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Hey, everybody. Mike Allen with Baird here. Thanks for joining the Pentair session. Pretty standard protocol here. We have John Stauch, CEO, Bob Fishman, CFO, and then Nick Brazis, who's going to be the incoming CFO. So we got a full team here, which is great. Again, pretty standard. We're going to do some prepared remarks, followed by a Q&A session. So if you've got any questions, use the card in front of you. Email me. I'm also fine if you raise your hand. I'll call on you. We can do it that way as well. So with that, gentlemen, thank you.
First of all, thanks for having us. It's always a great conference, and we're happy to be here, so I appreciate that. Bob, you're going to kick it off?
Yeah, let me say a few words about Pentair for those that might not know the story quite as well. So thank you, Mike, for the invitation. Again, Nick will be taking over from me March 1st, so a really nice transition period. I've been the CFO at Pentair for six years, six fantastic years, and just time for me to retire and move on. But the company is obviously in very capable hands with Nick. In terms of Pentair, one of the water industry's largest pure-play water companies, over $4 billion of revenue, $1 billion of EBITDA. We operate through three segments. We help the world move, improve, and enjoy water. The move segment is our flow segment. So think about small pumps, large pumps, and then an industrial solutions business. The improved piece of the business is two-thirds commercial water.
That's where two of our crown jewels sit, our Everpure filtration business and our Manitowoc Ice. The other third of the business is residential, and then the enjoy part of the business is the one that seems to get the most questions and most of the limelight, is our Pool business, so those are the three segments that we have. 75% of our revenue goes through distribution, and 75% of our revenue is break/fix, so that's quite handy to have during uncertain times. We launched a transformation program about two and a half years ago. We still feel like we're in the early innings, even though transformation has been paying out really well in our P&L in terms of ROS expansion. We've improved our ROS by close to 600 basis points over the last three years.
As we talk about our business, there's really three technologies that bring it all together: our pump technology (think about $1 billion of pumps cutting across the three segments), about $1 billion of filtration and separation, and around $800 million of heating and cooling. What we'd like to think that we do well is share technologies across the businesses to create innovation within the company. That, Mike, would be in a nutshell. A little bit about Pentair. Happy to take any questions you might have.
I'd love to do that because he stays on point. He knows it great. I would have messed that up.
I think we can both agree that our personalities do become a little more verbose relative to Bob. I think that's a fair statement. If you wouldn't mind passing me the iPad just in case someone sends something. I don't want to lie to them and say I was willing to answer questions and not listen to it. So why don't we start with the transformation piece? Simplistically, where are we? What are the next steps? I think it's really interesting to hear you say, not the first time I've heard you say it, that you're in the earlier innings despite seeing some pretty aggressive expansion already with some pretty interesting targets. So maybe just talk through the phasing. What have we done, and then what's next to give you the confidence that you are in those earlier innings?
Yeah, so I'll just start with, I think all companies struggle with what should be centralized and what should be decentralized. I think it's really easy to think of decentralization being closer to the customer, your sales, your marketing, staying agile, because that's where you compete and fight for your market share against competitors that look like you. But one of the things through being a series of acquisitions over a period of time, there's lots of things that were not scaled. And one of the biggest ones was sourcing. The problem with if you leave people to be centralized, everybody creates their own PCBA boards their own way. Everybody thinks of their products being unique. You have a lot of local suppliers.
And so a big part of our transformation push was how do we take these four pillars, which we believe if we standardize processes, pricing, sourcing, we already had operations in lean. We just wanted to do that a little bit better. And then the fourth one was how do we digitize the global support? And I think those are the four pillars of transformation. And clearly, the ones that have been great to have, we started the sourcing one way up front. That's where we got the most amount of benefit. And then pricing was right on its heels. And those are embedded processes in our organization. I said this in our Investor Day, I wish I would have done 80/20 before I did transformation. I think it's good to have both.
I mean, we're in an 80/20 period, but it's great when we do the 80/20 work by product line, by business, and by revenue stream to have that transformation playbook to pull from. Because the analysis is one thing, but what do I do about it is a second. And so we're very happy with that progress. I think what we want now is a more balanced approach of how do we get organic volume growth combined with the continued transformation benefit. So long-winded, Michael, we are early innings on transformation because a lot of work has been done just offsetting tariffs, and we still have the huge opportunities to go back and do some of the transformation work better than we did. And I think now it's about how do we also bring a better balance between volume growth and transformation as we head into 2026, 2027, and 2028.
So maybe put that in the context of 80/20, right? Because often people associate early 80/20 adoption with a couple of years of volume headwinds. I think you've seen less of the headwind part relative to some of the other firms we've seen implement a similar strategy. So how do you balance those two equations?
Yeah, I mean, you have your four quadrants, and the easy exits are usually in quadrant four, which statistically would be about 4% of the revenue stream that you're doing 80/20 on. You want to reduce the cost to serve in that box, but it doesn't mean you have to give up all the revenue. So there were businesses like residential water treatment where we used it as an opportunity to just do portfolio exits. And we didn't want to have that business at any price. And you still see some of that headwind. It'll be done by Q4. But for most of our higher-performing businesses, it was really changing how we transact with the customers. And you're going to lose maybe one-ish to two points of growth while you do that.
And then the math is that you're going to grow faster with the top customers because you're serving them better. And so I think ultimately, I don't think 80/20 is a headwind to growth. I think it's about focused execution. And really what you should be doing is freeing up, going back to your customers, being good at what you used to be good at with them, and making them feel differentiated and more special, which then you can grow with them better.
How's the adoption been internally? What's the response been from the team?
I'd give us a solid B. You always have those business leaders that are on board because they've done it before, and they believe it. It's helping to break through culturally what they need to do. And we have several of those. And there's always the one or two who like to do it their own way and make it more art than science. And I think what we have to do is just continue to encourage the use of the tool. And then one of the things I'm doing is making sure that not everybody has to use the tool at the same time. So for some of the businesses, they have a bigger operational footprint opportunity. For some of the businesses, they have a better digitized customer opportunity. So we're doing that to kind of balance the workload, Michael.
Yeah, it makes sense. Why don't we go division by division for a little bit here? Let's start with flow. Doesn't happen often, so might as well.
It's been performing great, so we like to talk about it now.
Yeah, and I think what's underappreciated is I think internally you feel better about the growth outlook relative to maybe where investor sentiment is on the growth potential for flow, so what gets you excited about that segment from a growth perspective?
You want to give them a little love right now?
Absolutely. So again, the Flow business, think about $1 billion of revenue. A third is residential. I would say the best news there is that that business is stabilizing. People are learning to live in the higher interest rate environment. And so Resi Flow has seen three years of headwinds relating to the higher interest rates. And they were down high single digits in many of the quarters. They showed growth in the third quarter. The spray specialty business within there has made its way to growing their top line. And so that Resi business is stabilizing, which is good news for Flow. There's another third of the revenue sitting in commercial and infrastructure. That's a business that's growing 12 quarters in a row. That business would supply pumps to buildings like this. We would lead with the fire suppression pump.
The ability to grow is through our water supply and water disposal pumps and selling to different types of customers, so office buildings, apartments, selling to data centers as an example. They're reaching out to increase the market that they go after. We have an industrial solutions business. Think about food and beverage, sustainable gas, which is starting to increase its top line because it's gotten through what I would call a lot of complexity reduction work. They've standardized their offering and can go to market in a much more consistent manner. We feel good around the flow business. It's typically a low single digit grower, but we just guided Q4 to be up high single digits. Half of that is our Hydra-Stop acquisition. They just grew close to 6% in Q3. They've got a lot of momentum entering 2026.
What did the Hydra-Stop acquisition bring to the table for you?
Yeah. And maybe Nick, did you want to take that one?
Sure. Yeah. They serve the municipalities, particularly in the repair space. So you've got an aging infrastructure. A lot of the water infrastructure that you see in big cities was put in 60, 70 years ago, and so as you go into repair those pipes, the Hydra-Stop offering provides the tools and the means to stop the valve right at the point that you need to repair instead of shutting down an entire municipality, so there's good adjacency for us in that, and then also some pull-through in our pump products into the municipalities that we serve.
It seems like that's part of a broader strategy, right, where you mentioned data centers and you're trying to find other adjacencies to go into. How much opportunity is there to go into what would be a white space for Pentair here? Maybe use the data center piece as an opportunity as a case study. However you want to answer that.
Yeah. You know, pumps, the specification of pumps, I mean, it's one of the oldest industries in the world. So some of these specifications might be 50, 60, 70 years, which is good for aftermarket and repair when you get around to doing it. Mike, but I think the thing that gives us opportunities is we're not always the largest pump player in these spaces, and we do have good competitive brands that we go head-to-head with. So the more that we get specified in the list and the better we operationally improved our business, so we have some of the lowest lead times in the industry now, we're able to respond quicker to some of the customers. We're taking mid-range jobs with higher margin. Some of our competitors are more distracted by the much larger jobs that they're going after.
And so it seemed easy to say, well, if we're selling you the fire pump anyway, where we have a leading position, why don't we also give you the water supply and the water disposal? We didn't discount margins to do that. We promised delivery, lead times, and customer experience. And that's been a really big momentum builder for us. What's slowing us down a little bit is the rate of specification, which is where we put our sales and marketing teams to make sure we get specified and to make sure we can quote on all these jobs nationally in the United States. Also helps be a U.S. manufactured product too.
Did the process of pushing through 80/20 and some of these transformation initiatives help inform?
Absolutely.
The opportunity to do this expansion, right?
Absolutely. The beauty of 80/20 is it creates a clear pricing strategy. If you're bogged down on product serving the customer, sometimes it's because you haven't priced it effectively. And sometimes the customer is willing to take those five-day turnarounds or the next-day delivery of spare parts at a much higher price point because they need to. And that frees you up a little bit. But it also informs where you should spend your time and where you shouldn't spend your time. And it's been a big, big plus for the flow business. I think flow took out a third of their SKUs during the 80/20 process in the last few years.
Yeah. It's interesting. You know, as we work to overserve those quad one customers, it really gives the sales teams an opportunity to spend more time with the distributors and the dealers.
It might be putting a new service person on their account, new salesperson as we shift some of the costs to deploy to that quad one. But just that ability to track metrics for a particular distributor or dealer, that face time with the dealers is incredibly important to understand how we grow the business.
Makes sense.
So we have like, I look at 12 businesses underneath the three segments and the business units. And these brands and revenue leaders are incentivized to drive profitable growth. And they're measured by a metric called realized standard margin. And that comes out of the 80/20 work, which don't look at the numerators, the revenue. Think of your standard margin plus or minus in period pricing and in period inflation. And we incentivize them on those metrics. And that's been a game changer for us to get the focus on what we need to do. But also attached to these categories is all the complexity, the factories, the different legal entities for sales and marketing support globally, et cetera. And that's really been able to create that transformation journey. And then we want to make sure that every one of those 12 unique revenue streams has a rule of.
You've heard us talk about pool being greater than rule of 40, right? That's the margin plus the growth rate. And we choose those benchmarks based upon other industry leaders and what the entitlement would be for that margin rate. And that's how we set our expectations and our transformation targets. And that's how we're getting the ROS expansion. The reason I'm sharing that with you is it's not always going to be equal. It's not always going to be a third, a third, a third. Some of our opportunities around cost are going to be outside of pool. And pool, having the growth opportunities that it does, will be investing often for that growth. And you might see a more muted margin expansion as we go forward.
And you guys are doing something besides pool?
Yes.
That's good.
We do.
That's good.
But we love ool.
So we are going to go to pool now. And Parks, I have a couple of questions on it, but just maybe a generic statement on how you're looking at the market today. And beyond interest rates, is there anything that we should be thinking about for a reacceleration curve?
Yeah. I told Bob when he joined that this would be the easiest, simplest, and most predictable business he would ever be associated with. And it's been anything but. And it still doesn't mean it's not a great business, but we've had the supply chain disruptions in this business. We had rates of peak inflation. We also had COVID and what that did to the supply chain. And I would say now we're into a flattish pool environment driven by high interest rates. It's our job as an industry leader on the equipment to build the content and be innovator so that we can continue to grow the pie so that we don't all fight for the share of an existing pie. So we've got some exciting new products that we're going to introduce in 2026 and 2027 that we think will be tailwinds for innovation in the industry.
Then what we also have to do is make sure that we're spending the appropriate amount of time with our dealers to help them win and make sure we're servicing them differentially, which is where 80/20 has really helped. We used to have 17,000 dealers that we treated equally. That's hard to do, right? We quadranted the dealers, and we have our A dealers, and it takes it down to about 400 that make up the majority of our revenue. Every single one of those 400 should have a field service tech behind them. They should have a dedicated customer service line. They should have a dedicated sales organization. We're going to have to go work with those dealers to go try to create the demand and get people excited about industry automation.
An automated pad has got a better longer-term value to Pentair and to the industry.
Yeah. That actually segues pretty well into a question here. Within pool, are you seeing any push by the distributors to have exclusivity of products? So how are you reacting?
No to the first one. I think there's three major equipment brands that are in the industry. There's also two other really good equipment players. I think we all have our strengths by region, and we all have our opportunities to improve. I haven't heard the exclusivity one. I do think we have our particular channel partners that are looking for differentiation, and they would like to have something different than the other individual distributor or distributors have, and I think that we have to think about that more, is what value do our distributors bring to the channel, and how can we partner effectively with them to take advantage of the regions that we really need to get higher share in?
Yeah. The follow-up is with some of the distributor changes that are seen out there, competition between scale players, the roll-up that continues. How much of an opportunity is that for you? Are you seeing any change in how they approach the market as a result that impacts you?
Yeah. I mean, I think what we've always liked about the Pool Industry is we've had a more even distribution of profit between the equipment manufacturers and distributors, which are very important channel partners to us, and then ultimately the dealers. And I think lately it's not as equally distributed, no pun intended on the distribution side. And I think we're very mindful because I think they're a very important partner, and they have a key role to play. And we got to make sure that they're getting their margins up, and they're winning in the industry for their service and their differentiation to the dealers. And that's kind of how we're thinking about it. Don't have solutions yet, but it happens in lots of industries. There's that one big box that starts with an H, and there's that other big box that starts with an L.
And you saw some of the efforts to put singular products in one versus the other. It usually backfires because if your brand is really valued in the industry, your dealers who support your brand want to go to where they're getting the best service element from. And that's why I think we've got to continue to be mindful of that.
Yeah. I mean, the Pool Industry remains very attractive. 5.4 million pools in the ground, average age 20 years plus, less than half have any form of automation. 20% of our revenue comes from new pools being built, 20% from remodels, and 60% is aftermarket. And a number of the products within the break-fix area are non-discretionary that need to be fixed immediately.
So a typical year in pool, and John is right. I have not had a typical year since I've been the CFO for six years, but a couple of points of price, 2-3 points of volume, and a couple of points of either share gain or new products or M&A gets you that mid-single digit plus growth in a business that has a 34% ROS. So a very profitable business within pool. I think we're slowly getting back to that more typical structure. I thought we were there this year, but tariffs came along. And while we'll grow about 7% this year in pool, roughly 5 points of that is price. And so, it's a flattish market, but overall, you know, a lot of purchases in the early years of COVID will now need to be replaced.
A lot of innovation, a lot of opportunities for us to go to market and overserve the customers. So we're encouraged and optimistic about pool.
Maybe a two-fold question on this side. How do you monetize the automation piece? What are you doing on that side? And then you mentioned new product introductions and excited about it. Is it automation? Is it something more? I know there's a variable speed change coming. How do you feel about the variable speed side? You guys have a great position there. So just all in a bucket, I suppose.
Yeah. First of all, we're not going to charge for an ongoing service, an ongoing annuity on a revenue and a software. Let me just hit that one. There's great apps out there. Our dealers like to use applications that are productive to them running their businesses. There's four great home automation platforms out there that you can, as a high-end pool builder, buy. Our goal has always been, how do we have the best and simplest way to automate and run our product? And then how do we integrate it into the solutions that you find to be useful? We do have to break through. The industry has to break through the dealer confidence of the value of automation, the value of AI. And I think AI becomes that powerful tool that allows it to happen.
So as we get more and more, we have 650,000 connected pools that we actively can manage and monitor. We can look at pump life. We can look at the characteristics of what's challenging that pump. Are you turning it on and off where you should be running at the lower variable speed, to your point, and how do we help you as a dealer help your customer extend the life of that product by being more intelligent and helping that individual think about what they're doing wrong? Weather notifications as well that can often cause freezing in places like Texas, which traditionally don't close down pools. Those can be very helpful, and we got to build that connectivity, and that's where we think we just have to create more and more features that are stickier to Pentair products.
And then we elevate the level of support that we give to our dealers. That's how we're looking at automation and AI. I think if we were to jump in and say, "Okay, we're going to create a revenue model out of this. We're going to displace everybody in the industry," I think that becomes extremely disruptive. I think Pool Corp has a great app that a lot of people like to use. There's also an independent server app, I won't name it, that a lot of people like to use. And I think we should support both of them.
Yeah. You just wonder if it becomes just more of a pull-through exercise as well, right? Visibility of your product, giving the tools. Not only does it just incentivize replacing like-for-like Pentair Pentair, but maybe you can get a little something extra out of it, right?
Yeah. I think every elevated experience that makes you want to have automation. I was able to turn on the hot tub from the 16th hole, and the hot tub was warm when I got home to sit in my hot tub. And by the way, that's a significant use of the hot tub and the app. What else can I automate? Well, my lights can be automated. Great. What do I want to do with my lights? Now you have IntelliBrite, which is a product that has infinite color schemes. You can actually go into the dial and kind of brand your own color based upon your university or something and then have that color in the pool. So those are the features that people like. And obviously, they're enabled by automation. And if you don't have automation, you can't do it.
And so how do you keep building that awareness and building the momentum of wanting the thing that nobody else has?
So one question on price here. Obviously, prices have been pretty sticky in the marketplace. How worried are you about the magnitude of pricing that's come into the market in the pool side over the last five years or so? Are you seeing any implications from that?
Yeah. I don't want to use the word worried because, I mean, in distribution dealer models, it's great, right? You can raise the price to offset the inflation and pass it on. I think we owe our channel more than that, right? I think as we drive these productivity benefits, how do we mute the amount of price that we're passing on so we can maybe keep price more constant as we go forward, still get our margin, but allow us to put more product into the channel? The reason I want to say I'm conscious of it is because I think overall, we've always been an industry that replaces. And there isn't a service network today that's really good at repairing. If we're not careful and the prices continue to drift, instead of replacing that pump on the seventh or eighth year, you could try to repair it.
Instead of replacing the heater in a particular time frame, you might try to repair it. And that's when you start to get third-party product that enters in as replacements, and you could have disruption of how the system actually works. And that's what I'm being conscious of.
That makes sense. On the water solution side, the de-emphasis of the residential piece, focus on the Manitowoc Ice, the Everpure business, KBI no longer there. Maybe talk about how those two pieces are transacting together and what you're seeing with Everpure and Manitowoc Ice and how much cross-sell is there.
Yeah. Let me describe the de-emphasis of residential really quick because I think it's important as we talk forward as a growth opportunity that we do think we have. What happened is Pentair used to have the leading valve, a water softener valve in the industry, and it also had the tanks, and we sold that as a branded product through a specialty channel. Back then, it used to be Kinetico, Culligan. It used to be regional players that private labeled, but they sold and supported our brand. It's really commoditized over time, and it's really become about how do you bring that system together and then sell your plumbing work into the channel, which means that there's this larger plumbing distribution channel that's evolved, and I think we've got to go there. We're already selling our R&I efforts, our water supply, water disposal through that channel.
We service well diggers. We service that. We service Ferguson, is the name of the company, right? And so we got to be part of their line card. And then if our specialty dealers want to go buy the product there, they can, but they actually acted as distributors mainly. They bought products on discounts, and then they send them out to their regional ends. So that's been where the de-emphasis of the revenue has been. It doesn't mean we won't continue to support the industry, but we need to be more relevant to the actual plumber who's coming in the utility room, either in the commercial side or the residential side. And if you can have more on that plumber's line card and truck, I think you got a better chance of continuing to drive the value going forward. So that's really been the overall.
Yeah. There's some really exciting opportunities within the resi space. Whole home filtration, big opportunity for us in the higher-end homes. That's exciting. And then just overall, we have a nice joint venture with Hope Hydration, which allows you to fill up your water bottle in an airport or wherever you might be. So that allows the owner to monetize a solution with some ads that are placed on the particular machine. But you're right, commercial water is two-thirds of that water solutions business, two very profitable businesses. What we've done quite successfully since the Manitowoc Ice acquisition is to go to market through the distribution through both filtration and ice. So by combining Everpure with the leading brand of Manitowoc Ice, we have an opportunity to give one-stop shopping to distribution and then make it easier for the dealers as well.
Great.
Then how are you thinking about capital usage right now? Balance sheet's in a great position. Cash flow is improving, aided by a lot of the work you guys are doing on the transformation, simplification efforts.
Listen, I start with reverse. Return on invested capital is really important to me. It's really important to Bob, and it'll be really important to Nick. I think it's the way you actually measure a leadership team over time. You might strategically do an acquisition that takes you down ever so slightly, but you've got to demonstrate that you can borrow money and return to share owners a differential strategy above that. Next year, it'll be our 50th year of raising the dividend if we do it. I don't think we won't do it, but I think we're going to do it. And that means 50 out of the 60 years that we've been a company because we'll be 60 next year. We'll raise the dividend.
I think a little bit of buyback is really helpful and healthy, and I think we're in a really good spot with the balance sheet. I think at any given time, we'd like the flexibility for maybe to have access to maybe around $1 billion over a couple of years to do acquisitions. But I think that's the discipline you need to make sure they're bolt-ons and they're strategic and they're going to return more than what a buyback would or some other use of organic capital.
Is there a reasonable funnel out there right now or no?
There's a lot of the funnels are actually really busy and active. But I think what I'm happy is strategically we're being very disciplined and price-wise we're being very disciplined.
Great. Well, please join me in thanking Bob, sorry, John, Bob, Nick for their time with us today.
Thank you.
Thanks.
Thanks for having us.
Management will be available outside and up the stairs for a brief breakout session. Thank you.