Century Aluminum Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 24, 2023

There are 17 speakers on the call.

Operator

Morning and welcome to the Pentair Third Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Shelly Hubbard, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Anthony, and welcome to Pentair's Q3 2023 Earnings Conference Call. On the call with me are 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 Q3 performance as outlined in this morning's press release. On the Pantera Investor Relations website, you can find our earnings release and slide deck, which is intended to supplement our prepared remarks during today's call and provide a reconciliation of differences between GAAP and non GAAP financial measures that we will reference. The non GAAP financial measures provided They are included as additional clarifying items to aid investors in further understanding the company's performance in addition to the impact These items and events have on the financial results.

Speaker 1

Before we begin, let me remind you that during our presentation today, 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 We advise listeners to carefully review the risk factors in our most recent Form 10 Q and Form 10 ks. Following our prepared remarks, we will open up the call for questions. Please note that we will limit your questions to 2, after which we ask you to then reenter the A quick reminder before I hand the call over to John. Similar to last quarter, we have included Slides 4 through 7 in our earnings slide deck, which provide a brief overview of Pentair.

Speaker 1

Please see these slides titled Strategic Framework, Pantera at a Glance, Pantera overview and Making Better Essential for more information. In reference to Slide 7, Making Better Essential, we are proud to share 2 recent recognitions that Pentair has received for its work in social responsibility and ESG. We have been recognized as a constituent of the FTSE For Good Index Series, and we have been named 1 of America's Greenest Companies 20 24 by Newsweek. This recognition from Newsweek evaluated Pentair's environmental performance in relation to our industry, assessing our progress against key environmental factors, including greenhouse gas emissions, water usage, waste profile and commitment to disclosing sustainability data. Panthera's achievement supports our purpose to create a better world for people and the planet through smart, sustainable water solutions.

Speaker 1

We look forward to continuing to reduce the environmental impact of our operations and further integrate sustainability into our product innovation As guided by our social responsibility strategic targets, please refer to our published 2022 Corporate Responsibility Report for more information on our sustainability strategy. I will now turn the call over to John.

Speaker 2

Thank you, Shelly, and good morning, everyone. Let's begin with the executive summary on Slide 8. We are very pleased with our Q3 results, which surpassed the guidance that we provided on our last earnings call. Q3 marked the 6th consecutive quarter of sales over $1,000,000,000 and the 6th consecutive quarter of adjusted margin expansion. Segment income increased 3% and ROS expanded by 140 basis points.

Speaker 2

Adjusted EPS was $0.94 versus our previous guidance of $0.84 to $0.89 And year to date free cash flow was 453,000,000 up 115% over the prior year.

Speaker 3

As we look to

Speaker 2

the full year, we are updating our 2023 adjusted EPS guidance range $3.70 to $3.75 which reflects the high end of our previous guidance. I want to celebrate these strong results with all our employees. Your resilience and dedication to serving our customers and delivering value for our shareholders During a year of global macroeconomic uncertainty is making a difference. Thank you for your leadership. Let's move to Slide 9 titled Strategic Focus.

Speaker 2

Through our mission to help the world sustainably move, improve and enjoy water, we are enabling the right investments to both deliver the core And build our future to drive long term value for shareholders. In Deliver the Core, we have driven Profitability and productivity across all three segments: Industrial Flow Technologies, Water Solutions and Pool in 2023. We've also been making better essential through our products and solutions for people and the planet with a focus on sustainability and We have been investing in our people to develop talent and build a higher performing culture. Another strategic focus of ours is to build our future to accelerate performance. In 2023, we have further invested in transformation, innovation and M and A.

Speaker 2

In fact, we have seen great results across all three of these areas with our transformation having begun to readout and new innovation launched this year With exciting new products coming in all three segments. And our Manitowoc Ice acquisition is exceeding expectations. Regarding innovation, in 2023, our businesses have launched 25 new products. Examples include A new high efficiency ice maker for convenience stores and fast casual restaurants designed in advance to meet the future EPA regulation for refrigerants. Expansion of our ENERGY STAR award winning and SMART Intelliflow 3 pump series and the advancement of our beer membrane filtration solutions to operate continuously with higher levels of smart automation.

Speaker 2

In addition to these new product launches, Our innovation teams continue to make great progress advancing our strategy to build our future as they focus on our longer term growth themes centered on the pool of the future, Reimagining residential commercial water treatment and industrial waste to value solutions. Over the last 3 years, we have launched over 100 new products. Let's turn to Slide 10, titled Transformation Update. We embarked on this transformation journey nearly 2 years ago with the intent to transform our business for the Pentair of the future. Our company has evolved substantially with the separation of nVent And then evolving to a leading diversified water company.

Speaker 2

Through our 4 key transformation themes, including pricing, sourcing, Operational excellence and organizational effectiveness, we are streamlining our processes and building additional capabilities, which add more tools in our toolbox to drive growth and productivity. In Q3, transformation gained momentum and drove a substantial increase in productivity Sequentially from Q2. After implementing Wave 1 in both pricing and sourcing, we expected transformation to begin to scale in the second half of this year We are pleased to note that our transformation initiatives remained on track. Let's turn to Slide 11 titled CEO Summary. We delivered another strong quarter with significant ROS expansion.

Speaker 2

Our Manitowoc Ice acquisition continued to exceed expectations. Our IFT and Water Solutions segments more than offset pool's volume decline and our transformation initiatives drove margin expansion. Our performance through Q3 resulted in another positive update to 2023 adjusted EPS guidance. All in, we are building a strong foundation to drive long term growth and profitability across our diverse water portfolio. We have updated the full year adjusted EPS guidance to a range of $3.70 to $3.75 from the previous range of $3.65 to $3.75 We are mindful of the uncertainty across the global macroeconomic and geopolitical landscape and we continue to closely monitor macroeconomic developments and implement risk mitigation strategies when and where necessary.

Speaker 2

We have continued to accelerate transformation funnels, while focusing on investing in the long term growth of our company. We remain confident in our diversified water business model, long term strategy and our transformation initiatives, which we expect to continue to drive shareholder returns. We have a long successful track record of generating strong cash flow and being disciplined with capital allocation. We achieved 47 consecutive years of dividend increases and are targeting high teens ROIC. We have a strong balance sheet and an enviable 5 year financial track record.

Speaker 2

I will now pass the call over to Bob, who will discuss our performance and financial results in more detail. Bob?

Speaker 4

Thank you, John, and good morning, everyone. Let's start on Slide 12 titled Q3 2023 Pentair Performance. We delivered another strong quarter of significant margin expansion despite sales being down 4% year over year. The diversification of our portfolio And our transformation initiatives continue to more than offset Pool's lower volume impact on margins. Core sales for Q3 were down 7% year over year driven by our residential businesses.

Speaker 4

Our commercial and industrial businesses performed well in the quarter. While Q3 sales declined primarily due to the volume headwind in pool, The negative volume impact on Pentair and POOL improved sequentially from Q2. 3rd quarter segment income increased 3 percent to $212,000,000 and return on sales expanded 140 basis points year over year to 21%. This improvement was driven primarily by productivity from transformation, Accretive margins from the Manitowoc Ice acquisition and some price versus cost benefit. We delivered adjusted EPS of $0.94 Net interest expense was nearly $29,000,000 And our adjusted tax rate was 15% during the quarter with a share count of 166,600,000.

Speaker 4

Please turn to Slide 13, labeled Q3 2023 Industrial and Flow Technologies performance. Industrial and Flow Technology sales increased 3% year over year, driven by commercial sales growth of 8% And industrial sales growth of 12%, which more than offset a decline in residential sales of 7%. Segment income grew 18% and return on sales expanded 250 basis points to 19.4%, Marking the 5th consecutive quarter of equal to or greater than 200 basis points of improvement. The strong margin expansion was a result of continued progress on our transformation initiatives. IFT's continued success was partly driven by a revised go to market strategy and industry leadership that has been underway over the last 2 years.

Speaker 4

For example, within our industrial businesses, our strong reputation and industry expertise is driving above industry growth. We've been moving away from primarily project led business to standardized solutions, Focused on ease of doing business with distributors and our key accounts have begun to reinvest in sustainable product lines following the pandemic. Within our commercial businesses in IFT, we are focused on driving business beyond warehouses and office space To data centers and institutions such as universities, airports, hospitals and government buildings. We also believe there are large opportunities in municipal infrastructure as driven by the Infrastructure Investment and Jobs Act legislation In the U. S.

Speaker 4

With a focus on investments in clean water, flood control and broadband. Interestingly, one of our customers is the leader in directional drilling equipment for fiber optic cables. We continue to believe the aftermarket is a good opportunity for future growth because of our significant product installed base. Lastly, we believe we are in a strong position to benefit from the Build America, Buy America Act as our compliance is expected to give us A strategic advantage. Within our residential businesses and IFT, we have seen a return to normalization.

Speaker 4

Recall that these products are typically not a discretionary spend. When a sump pump or a well pump breaks, it's critical to get it fixed. Please turn to Slide 14 labeled Q3 2023 Water Solutions Performance. In Q3, water solutions sales increased 9% to $299,000,000 driven by our Manitowoc Ice acquisition and price. Segment income grew 40 percent to $69,000,000 and return on sales expanded 5 10 basis points to 23%, driven primarily by our accretive Manitowoc Ice acquisition and productivity from our transformation initiatives.

Speaker 4

Margins have expanded over the last seven quarters from 10.8% in Q1 of 2022 to 23% in Q3 of 2023. Within our Residential Business and Water Solutions, We noted last quarter that we are seeing North America stabilize. This was evident in Q3 as residential sales decline improved sequentially from Q2. Within our commercial business in Water Solutions, filtration sales in North America remained strong And Manitowoc Ice continued to exceed our expectations. Please turn to Slide 15, labeled Q3 2023 Pool performance.

Speaker 4

In Q3, pool sales declined 21% to $309,000,000 The volume decline of 28 points was primarily due to continued channel inventory corrections in the quarter And reflects a strong Q3 2022 comparison. Sequentially, the negative impact of volume significantly improved from Q2. The pricing benefit of 7 points helped partially offset the volume decline. Despite lower pool sales in Q3, return on sales expanded 130 basis points due to price offsetting inflation, Prior actions to right size direct labor to align with lower volumes and improve productivity driven by our transformation initiatives. Please turn to Slide 16, labeled transformation initiatives.

Speaker 4

Similar to last quarter, We believe this slide provides a good illustration of our transformation initiatives and our ultimate goal of driving margin expansion. For reference, our transformation initiatives focus on 4 key themes: pricing excellence, strategic sourcing, Operations excellence and organizational effectiveness. As we've mentioned in past quarters, we expect strategic pricing actions to benefit the top line Of all three of our segments, we expect our other three transformation initiatives to help improve our overall cost structure. As a result, We are targeting RAS of approximately 23% by the end of fiscal 2025, expanding margins over 400 basis points as compared to fiscal 2022. Please turn to Slide 17, labeled Transformation Runway.

Speaker 4

As you look at each of the 4 key themes, you can see that the work within these transformation initiatives is in various different stages. For example, in 2023, we have begun to see early readouts from Wave 1 within pricing, sourcing and operations. We are beginning wave 2 within each of these three themes and expect margin benefits to read out in 2024. You can see how each new wave is expected to compound on the others to drive expected margin expansion year over year through 2025 and beyond. In pricing excellence, The strategic pricing playbook has been developed, which is just beginning to roll out across segments and categories.

Speaker 4

For example, in Q3, we began to implement strategic pricing actions across select products within our Pool segment. Within these price actions while these price actions are reflected in our recent annual price increase, Please note that these strategic actions differ from annual price increases. Typically, on an annual basis, we evaluate overall inflation, Both material and costs to determine the appropriate price increase across our products. With regards to strategic price actions, we are evaluating all products through a value based model and identifying which ones Have opportunities for adjustments. Recall that in the past, we primarily evaluated pricing through a cost plus approach.

Speaker 4

In sourcing excellence, the implementation of Wave 1 is underway with savings currently reading out. As a reminder, Wave 1 included materials such as electronics, Motors, maintenance, repair and operations spend, packaging and logistics. Additionally, we We kicked off Wave 2 this summer with over 800 suppliers attending our Supplier Show. For reference, Wave 2 materials include metals, molding, resins, ocean freight and purchased finished goods. We expect Wave 2 to begin to readout beginning in 2024.

Speaker 4

Incremental to our strategic sourcing waves, We have seen benefit from our rapid renegotiation process that is a part of our transformed sourcing excellence work. In operational excellence, we have completed the consolidation of 3 facilities, while continuing our execution on lean transformation plans In organizational effectiveness, we are in the earliest stages with Wave 1 and expect margin benefits to be realized beginning in 2024. Due to the staggered nature of these transformation initiatives, We expect Wave 3 to begin to readout post 2025 in operations excellence and organizational effectiveness. Overall, we are excited about the savings we have begun to realize from the early waves and remain confident that our teams can execute on pricing actions And savings we have identified particularly in sourcing. Please turn to Slide 18, labeled balance sheet and cash flow.

Speaker 4

In Q3, we generated $143,000,000 in free cash flow, up nearly 100% year over year, reflecting another strong quarter. Year to date, our free cash flow was $443,000,000 Up nearly 115 percent year over year. Our net debt leverage ratio was 2.1 times, Down from 2.6 times in Q1 and 2.2 times in Q2. Our maturity stack is very manageable. Total debt is now less than $2,000,000,000 and the average rate is approximately 5.3%.

Speaker 4

Our ROIC was 14.1 percent, exceeding our cost of capital and includes debt from the Manitowoc Geys acquisition. We continue to target high teens ROIC in the long term. We plan to remain disciplined With our capital and continue to focus on debt reduction amid the higher interest rate environment. Moving to Slide 19 titled Q4 and Full Year 2023 Pentair Outlook. For the full year, we are updating our adjusted EPS guidance to approximately $3.70 to $3.75 from our previous range of $3.65 to $3.75 Also for the full year, we expect Sales to be roughly down 1% segment income to increase 10% to 11% with corporate expense of approximately $85,000,000 to $90,000,000 Net interest expense of roughly $123,000,000 to $125,000,000 an adjusted tax rate of approximately 15% And a share count of 166,000,000.

Speaker 4

For the Q4, we expect sales to be down approximately 3% to 4%. This is mainly attributable to expected lower pool volume year over year and the return of seasonality in our business Now that lead times have normalized, we expect 4th quarter segment income to increase 3% to 8% With corporate expense of roughly $23,000,000 net interest expense of roughly $28,000,000 to $30,000,000 An adjusted tax rate of approximately 15% and a share count of 166,000,000 We are also introducing adjusted EPS guidance for the 4th quarter of approximately $0.82 to $0.87 Moving to Slide 20, titled Full Year 2023 Guidance at Midpoint. We continue to expect total Pentair sales in fiscal 2023 to be approximately $4,100,000,000 or down about 1%. We continue to expect IFT sales to be up mid single digits and Water Solutions sales to be up high teens. For pool sales, we have made a slight adjustment to down high teens from previous guidance of down mid teens at the high end of the range.

Speaker 4

Segment income is expected to increase approximately 10% to 11% With RAS expansion of over 200 basis points to 20.9 percent. Moving to Slide 21 titled Q3 Progress Summary. We are very pleased with our Q3 and year to date performance. As John mentioned earlier, our 3rd quarter marked the 6th consecutive quarter of sales over $1,000,000,000 And the 6th consecutive quarter of adjusted margin expansion. We have executed well in a dynamic environment and delivered on our commitments.

Speaker 4

Specifically, our diversified water portfolio and transformation initiatives have driven significant margin expansion Despite pool's volume decline, our Manitowoc Ice acquisition has exceeded our expectations. We have instilled performance accountability across the organization, which is being measured through key metrics. We have a very strong balance sheet and free cash flow generation, and we have a disciplined capital allocation strategy That aligns to our high teens ROIC target. I'd now like to turn the call over to the operator for Q and A, After which, John will have a few closing remarks. Anthony, please open the line for questions.

Speaker 4

Thank you.

Operator

We will now begin the question and answer session. Our first question will come from Brett Linzey with Mizuho. You may now go ahead.

Speaker 2

Hey, good morning all. Good morning. Hey, first question is just on pricing and pull. So it sounds like you're going to have 2 different actions here. So one being the normal course of business And then on top of that, some surgical, if you could just square that comment.

Speaker 2

And then anything you can share in terms of the magnitude of the actions that you're contemplating there? No, I think just to clarify as we go into next year, we're only counting on a price increase, which would be a more normalized price increase And modest compared to prior years, but slightly higher than what we would have said would have normally occurred, which is us covering the Inflationary aspects. Not aware of anything incremental than that. And those price increases have already been announced in the market.

Speaker 4

Yes. Our comment Was that not only did we use an approach that looked at inflation, but for certain product lines, looked at adjustments Based on a value based model, but that is all included in the pricing that went out To be effective, Jan 1.

Speaker 2

Understood. Thanks for that. And then just wanted to circle back to the comments around the market extensions Within IFT Commercial, great to see some opportunity outside those traditional verticals. Is there any way to quantify the Total addressable market size that will increase here given this new reach, this new focus? No, but I mean it opens up what we would say would be at least $1,000,000,000 plus for our particular opportunities.

Speaker 2

And I think that's a conservative estimate, Brett. Okay, great. Best of luck. Thanks. Thank you.

Operator

Our next question will come from Andy Kaplowitz with Citigroup. You may now

Speaker 5

go ahead. Good morning, everyone.

Speaker 4

Good morning. Good morning.

Speaker 5

John, can you update us, give us more color on what you're seeing in the pool market? It looks like you're suggesting with your Q4 guide, Slightly bigger inventory correction than the 150 you were guiding to. Maybe you could give us some more color on that? And then how do you think that sets up pool for 2024, especially given a higher interest rate environment.

Speaker 2

Yes. So I think, first of all, we're pleased that we were able to predict The way that Q3 was going to unfold and it played out generally as we expected. I think we focused on sell through data And then also focus on the metrics of our channel partners, and I think that data is providing clarity of what's going I think the inventory is generally behind us. I don't think that's what Q4 represents. I think Q4 represents what we would say is Reflecting the higher interest rates and the impact it could have on the sell through aspects within the market, and it's helping to position ourselves And it's setting ourselves up for a really good 2024.

Speaker 5

It's helpful, John. And then you beat your forecast for Q3 sales overall were down 4%. I think you're expecting down 7%. You didn't change anything other than pool, which we just talked about. But my question is whether you're seeing anything IFT at Water Solutions has stopped you from raising your forecast at all.

Speaker 5

I would imagine you want to be conservative as you talked about, but any more color there Current economic conditions, how they're affecting the other segments?

Speaker 2

No. I mean, I think Water Solutions has benefited from significant performance At Manitowoc Ice, we're really pleased with how that acquisition came in and has performed. Just a reminder though, we're going to start comparing against really Good delivered quarters in the prior years and so that year over year performance is going to moderate. I think the market outlook for that business continues to be strong, But it's going to be hard to continue to put up those types of numbers on a consistent basis.

Speaker 5

And then in IFT, Tee, anything you're seeing in terms of channel destock or anything like that?

Speaker 2

No. But I think it's only fair to suggest that higher elevated interest for longer Make sure that productivity based projects and or expansion investments are going to be up against higher hurdle rates and We're reflecting that in our particular revenue forecast as we go forward.

Speaker 5

Appreciate the color, John.

Speaker 6

Thank you.

Operator

Our next question will come from Brian Lee with Goldman Sachs. You may now go ahead.

Speaker 7

Hey guys, good morning. Thanks for taking the questions. I know there's a lot of questions around pool. I'll just throw another one in there. And a lot of moving parts and the macro is still uncertain.

Speaker 7

But is there sort of a framework You guys can provide us to think about for pool, because if all goes right, it sounds like by the time we get to end of 'twenty 3 here. Channel destocking is fully complete. You've got normal seasonality returning. Price is still kind of elevated in the mid single digits. So I guess, first off, do you see that holding in 24 on the price side?

Speaker 7

And then just from a volume framework perspective, assuming all those things Do play out as you expect channel destocking seasonality like what is the framework we should be thinking about in terms of The pool volume outlook here as we think about the next kind of 12 to 18 months?

Speaker 2

Yes. First, I think we're feeling really good about the ability in 2023 to have continued to raise our guidance Through the diversified portfolio offsetting a really consistent performer in pool. I mean pool has generated a lot of growth for us over the years. And I think it was a little bit worse this year than we anticipated coming to the year, primarily because that inventory was larger. The overall market wasn't as strong as we had hoped it would be.

Speaker 2

But as we head into 2024, we're looking at the framework as being that we do pick up the tailwind from not having that And then as we get closer to the end of the year, we'll predict what the markets are going to be. I think it's fair to say that we're not thinking that overall pool builds Expand from here. And we don't think overall remodeling expands, but I do think we're going to see a little bit of recovery in that aftermarket, Which I think was accelerated into the prior years and now it will be normalized. And a lot of those are non discretionary purchases, and we think we get back to a potential overall growth plus the benefit of the tailwinds of inventory.

Speaker 7

Okay. Fair enough. Makes sense. And then maybe just with interest rates backing up here and the macro, I think A lot of focus around kind of what it meant for your pool business all year long. Kind of are you seeing anything beyond The resi sector in your kind of end market exposures that are having any impacts or constraints on spending when it comes to that Cost of capital environment and just financing conditions getting a little bit tougher here.

Speaker 7

Anything you can speak to at kind of a high level?

Speaker 2

Yes. I mean, I think you're calling and I think we're seeing it everywhere, to be honest with you, in little bits. I mean, as a reminder, 75% of our end customers are small dealers and professional trade channel people and their borrowing of capital is higher And harder to get access to capital. I think that slows down some of the projects that we're working on. We're not exposed to commercial buildings, more than $100,000,000 or a couple of $100,000,000 but I think you're going to see financing be tougher on the building side.

Speaker 2

And so an elevated higher interest rates for long just I think produces Fluggish environment is the way we're looking at it, which is why we're really putting that Accelerator on the transformation initiatives we have. Pricing Selectively making sure that we understand market back and how to position our products and services effectively in the industries And then making sure that we're managing the cost structure well within the company.

Speaker 8

All

Speaker 7

right. Appreciate it, guys. Thank you.

Speaker 3

Thank you.

Operator

Our next question will come from Brian Blair with Oppenheimer. You may now go ahead.

Speaker 2

Thank you. Good morning, everyone.

Speaker 4

Good morning.

Speaker 6

I was hoping to drill down a little bit more on Commercial Water Solutions trends, it sounds like underlying market activity remains pretty solid. Just curious if your team is seeing anything Shift on a sequential basis, I know a lot of questions have been asked already in terms of macro backdrop, higher for longer rate environment, etcetera. Specific to that platform, are you seeing anything as we get into Q4 or the outlook for 2024 that concerns Your team in terms of the strength that you've been leveraging recently?

Speaker 4

There's no doubt that Commercial Water Solutions has had an excellent 2023 Going to market with the end to end solution of water quality, ice and services has been very compelling. Manitowoc has had an excellent year, and we've done well in North America filtration. So overall, we continue to see The market within the restaurants, primarily the quick service restaurant space, staying solid for us. The challenge for us is Bumping up against tough compares next year, but overall, the markets that we serve are doing well.

Speaker 2

Just to give you some indication of point to point, I mean, despite the fact that we're going to see Significant shipments in Manitowoc this year and feel really good about their progress. The overall CAGR from 2019 to the end of 20 to the end of 2023 is about 8% -ish or slightly a little bit higher than that, which we had slightly normal than Higher than the mid single digits that we had forecasted business to have. So just a reminder that the markets, as Bob mentioned, are recovering globally And they continue to participate in that recovery.

Speaker 6

I appreciate the color. That's very helpful. You mentioned the end to end solution and There is no doubt that the value proposition combining Everpure, KVI, NANICE, that's resonating with your customer base. Can you speak to direct cross selling traction within the platform? What's been realized to date For your legacy businesses, not just the lift and

Speaker 2

That values a couple of points of incremental growth, as the overall commercial water solutions business From those synergies, I mean, lots of excitement and putting Everpure in the trade shows next to The Manitowoc ICE and vice versa and helping our customers, which are a distributor and an installer realize the benefits of Promoting both. And I think when you have a good filtered solution on an ICE machine, you're extending the life of the ICE machine. And then it also leads to the service capabilities we have and the fact that we can offer some of those services. But more importantly, just understand With the service providers up against so that we can redesign for service and also work with our partners to help them get in and out of those end markets faster. So I mean there's a lot of energy and excitement and we couldn't be more pleased with the synergies and the go to market strategies of these three businesses put together.

Speaker 6

All makes sense. Thanks for the color.

Speaker 3

Thank you.

Operator

Our next question will come from Mike Halloran with Baird. You may now go

Speaker 9

ahead. Hey, good morning, everyone. So two quick ones here. First, on the destock impact last quarter, you talked about About $150,000,000 impact on destock this year. Is that still the number we should be thinking about or has that changed at all?

Speaker 2

No, I think there's nothing that's changed in that number. It played out as we said as expected.

Speaker 9

Thanks for that. And then, on the balance sheet side of things, you're 2 times levered now on a net basis. Bob talked to debt pay down still the priority. Maybe you could just talk to given the changes in the interest rates, how your financing terms are, Is there been any shift in what kind of leverage levels you're looking at going forward? Or maybe better put, where would you what kind of leverage levels would you want to Before you became more aggressive using your balance sheet, whether it's for buybacks, M and A, whatever it is.

Speaker 2

Mike, I promised myself I wouldn't give a target today. I think right now, I think we all have to be mindful of access to capital and managing with our capital Framework and I think paying down the debt right now is a good use of it. Obviously, we're always looking at strategic complementary businesses to our Current business units, the market is not robust though at the moment. And even when you're seeing assets Availability, you've got to question how those interest rates environments affect their business, so you're not seeing transactions happen. So I think just Paying down the debt right now and giving ourselves the maximum flexibility is where Bob and I are focused, for the remainder of this year and into next year.

Speaker 4

Yes. I would just add to that, that obviously staying investment grade is hugely important to us. As the variable rates have crept up, we did undertake the interest rate swap in Collar. So that turned out to be a smart move where, when you include the collar, effectively 65% of our debt is fixed. That brings us to kind of a weighted average rate of 5.3% in the quarter, maybe 5.5% going forward.

Speaker 4

So Overall, we've done some good things to manage within this environment and paying down the debt has certainly helped From an overall perspective.

Speaker 9

Thanks for that. All very reasonable. Appreciate it.

Speaker 2

Thank you, Mike.

Speaker 3

Our next

Operator

question will come from Julian Mitchell with Barclays. You may now go ahead.

Speaker 10

Hi, good morning. Maybe just wanted to Follow-up on the sort of profit bridge a little bit from Slide 12. So the sort of price net inflation number was close 0, it seems inflation picked up a bit as a headwind year on year versus the prior quarter. So maybe help us understand kind of the inflation Moving part in Q4 into early next year, and should we expect that price net of inflation number to be sort of close to 0 Like it was in Q3?

Speaker 2

So I think the way it's good observation. I would remind you that inflation as we show in our bridges Year over year, so it doesn't necessarily reflect sequentially this year. It could be that we saw some elevated inflation on some of the buys that we had last year. So We think that we are overall moderating to price versus cost being neutral or slightly more close to neutral. And then obviously focusing on the productivity contribution that's coming from our transformation initiatives.

Speaker 2

That's the model going forward. If you recall, we were benefiting quite substantially early in the year and last year on price versus cost, and now that's shifting to more of a transformation benefit as we go forward. Bob, I don't know if you want to add anything.

Speaker 4

Yes. I would just add to that, that while inflation did the change in inflation increase in Q3 versus Q2, This is Q2. The nice thing was that price was able to cover that. We do expect inflation to moderate significantly in the Q4 and certainly where price exceeds inflation. At the beginning of the year, we talked about Inflation being around 4.5% of sales, and we're really tracking right towards that.

Speaker 4

So the team has done a nice job of understanding inflation and factoring in the So overall, pleased with what we're seeing and that will moderate in the Q4.

Speaker 10

That's helpful. And as you said, hopefully that productivity piece It becomes larger as a driver. It was substantial already in Q3. Maybe just sort of refresh where we are on the sort of wave 2 from transformation savings and how substantive that productivity Number should be, as a segment income driver next year when you kind of roll together sort of incremental Savings from transformation next year.

Speaker 4

Yes. And that is a very important part of our margin expansion story. As we talk about Price equaling inflation, it's important that productivity then drives that ROTH expansion. So we were pleased to see The $29,000,000 readout in the 3rd quarter, up significantly from the single digit in Q2 And expect to have a significant transformation benefit in the Q4. We're really within wave 1 in terms of Reading out in 2023, we've built some healthy funnels around each of the four pillars of transformation.

Speaker 4

And so that will start to read out To an even greater extent next year. So overall, pleased with the momentum going into 2024.

Speaker 10

Got it. And your sort of second half run rate for those savings, we should expect that sort of to be steady through at least the first half of next Yeah, I suppose. And then maybe the sort of the comps get a bit tougher on productivity.

Speaker 2

Well, and then that's when the wave 2 kicks in, Julian. So but you're right. The material took a long time to realize because of all the engineering work and the resupply efforts that we had to do with the So we're starting to benefit from those in Q4. That run rate will go into next year and then Wave 2 starts to take over in the second half of next year from a sourcing standpoint. To give you some color, about a third of our businesses engaged in the pricing exercises in 2023.

Speaker 2

We'll be close to 2 thirds of the way through that in 2024. So that's kind of how the waves that Bob mentioned start to unfold, and we start to benefit, from the performance inside the businesses.

Speaker 8

That's great. Thank you.

Speaker 6

Thank you.

Operator

Our next question will come from Saree Boroditsky with Jefferies. You may now go ahead. Hi.

Speaker 11

Thanks for taking my question. Just building on the transformation initiative comments, We discussed the benefit from Wave 2 in the second half of next year. Could you just quantify how we should think about that as contributing to margin performance?

Speaker 4

We're very focused on RAS expansion. So if you think about us finishing around 21% this year, we've talked about Improving the RAS to 23% by 2025, and we've said that's being done in a linear way versus it being all back end So we expect RAS to improve next year as we head towards that 23%.

Speaker 11

Appreciate the color. Then just kind of going back to pools and a lot of questions today, but when you talked about some of the early buy programs, having modest And maybe as you think about 4Q delivery versus 1Q, is there any way to think about how you thought about those delivery patterns and what that means for 1Q sales?

Speaker 2

Yes. I mean, I think what we'd like to see unfold is we believe Q4 can be higher from a shipment perspective for Pentair than Q3, And then we would expect Q1 to be better than Q4. And then we would be in the normalized pattern then of Q2 next Finally being a normal seasonal pattern, which would be the strongest full quarter of the year. And as a reminder, Q3 is modestly less than that. And then again, Q4 4 starts to preload for the 2025 season.

Speaker 2

So we feel like we've worked through this and now we've got a clear line of sight to more normal Seasonality in the business and really keeping our eye on sell through going forward so that we don't get in this inventory situation with our channel again.

Speaker 11

Appreciate the color. Thank you.

Operator

Next question will come from Jeff Hammond with KeyBanc Capital Markets. You may now go ahead.

Speaker 12

Hey, good morning guys.

Speaker 4

Good morning. Hi, Jeff.

Speaker 12

Hey. Just on IFT, can you just talk about like the order trends you're seeing? I don't know if it was really a comp issue, but Seemed like there was a step down in the growth rate. And I'm just wondering what the orders are telling you about kind of the go forward there?

Speaker 2

Yes. I mean, just again, we're looking at year over year comps, Jeff. And our infrastructure businesses had a really solid 2022. And so Some of these growth rates reflect against the prior quarter of 2023. I think the orders continue to be strong From a mid single digit indicator as we go forward, but the year over year comparisons are going to be tougher.

Speaker 2

And as Bob mentioned, we are really focused on Non project related wins, we're focusing on service, we're focusing on aftermarket, we're focusing on recurring revenue streams with our

Speaker 12

Okay, great. And then just back on this Manitowoc Ice tough comp issue, can you just talk about I think you called out A lot of the success in the synergies, but just what's been going on with backlog drawdown and order rates there to kind of think about This tough comp dynamic, we're also kind of picking up in the channel that commercial food equipment and some of their markets are maybe Starting to see more normal growth as well.

Speaker 4

Yes. I would say backlogs have returned to more normalized levels. Just as a reminder, Manitowoc grew roughly 30% in the second quarter, will have grown or did grow 20% in the 3rd quarter. And for the full year, Manitowoc will be up roughly 20%. So they've had a very strong year.

Speaker 4

To John's point, when you look at the CAGR From 2019, that's sitting at roughly 8%. So we do expect a more normalized year next year as we bump up against 2023 is 20% growth, but overall, the business remains very healthy. The end to end approach in terms Going to market is resonating well, so very confident in Manitowoc business.

Speaker 2

And Jeff, your data points are right. This isn't a sustainable Growth level for our ICE business. I mean, when you're mid to high single digits, we would hope that, that is the more linear growth rate that we get to. And Obviously, we're going to satisfy the demand and make sure that it's a Manitowoc ice machine that someone's putting into their restaurant. So it gives us the ongoing service and relationship with that customer.

Speaker 2

But this is not normal as we've said all year.

Speaker 12

Okay. Appreciate it guys.

Speaker 3

Thank you.

Operator

Our next question will come from Andrew Creel with Deutsche Bank. You may now go ahead.

Speaker 13

Hey, thanks. Good morning, everyone. I want to go back to the pool pre buy. I think you might have said you were expecting like a modest Pre Buy this year, so just any more insight you can give on that and maybe try to like quantify how it's tracking versus more normal years? And just to clarify, are you assuming that as part of the 2023 guide or would that be incremental to the pool sales guidance?

Speaker 13

Thanks.

Speaker 2

No, it's all included in our current view of what our business will do in Q4. And just to remind everybody, What we try to do is level load factories, to make sure that we're not taking down our shipments in any one quarter beyond the level of our employment Groupings. So we're obviously encouraging the channel to buy ahead of next year's pool season through discounts that we offer and term extensions, right? We're now at a level that we think is prudent for us and that's where the modest early buy is. And As you know, the channel would take more if they're incentivized more to take it.

Speaker 2

And if they don't, then those become standard buy orders in the next year. And so that's always what the forecast is reflecting, and we have to do it in our economic best interest. Our channel partners do it in their best economic interest. And right now, we feel our guide is the best reflection of what we'd say a more normal seasonality and a more normal early buy, which would set us up nicely for

Speaker 13

Got it. Thank you. And just for the 4Q guidance might be implied margins for the total company mark a pretty meaningful step down sequentially. I think Historically, you've been more flattish from 3Q to 4Q. I know this isn't necessarily a normal year, but just it seems a little perhaps Conservative, especially with the cost actions starting to come through.

Speaker 13

So maybe if you could unpack that and if like any segments in I think the margins are weaker than normal for 4Q.

Speaker 4

We implicit in our guide is significant RAS expansion versus last year's Q4. When you look sequentially, it does come down, but a lot of that does reflect some of the seasonality That is returning back to more normalized levels. So overall, pleased with the Ross Expansion in Q4 versus last year's Q4, and it will be the momentum we need exiting the year.

Speaker 3

Thank you. Thank you.

Operator

Our next question will come from Joe Giordano with Cowen. You may now go

Speaker 14

ahead. Hey guys, good morning.

Speaker 4

Good morning, Joe.

Speaker 14

I want to start on margins and keep it there for a sec. I mean, not Probably splitting hairs a little bit, but pool margins went below 30%. I think we were kind of talking about 30% being like a new floor. And you're close enough where that's still like a valid statement. But just from here into Q4 into next year, does that 30% kind of Feel good still as probably kind of a bottom level?

Speaker 2

Let's say, yes, on the second part of your question. And I think Delivering the margins we did despite the year over year decline in volume is what I'm most proud of the team having accomplished. And Yes. I mean, I do think we're splitting hairs. I think they're directionally in a really good spot as a business model and obviously getting growth from here is going to leverage up nicely.

Speaker 14

Okay. And then similarly on Water Solutions, I think you were talking about like the commentary coming out of last quarter was that the margins were going to step down Pretty decently sequentially in the Q3 because of the deliveries that Manitowoc did in 2Q and the opposite happened, right? It went up sequentially. So how should we think about Margins there, I know Manitowoc is still delivering at a high level, but how should we think about sequential margins there and the sustainability of this like 22%, 23% Yes.

Speaker 2

I would remind you that Water Solutions has a residential components and systems businesses and they also have the commercial water solutions. When we mix towards commercial, we're going to have a lot higher margin profile. And what we're really doing is being very selective on the products That we're offering on the residential side and we try to mix up that business. And so a lot of the decline in the revenue was on the residential side And that actually helped the overall mix of the business to the positive.

Speaker 14

Okay. That makes sense. And if I could just sneak in one last one on Just volume. So I mean your pool volumes this quarter came in better than what we were thinking about when we spoke 3 months ago. Your commentary from your largest distributor calls for like Q4, their inventory levels in dollars are going to go up from the Q3.

Speaker 14

So like that kind of implies growth for you guys. If they do normal seasonality implies growth in pool of like high single digits. If they do less, maybe it's More modest growth, but how would you kind of think about where growth could look like for pool into Q4?

Speaker 2

Well, I think we're a piece of their puzzle. So we'll start there. And I think we are indicating that we do think sequentially our revenue numbers do go up From Q3, and then it's really a discussion of how much more. And I really think that We do our best to predict that business with reasonable accuracy and getting it exactly to the dollar is improbable. And so I would say we got really close in Q3 and I think we feel really good about our Q4 revenue estimate at this moment.

Speaker 6

Thanks guys.

Speaker 4

Thank you.

Operator

Our next question will come from Scott Graham with Seaport Research. You may now go ahead.

Speaker 8

Good morning, John, Bob, Shelley. How are you?

Speaker 4

Good morning. How are you? Good morning. Hi, Scott.

Speaker 8

Good. Thank you. So the productivity jump was Obviously meaningful. How much of that 2.8% maybe was some help from a better supply chain sort of external?

Speaker 2

I think a lot is coming from that, Scott. I mean, I think we're working more seamlessly with our supply chain today. Obviously, we've caught up On most of the demand to them and aligned with our channels. And so we are benefiting substantially from a lot of More seamless deliveries across the entire supply chain today.

Speaker 8

Thanks. I'm back on to pool, sorry. But Historically, these numbers kind of shook out as forty-thirty-thirty new remodel And then sort of the maintenance, the aftermarket. As we look at a week 2023, Kind of what is that what are those numbers kind of end the year at? Is that an estimate you can make?

Speaker 2

Yes. I think they're generally in that ballpark and We could argue weak. I think the overall builds in 2023 are going to definitely be at pre pandemic levels, but generally in line with what we had seen prior to the pandemic. So I think we're in the more normalized area. Scott, I think the learning is across the channel is there's high end pools, there's low to mid market pools and the Interest rates are definitely impacting the more low to mids and the highs are continuing to be built.

Speaker 2

So I think that we'll all probably start to Refine the numbers to try to break it out by the demographics that it's serving, but I think generally the model is still working.

Speaker 8

Okay. Thank you, John. Last one, you indicated builds you are assuming kind of flattish, remodeling flattish and then aftermarket up. Were you referring to the Q4 or a period of time longer than that?

Speaker 2

No, we're talking about if we think about heading into the 2024 pool season, That's generally what we're our current expectations would likely suggest.

Speaker 8

Okay. So your mid single digit plus long term thinking on pool, It's not going to be that next year

Speaker 6

based on that.

Speaker 2

We'll give that in January. Scott, I'd remind you that there's an inventory correction next year, which creates some benefits and then there's the overall general market conditions that we were addressing. But When we get to giving our Q4 earnings, we'll update and share with our 2024 guide. All right.

Speaker 8

Thank you. Pat to try.

Speaker 2

Yes, you tried. Thank you.

Operator

Our next question will come from Deane Dray with RBC Capital. You may now go ahead.

Speaker 15

Good morning. This is Jeff Reeve on for Dean. Maybe my first question, you talked about your Innovation, the 25 new products this quarter, 100 for the year or the last 12 months. Is there any internal metric you target? Like are you targeting new product vitality?

Speaker 15

And what is the typical margin differential on new products?

Speaker 2

Yes, I mean, we do. We have all those vitalities. Obviously, they're by product line by product line. When we create New valuable products that the market or that our customers want, we tend to see margin lift from those new products, Not usually in its initial stage. It usually takes probably a year or 2 for that to recognize, but that is the model we work to.

Speaker 15

Okay. So nothing to quantify. And then maybe on IFT, you kind of mentioned the Build America, Buy America, a provision in infrastructure spending. Are there any products that you offer where you're Virtually 100 percent America made where your competitors aren't and is that a meaningful piece of the business?

Speaker 2

Yes. We add to there the Born in America, where a lot of our historic brands, 120, 130 years old, Have originated in the United States. They've been specified here for long periods of time, and they're manufactured here. And so Our employees are really proud of those brands. Our customers are really proud of those brands and they tend to give us The ability to have at least a fair opportunity to win those jobs when we go to market.

Speaker 3

Got it. Thanks. Thank you.

Operator

Our next question will come from Nathan Jones with Stifel. You may now go ahead.

Speaker 3

Good morning, everyone.

Speaker 4

Good morning. Hi, Nathan.

Speaker 3

Couple of questions on Water Solutions. I think the first one is probably on Manitowoc I think you guys have shipped out a backlog this year. You had maybe a couple of large projects that might not repeat Next year, you talked about mid single digit plus, but should we be thinking of that long term mid single digit plus as being off a Lower number than what you've done in 2023 or do you think you can actually grow from the number that you're putting up in 2023 as we go into 2024?

Speaker 2

It's a nice try, Nathan. We're not going to go there yet. Right now, we're trying to satisfy our customer demand for the rest of the year and do an assessment of where we think we are and we'll be prepared to share that insight with you as we head into 2024.

Speaker 3

Okay, fair enough. In Water Solutions, I think you've also had some inventory destocking in some other business, residential water treatment businesses. Can you talk about the impact that comping again to that as we go into next year might have without looking at the Fundamental outlook of 2024?

Speaker 2

Yes. As a reminder, we what we did in 2022 is we exited a fair amount of Lower margin direct to consumer business and we've been up against those comparisons this year. In Water Solutions, those comparisons As we head into next year go away. And so obviously, this is all included in Water Solutions this year and next year we get a little bit less Contribution from acquisitions and we have a little bit less headwind from the business exits that we took on this year.

Operator

Our final question will come from Andrew Obin with Bank of America. You may now go ahead.

Speaker 16

Hey, you have Sabrina Abrams on for Andrew Obin. Just wanted to ask, I know there's been a couple of questions about Manitowoc, but are you guys still committed to the $370,000,000 full year guidance?

Speaker 2

That would be an easy commit.

Speaker 4

Yes. We had talked at the beginning of the year of that $370,000,000 but the business Done significantly better than that and will grow roughly 20% this year.

Speaker 16

Got it. And then Just going to ask another one about pool and maybe if you could get some color on the pricing number, I know you're returning to the regular discounts in 4Q. Any color on what we should think about the pricing in 4Q 'twenty three given that the past Couple of years, you were not having normal pre buy?

Speaker 2

Yes. I don't know how to answer the question. I mean, I think as a reminder, we Our price increases in for the season over the next year, we do that in Q3. And so the discounts Usually take you to more flattish pricing year over year. So there the pre buys are term extensions, but they don't Include a price increase necessarily because there's a discount to what the price increase would be.

Speaker 2

So not like we're discounting product to sell it. We're just not having to we're just not getting the full raised prices in that early buy.

Speaker 16

Got it. Thanks.

Speaker 2

Okay. Thank you. Okay. So thank you for joining the call today. In closing, I want to reiterate some key themes on Slide 22.

Speaker 2

1st, solid execution within our diversified portfolio and transformation initiatives Continue to drive significant margin expansion in Q3. 2nd, we updated our 2023 guidance due to strong performance year to date and confidence in our strategy. 3rd, our transformation initiatives have gained momentum in 2023 with benefits expected for the remainder of 2023 and beyond. And finally, we expect to continue to deliver long term value creation. Thank you, everyone, and have a great day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Century Aluminum Q3 2023
00:00 / 00:00