ended up with 75% of the debt variable to help mitigate some of the higher interest expense that will occur versus our original assumptions and to allow us to pay down the variable debt as free cash flow is generated. We repurchased $50 million of shares in the quarter. Our primary focus for the remainder of the year will be on debt reduction upon the closing of the Manitowoc Ice acquisition. Please turn to slide 12, labeled Q3 and Full Year 2022 Pentair Outlook. For the third quarter, we are introducing adjusted EPS guidance of $0.93-$0.95, which represents a year-over-year increase of 4%-7%.
We expect total sales to grow 3%-5% against a tough comparison as we expect seasonality for the business and channel inventory levels begin to normalize. We expect segment income to increase 5%-7% with corporate expense coming in around $20 million, net interest expense of $6 million-$7 million, an adjusted tax rate of 16%, and a share count of 165 million-166 million. For the full year, we are adjusting our top-line guidance to a range of 8%-10% increase related primarily to a 1% higher FX headwind than previously forecasted. We expect segment income to increase 9%-11% as we expect price continues to exceed inflation in the back half of the year, offset by manufacturing inefficiencies in the near term, given ongoing component and labor availability.
We expect adjusted EPS in a range of $3.70-$3.75 or an increase of 9%-10% for the year. We have reduced the high end of our previous guide by $0.05 to reflect FX and interest headwinds. Below the line, we expect corporate expense to be around $80 million, net interest expense of $21 million-$23 million as interest rates have increased, an adjusted tax rate of approximately 16%, and shares to be around 165 million-166 million. We continue to target free cash flow to approximate net income. We are focused on bringing down inventory levels despite ongoing supply chain inefficiencies. Our third quarter and full year guidance does not include the impact of Manitowoc Ice, which we expect to close later this week.
For the balance of 2022, we would expect the acquisition to be neutral to earnings. We had previously communicated that we expect $0.25 of accretion in 2023. However, we now expect about a $0.15 headwind from higher interest expense as a result of rates rising since we announced the transaction in March, and we would now expect approximately $0.10 accretion in 2023. We continue to target $0.40 accretion by 2025. I would now like to turn the call over to Jamie for Q and A, after which John will have a few closing remarks. Jamie, please open the line for questions. Thank you.
Ladies and gentlemen, at this time, we'll begin that question and answer session. Once again, to join the question queue, you may press star and then one. To withdraw your questions, you may press star and two.
Our first question today comes from Andy Kaplowitz from Citigroup. Please go ahead with your question.
Morning, everyone.
Morning.
John or Bob, could you give us some more color into how you're thinking about Pool moving forward? I know you said you'd give us more of an update in October, but I think you did suggest earlier in the year that you expect some inventory correction in the channel and Pool later in 2022. Given the strength you saw in Pool in Q2, but obviously more normalized inventory in the channel, do you expect a potential channel correction to be better or worse than your initial expectations? What could that mean for 2023 Pool demand?
Yeah, thank you for the question. From our perspective, the year is playing out very much, you know, like we thought it would be, when we gave our initial guide at the beginning of the year. When we look at the business, we, you know, have a comparison to last year, where if you remember, inflation started accelerating in Q2, Q3, and Q4 of 2021 and price was still catching up. When we looked at the volume in last year's Q3 and Q4, really normal seasonality was not in play. Backlogs were high. We were shipping the products that were available to us and revenue growth was primarily volume driven.
As we built the guide for this year, our view was that price would start to read out quite effectively and price offset inflation in Q1, and then read out really nicely in the second quarter. Our view is, you know, price will continue to exceed inflation in the back half of the year. As we look at the back half of the year, price remains strong for the business, and channel inventories return to more normalized levels against tougher comparisons. What that means is that our guide remains very consistent with what we said at the beginning of the year and it sets us up for a more normalized pool season in 2023.
Bob, maybe I could ask you to elaborate on price versus cost dynamics and supply chain in the sense that, you know, commodities have started to come down, you know, but you definitely still talked about supply chains and efficiency. Is price versus cost or supply chain, you know, stabilizing? Was your expectation, obviously you were in the green in Q2, you know, expectation in the second half, is it better or worse than you had, kind of the same? You know, what are you seeing in terms of, overall price versus cost?
Yeah, I'll break that into the two pieces because we look at really inflation and supply availability in two different pieces. From an inflation perspective, our biggest challenges really are across, you know, metals, motors, drives, electrical, freight, including fuel charges and labor. Of those pieces, most are about the same with commodity prices, metals, copper, steel, showing some improvement which would likely read through early next year. Our view is inflation gets a little bit better in the back half, but continues to be a challenge. From a supply availability perspective, you know, heaters and lighting, cleaners have all improved. The challenge remains around variable speed pumps, automation, sanitization, really anything related to availability of chips.
We also continue to have challenges around, you know, resins, drives, electronics. Supply availability about the same. Inflation getting a little bit better in the back half, but should read out in an improved fashion in 2023.
Appreciate it.
Our next question comes from Joe Giordano from Cowen. Please go ahead with your question.
Hey, thanks guys. You know, when you think about Manitowoc Ice in the context of a potential recession and consumer weakening, I know you cut the accretion on just like on the interest side, but how do you think about the underlying performance of a business like that relative to what you maybe thought when we made the announcement?
Yeah, I think we're still very positive about the outlook. I mean, one of the things that gives us that confidence is Everpure, which is our commercial water solutions business. You know, we've seen that business perform significantly well during cycles, I mean, other than COVID. Just as a reminder, we're not yet to the hospitality levels globally that we expect to get back to. When that global travel starts to open up, those are great markets that have been on pause for a little bit in those spaces. You know, we share some of the same accounts, and we have opportunities to penetrate the complementary accounts and then we believe that the KBI service piece of it creates that ongoing service annuity around these two products. No, we think it's gonna perform well.
Can you just touch on the leadership changes and like the kind of the flip-flop of responsibilities from one segment to another and what those individuals bring with a fresh set of eyes to those businesses?
Yeah, I mean, you know, listen, you know, Mario has brought a lot of great leadership capability to Pentair, and I'm sad by what we're doing here from the standpoint that we're almost a victim of our own success. I mean, Pool, as we mentioned, has almost doubled since 2018. Along the way, we're now competing directly with two standalone pool public companies. That business needs a different level of agility and focus.
For it to deliver to the customer's expectations and be the premier Pool provider. You know, on the Water Solutions side, we're adding a commercial element that skews us more from a residential into a commercial aspect. All of the great capability that Consumer Solutions built, you know, the stronger brand, the customer service, the connected solutions, the effortless customer experiences, all phenomenal progress over the last 8-10 quarters. All of that capability we'll use, but I wanna use it closer to the customer. You know? Pool needs what it needs to do from those capabilities, and then we need to make sure we're not losing sight of servicing the food service customers in Water Solutions. Jerome used to run Pool, and so he's coming back to lead that segment.
Within Water Solutions, you know, Adrian's been very close to that process through the transformation work, and, you know, the onboarding of Manitowoc, and I feel like he's gonna bring the right capability and leadership style. De'Mon has run our Pool business for the last three years. He's a long-term Pentair employee, and I think he's gonna bring great capability to IFT. You know, Mario and I talked, and I think this is a great opportunity for him to use his skills and either take my job somewhere else or go lead a bigger segment somewhere else. That's a little bit of color.
Thanks, guys.
Thank you.
Our next question comes from Mike Halloran from Baird. Please go ahead with your question.
Hey, good morning, everyone. Just a clarification on the pool inventory levels from Bob's comments. Just wanna make sure I understand. Essentially you're saying you are at normal channel inventory levels for everything that really doesn't involve chips or electronics, whereas the pieces like variable speed motors, sanitization, things like that, those are not at normal levels. Those are below normal levels from a channel inventory perspective. Is that accurate?
Well, I think, Bob, I don't wanna put words in your mouth. That's an end-of-year forecasted statement, and we've got a fair amount of volume reduction in our, you know, Pool Q3 and Q4 year-over-year that would bring us into what we expect to be normalized levels by the end of the year.
Correct. Yeah, that's built into the guidance that we have. You know, our view is that still catching up on the heaters, lighting, and still catching up on the variable speed pumps, the sanitization, the automation, and you know, heaters, lighting, and cleaners will be those backlogs will come down in Q3 and Q4.
Okay. The commentary you made on the guidance piece of some destocking was primarily related to some of those pieces you just mentioned.
Yeah. I, you know, I think, you know, we had in our guide that we felt like we were going to the original guide, and as Bob said, our current guide's equal to that original guide, and we always forecasted that we would see those inventory levels start to come down as our lead times started to get better to the channel. I mean, historically, we were generally at five days out for any product we made. You know, clearly, when we were trying to catch up in 2021, that exceeded 180 days in some aspects.
Those lead times are not yet back in line to the products that Bob mentioned, anything chip related or IoT related, and we expect that we'll begin to catch those up between Q3 and Q4 and get more normalized as we head into next year.
No, no, that makes sense. Within the resi flow piece here, maybe just talk about what the sequential dynamics look like, and what kind of dynamics you're seeing on the stocking, destocking piece, as you know, kind of where end markets are tracking now versus where the inventory levels are.
Flow continues to remain strong from a demand perspective. Our bigger challenge is around supply availability and labor. You know, backlog looks healthy. Inventory in the channel looks healthy and you know, in good shape. We just need to deliver that backlog in Q3 and Q4.
Thanks for that. Appreciate it.
Thank you.
Our next question comes from Brian Lee from Goldman Sachs. Please go ahead with your question.
Hey, guys. Good morning. Thanks for taking the questions. I guess, you know, first one, just kinda going back to your comments, Bob, around, and I don't wanna put words in your mouth, but you sort of suggested normal pool season dynamics in 2023. I mean, historically, is that sort of a framework of, you know, low single-digit price, mid-single-digit volume, or, you know, could we expect there's still some additional pricing in 2023 that persists from these kind of levels? And then maybe conversely some volume headwinds given, you know, tougher comps and maybe a slower new pool market. Just trying to get a frame of reference when you're talking about sort of the normal, if there's a new normal or it's sort of the historical metrics you would be referencing.
Yeah. It's still very early to give our view of the 2023 pool season, but certainly what we see today suggests more of a normal environment. We spoke about inventory in the channels at the end of the year being more in line, and then that allows us to have some amount of price carryover from 2022, but more normalized seasonality in the business. That's our view right now. We'll let the Q3 and the pool season end in October and then have a better perspective on our next earnings call.
All right. Fair enough. In IFT, I'm not sure if you provided color on this, but this was.
I guess the second straight quarter, no volume growth in IFT. Maybe just level set us a bit. Where are we in the cycle? Just kind of thoughts on volume growth in this segment moving through the rest of 2022.
Yeah. I just wanna give some color and then Bob will take it a little deeper. I mean, just a reminder that in flow, in our IFT side, we struggle with some of the same challenges we're struggling with on the Consumer Solutions regarding, you know, variable speed and the availability of those drives. We are still seeing a shortage of those products and that's where we're having trouble getting the backlog out as well as Bob mentioned, some of the labor and some of the premium freight associated with that lingering around the cost side. Bob, I don't know if you wanna provide any more color there.
Yeah. It's really three different business. We spoke about residential flow, and that business continues to have good demand. Commercial sales was down. That's primarily due to us needing to improve some supply chain inefficiencies. Then the longer cycle industrial solutions business is doing well led by sustainable gas. Again, a mix of businesses, but overall, you know, pleased with the 7% core growth in IFT.
Okay. Thanks a lot, guys. I'll pass it on.
Our next question comes from Saree Boroditsky from Jefferies. Please go ahead with your question.
Hi. Good morning. Just, you know, given the significant growth in pool demand over the last couple of years, I know you're not forecasting 2023 today, but if you do see some declines in demand into next year, what kind of levers do you have to keep profitability?
Yeah. We have a number of levers. I'll start with transformation. The transformation program is really gaining momentum. We're seeing some small benefit this year in 2022, but a significant funnel being built in the transformation. We talked about 300 basis points improvement for the overall Pentair business to 2025. Certainly on track to deliver that. It starts with transformation. We have a number of inefficiencies, to be honest, in the 2022 P&L, and we're in the process of looking at those as we build out our plans for next year. Everything from, you know, air freighting product to you know, having our labor and certain manufacturing inefficiencies in our factories.
Overall, you know, lots of opportunity to expand margins next year through the transformation and being laser focused on the inefficiencies this year.
Thank you. Just given the addition of Manitowoc Ice in a couple of days, could you give us an update on how you're thinking about the contribution to revenues for this year and then earnings into 2023?
Yeah. We have a page in the deck that talks about Manitowoc being around $325 million of revenue. If you took five-twelfths of that, you can be pretty close to the revenue number. From an income perspective, you know, we've talked about that being a 30% EBITDA margin business. Again, if you took five-twelfths of that, you come up with roughly what the EBITDA would be for the business.
Great. Thanks for taking the questions for the day.
Our next question comes from Bryan Blair from Oppenheimer. Please go ahead with your question.
Thanks. Good morning, guys. I was hoping you could offer a little more detail on underlying trends in commercial water treatment. You know, prepared remarks sound pretty bullish on trajectory there. Just curious if there's any discernible shift in underlying demand as Q2 progressed or what you're seeing in the early part of Q3.
Yeah. I mean, you know, it's a steady mid-single-digit grower, normalized, and we continue to see it clipping along at that rate. You know, I think, you know, there's always a little bit of headlines on restaurants that are challenged, but then you always see or don't hear about the new restaurants that come online. You know, while restaurants might not be able to fill out their capacity levels because of labor constraints, it doesn't mean that they're necessarily using less water. That water in most of our restaurants is filtered to a high quality standard. So I mean, we're seeing good progress there, and we're continually be bullish on that particular space.
Yeah. Appreciate the color. Just to level set, are there any operational factors that are restricting Manitowoc Ice accretion this year, or lowering the 2023 outlook? Sounds like it's strictly interest expense. Just wanna make sure that is the case.
Yeah. Just interest. The business is tracking well and our goal is to be focused on synergies next year in addition to that.
Got it. Thanks for taking the questions.
Our next question comes from Nathan Jones from Stifel. Please go ahead with your question.
Good morning, everyone.
Good morning.
Question on the inventory comments. You talked about looking to take inventory down in the second half of the year despite supply chain challenges. Is that more related to the seasonality in the business that you're looking to take inventory down? Or is there, you know, a move at the moment to structurally reduce inventory that, you know, you may have been carrying because of those supply chain challenges?
Both. I mean, I think, you know, Bob mentioned that we're gonna have a normal seasonality next year. Just to be clear, regardless of what the Pool outlook is for 2023, we think it'll be back in line with the historical patterns of, you know, peak performance in Q2, little lighter in, you know, Q1 and Q4.
Regarding that pattern, and that's what we think to happen. What we expect to be at is that we're back to more normalized inventory that we reflect no more further significant supply chain issues. We need a couple more quarters to catch up.
Yeah, I understand that.
We're still short as you've heard from some of our key customers and, you know, they need those variable speed pumps. They need the sanitizers, and when we finish those out and get those to them, they can get to close the pool pads out. That brings the inventory back in line.
Okay. Makes sense. One on the transformation. You guys have been talking about, you know, the funnel of opportunities for transformation continuing to build. I noted in the press release today that there's no expected expenses for transformation in the second half of the year. Can you just talk about, you know, are these things self-funding now, or why are there not expenses related to transformation, but you're talking about a building pipeline of opportunity?
Yeah, we typically would not forecast transformation expenses. We do forecast the amortization on intangibles going forward, but we would not forecast that. You can expect us to continue at about the same rate as what you saw in Q1 and Q2 in the back half of the year as we spend money on third-party consultants to help us drive primarily pricing and sourcing.
That makes more sense. Thanks for taking my questions.
Our next question comes from Julian Mitchell from Barclays. Please go ahead with your question.
Hi. You have Matthew Shaffer on from Julian Mitchell's team. My first question was for IFT. You guys had good margin expansion year-over-year in 2021, but that seemed to run out of steam in 2022. What are your expectations for margin expansion in the division for the remainder of the year? Can you just remind us, too, of the IFT complexity reduction initiatives and the expected impacts there?
We are pleased with the IFT ROS improvement in the business. We do expect to finish the year with return on sales higher than the prior year. You'll remember that last year they started benefiting from complexity reduction in the back half. That trend has continued and we continue to have momentum in that business. Overall, we were flat for Q2, but do expect in the back half of the year to see ROS expansion in that business.
As I said in my comments, you know, we had a supplier show, and you probably heard me talk about all the great opportunity to partner differently with supply partners. You should read into that a lot of complexity of product, both in the form of castings as well as, you know, semiconductors and PCB boards and et cetera. As we go forward, the opportunity to consolidate those designs is a big piece of how we think we're gonna drive longer term margins in IFT. Consumer Solutions, of course, but we'll see it in IFT as well.
Great. No, thank you very much on that. The second half sales growth implied to be low single digits, mid single digits for the company. How much of that growth will be from price versus volume, or any detail there would be very helpful.
We expect price to continue to be strong at that double-digit rate. We did 10% in Q1 and 14% in Q2. You know, think double digits in the back half is our assumption.
If that continues to be the headwind on a year-over-year basis, and you can back into the volume, which is a comparison to higher levels in Q3 and Q4. Also, as we mentioned, our views of what the inventory correction will be in the channel due to supply chain catching up.
Great. Thank you, guys.
Our next question comes from Jeff Hammond from KeyBanc Capital Markets. Please go ahead with your question.
Hey, good morning, guys.
Morning.
Hey, just, can you give us Like, what's your assumption for the volume decline in Pool in the second half? Then just on the, you know, third quarter, you know, I think you're saying 3%-5% growth. What, you know, is there much differentiation between the two segments?
Yeah. We don't really wanna get into all the specific pieces for each of the different segments. I would say that overall for the company, we've talked about, you know, price reading out double digits. You can think about acquisitions roughly offsetting FX, and then the rest is volume. Think about volume as being down low single digits to mid single digits in the back half.
Okay. Can you give us any color on how to think about Manitowoc Ice seasonality? Is it pretty, you know, ratable quarter to quarter or?
Yeah, pretty flat quarter to quarter.
Okay. Just last on transformation. Just, you know, you guys have been talking about it for a while. What do you think is the timing where you start to, you know, kinda spike out, you know, kind of the different buckets and, you know, cost savings, et cetera?
I think early next year, in accordance with when we provide the guidance, we would expect to give you the transformation expectations and break out some of the components of how we're gonna achieve that.
Okay. Appreciate it.
Our next question comes from Scott Graham from Loop. Please go ahead with your question.
Hi, good morning John, Bob, Jim. I wanted to ask you a little maybe to develop your answer to a previous question I think about one business for July. How are things in July in general? Is there any big change in one segment versus another versus the second quarter? Just maybe whatever you can tell us about July would be helpful.
Off to a good start in July. You know, a lot of it comes down to the allocation of key product, and so we're on track to deliver the quarter based on the start in July.
Got it. Thank you. Forgive me for not having to put pen to paper on your last answer on down, low- to mid-single for the second half in volumes. Is the second quarter pricing that kind of the peak, and then we kind of moderate a little bit because the second half of last year you started to see the ramp?
That's exactly right. Still double digits, but starts to moderate.
That's great. Thanks. If I could just squeeze in this last one. You've got a pretty healthy incremental margin implied in your third quarter guidance. Is that mostly a widening of the price cost gap, or is there something else?
Price cost stays about the same. I think the Q3 ROS is roughly in line with the first half.
Very good. Thank you.
Our next question comes from Rob Wertheimer from Melius Research. Please go ahead with your question.
Yeah. Hi. Good morning, everybody.
Morning.
Morning.
I had two questions. One is simply on gross margin, where you've noted obviously prices catching up and nicely so to some of the cost increases you've seen. Is there still 100 basis points or more tailwind as that continues to happen and you revert back to prior gross margin levels? I know there's issues with mix. I know there's issues of you don't necessarily get margin on pricing. Just is there still continued tailwind on gross margin?
Yeah. I'll take the first part, and then Bob will give you a little bit more color. I'm looking at 2019, and I'm looking at my gross margins in 2019. As you recall, you know, we took a small dip in 2020 as COVID started to unfold, and we've been catching up ever since. Our gross margins are still down from 2019, and we still believe when we look at our transformation savings, that we're using that historical point and then seeking to drive significant gross margin expansion from there. As we think of pricing, as we think of sourcing, it's not just about, you know, getting back to that level.
We wanna be back to that level and then some, which would get after the right pricing dynamics that we're seeking in each of our industries, as well as getting real sourcing benefits from our supply partners and from, as I mentioned earlier, reducing the complexity of our designs, you know, through our centers of excellence. Bob, I don't know if you wanna bring more color.
Yeah. All of our transformation initiatives are focused on sustainable gross margin improvement. When we talk about 300 basis points of ROS, you can basically equate that to 300 basis points minimum of gross margin.
Perfect. From here, is that more pricing catching up, or is that more just like reducing all the inefficiencies and then doing all the things you're talking about transformation to get there?
Yeah. You know, I think in our distribution and dealer-based businesses, we're pretty confident having been through these cycles before that, you know, our customers understand that labor's a big piece of the price that, you know, the price efforts we've put into place, we would expect to be more sustainable levels. When you get to more project- or the OEM-related businesses, I mean, there is a dynamic where we would expect to see pricing headwinds in those businesses, and we'd need to capture more sourcing savings to drive those gross margins as we go forward. It is different depending on what business you're looking at, but it's a combination of both of those things.
Perfect. If I can, I mean, there's a lot of questions on, really on the consumer, obviously the big theme in the quarter. You have some natural strength. I mean, Pool has a lot of stability to it, a lot of backlog, a lot of different things. I'm curious if you're able to look through all that and whether consumer water treatment or anything else on just what the current mood is, if you're seeing any downturn or any inflection on, you know, near-term purchases, that would indicate a change in trend. I'll stop there. Thank you.
Yeah. I think it's hard, you know, to see the immediate reactions. I mean, it's logical to think that higher interest rates are gonna put a pinch on consumer spending. I would say that, you know, we break those into two categories. What's the discretionary piece and what's the non-discretionary piece? You know, we don't see pool owners in particular on the high end really changing behavior at all. You know, houses still continuing to transact. Some of those are, or most of those, I should say, are cash based. You know, they're still gonna seek those pool.
I think where we may or may not see it as we look into 2023 and 2024 is on remodeling, you know, home remodeling and/or, you know, what is a non-discretionary purchase of a higher end water softener or water treatment system, et cetera. That's where we'd see it. We have not seen it yet, but that's where we would expect to see and measure the consumer sentiment regarding our products. The rest is break and fix, and I'd call that non-discretionary. You need a pump. You know, you need a filter replaced.
Our next question comes from Damian Karas from UBS. Please go ahead with your question.
Hey. Good morning, everyone.
Morning.
Just have a follow-up question on price. You mentioned you're expecting up double digits in the second half. Is that primarily just coming from prior price actions?
How should we be thinking about, you know, what your refresh pricing that usually hits in September is going to be aligned? I mean, is there some incremental price that's likely to happen? Just, you know, we're talking lower relative to, you know, actions from the past year, or, you know, given material deflation that we've been seeing recently, is it, you know, possibly just more of a pause on kind of the September price refresh?
To answer your first question, the pricing in the back half of the year is based on all of the price actions that we have taken over the last couple of quarters. Those are locked in. As we think about pricing, you know, moving forward in the back half of the year, price increases, I would expect at this point that there will be some price increases. You know, labor continues to be high. While we are seeing some relief in commodities, we continue to see pressure on other pieces of the supply chain. Definitely, you know, moderating, but at least at this point, suggesting, you know, some small price increase.
Okay, that's helpful. Bob, you talked about the higher interest expense and variable debt. Could you maybe just give us your updated thinking on capital structure and your capital deployment priorities post closure of the Manitowoc deal?
From a capital allocation perspective, you know, maintaining our investment grade is extremely important to us. I typically start with that. In terms of, you know, paying our dividend, we've increased our dividend 46 years in a row. That's important as well. Near term focus will be on debt reduction, as we bring down that interest cost. And then from an M&A perspective, we are entirely focused on the successful integration of Manitowoc Ice and driving the synergies that we've discussed previously. From a capital allocation perspective, those would be the key priorities.
Got it. Thanks very much. Best of luck.
Thank you.
Ladies and gentlemen, with that, we'll conclude today's question and answer session. I'd like to turn the floor back over to John Stauch, President and Chief Executive Officer, for any closing remarks.
Thank you for joining us today. It's an exciting time for Pentair, and we are preparing to make the most of it. We expect Manitowoc Ice and our new segmentation to be accelerators for all of our stakeholders, and we look forward to updating you on our progress in the future. Jamie, you can conclude the call. Thank you.
Ladies and gentlemen, with that, we'll conclude today's conference call. We thank you for attending today's presentation. You may now disconnect your line.