Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 Pentair Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Jim Lucas, Senior Vice President, Treasurer and Investor Relations. Thank you. Please go ahead.

Thanks, Mariama, and welcome to Pentair's Third Quarter 2020 Earnings Conference Call. We're glad you could join us today. 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 third quarter 2020 performance, as well as our full year 2020 outlook, as outlined in this morning's press release. Before we begin, let me remind you that any statements made about the company's anticipated financial results are forward-looking statements subject to future risks and uncertainties such as the risks outlined in Pentair's most recent Form 10-Q, Form 10-K and today's press release. Forward-looking statements included herein are made as of today, and the company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances. Actual results could differ materially from anticipated results. Today's webcast is accompanied by a presentation, which can be found in the Investor Relations section of Pentair's website. We will reference these slides throughout our prepared remarks. Any references to non-GAAP financials are reconciled in the appendix of the presentation. We will be sure to reserve time for questions and answers after our prepared remarks. I would like to request that you please limit your questions to one and a follow-up in order to ensure that everyone has an opportunity to ask their questions. I will now turn the call over to John.

Thank you, Jim, and good morning, everyone. Please turn to Slide number 4 titled Executive Summary. First and foremost, we hope that everyone is and remains healthy and safe. I’d like to start by expressing my sincere gratitude to all of our frontline employees for their continued commitment to our customers and shareholders. Our performance could not have happened without these teams and their dedication to the Pentair Win Right Values and our customers. While the world we live in continue to face much uncertainty, we were pleased to deliver strong third quarter results with double-digit gains in sales and EPS while also delivering robust free cash flow. We’ll discuss the details for the quarter shortly, but we believe our mix of residential focused businesses has helped differentiate our results in these uncertain times. Despite the ongoing challenges and uncertainties that persist we have continue to invest in our top growth priorities in digital transformation. We have successfully soft launched both the Pentair Home and Pentair dealer apps and we expect 2021 to be a great year for a number of new connected products across many of our businesses. While our businesses are seasonally stronger during the second and third quarters, we are expecting a strong finish to 2020. I am proud of all of our businesses’ commitment to strong execution in a continued challenging environment. I would now like to turn the call over to Bob to discuss our performance and our financial results in more detail, after which I will provide an update on our overall strategic position. Bob?

Thank you, John. Please turn to Slide 5 labeled Q3 2020 Pentair Performance. During the third quarter, we delivered sales growth of 12% and core sales growth of 10%. On a core basis Consumer Solutions was up 23%, while Industrial & Flow Technologies declined 4%. I will discuss the details for each segment on the subsequent slides. Segment income grew 14% while adjusted EPS increased 21%. Our tax rate of 13% was a true-up as we now expect our annual tax rate to be 15%. Price was minimal in the quarter as the elevated volumes we experienced in the quarter primarily in pool resulted in a higher than usual level of rebates with our channel partners. Likewise, our productivity was offset by additional expenses incurred such as increased hiring to help keep up with demand and higher overall incentive compensation on a year-over-year basis. Please turn to Slide 6 labeled Q3 2020 Consumer Solutions Performance. As a reminder, nearly 80% of Consumer Solutions serves residential markets. Many of our products has been in higher demand this year given consumers staying at home. For the quarter, sales grew 25%, segment income increased 39% to 24.2%. Pool was clearly a strong performer this quarter with a 46% increase in sales. This follows a flat performance in the second quarter, which is worth discussing for a moment. In a normal year, the pool season starts in March or April. In 2019, we saw a late start to the season due to cool wet weather in several key markets. This year, we saw a pause in business in the first part of April as the industry tried to understand the impacts of lockdowns in the U.S. By May, orders start seeing unprecedented demand as consumers sheltering at home were investing in their existing pools,…

Thank you, Bob. Please turn to Slide 10 labeled Our Longer-Term Aspirations. Our first two years are focused on developing our new standalone strategy, aligning our organization to our strategy, improving our new product pipeline and growth capabilities, and developing the right operating rhythm. Growing the top-line organically, consistently and predictably is our main area of focus. We start to growing the entire portfolio at least greater than GDP and delivering income from our core businesses, and we realize that not all businesses will contribute evenly, while we believe that our Consumer Solutions businesses are well-positioned to drive above average growth and are important to building out additional legs of the business and creating our future. In addition, we continue to focus on improving our commercialization process, investing in our digital transformation to deliver more effortless customer experiences, and building our brand. We are focused on accelerating fewer, larger growth actions including expanding our content in pool and building out our residential water treatment offerings. Within RFT, we are exploring a few promising growth areas around sustainable gas and smart solutions within our food and beverage business unit. In addition to growing organically, we believe that there are attractive areas to add tuck-in and bolt-on acquisitions. We expect this will primarily be within our residential, commercial water treatment business and includes both products and services. The addition of Pelican and RainSoft portfolio have allowed us to both accelerate our learning and improve our growth performance. We are currently focused on building a robust opportunity funnel given many of the businesses we are looking at are smaller and privately owned. We are also focused on driving productivity and cash flow, while optimizing our ROIC. PIMS, the Pentair Integrated Management System is an extensive toolkit that we must continue to deploy effectively.…

Thank you. [Operator Instructions] Your first question comes from Andrew Kaplowitz with Citi. Your line is open.

Hi, this is Aton Bookbinder on for Andy.

Hey, good morning.

So, 46% growth in pool, could you give us more of a breakdown of what you are seeing? Did you see an uptick from the normal 20% of original equipment business? And can you discuss any progress in catering for the share on the pool pad?

Yes, we were very pleased as we mentioned in the prepared remarks. Coming into the quarter, demand was high, but making sure that we were able to fill that demand which was extremely important and we were able to ramp up manufacturing production significantly. So, again, pleased with the execution and very pleased with all of the works of our frontline workers. The 46% was really as I mentioned across the board, across all product categories. Demand remains strong going into the fourth quarter and we are optimistic getting into 2021 as well. I would say that, I think a good way to look at that would be spread it over Q2 and Q3, because as mentioned in Bob’s remarks and talked for the last earnings call. We were catching up and we still are catching up to what the demand is in the industry. As far as expansion on the pad, I mean, Bob mentioned, heaters is a category that has substantially grown this year. That would be another product that we probably added as far as the content on the pool and we are very pleased with our automation pull through over the last couple quarters as well. And we think we are getting an uptick in our automation sales as more homeowners enjoy the ability to manage their pool more remotely or utilize it as it’s controlled through their iPhone. So, quite pleased with those two upticks. And as I mentioned, we ended the quarter even catching up as well.

Thank you. And just as a follow-up. For margin in IFT pulled back sequentially despite higher volumes, you’ve been in the second quarter, can you talk about some of the factors that impacted margins and what you see as the outlook for margin while rightsizing the segment going forward?

Yes, from an overall margin perspective and also mentioned this somewhat in the prepared remarks is that, we did have a catch up of items like compensation-related expenses in the quarter. Rebates were higher than typical as the pool revenue grew significantly again ramping up production, expediting inventory to make sure we capped up it with the demand. But those were some of the headwinds that we saw in the quarter. I would say that that Q4 from a drop through perspective does return to more normalized levels.

Thank you. That’s helpful. I’ll pass it along.

Your next question comes from Steve Tusa with JPMorgan. Your line is open.

Steve?

Steve Tusa, your line is open.

Steve? You are on mute.

Your next question comes from Brian Lee with Goldman Sachs. Your line is open.

Hey guys. Good morning. Thanks for taking the questions. Maybe as a follow-up to the prior one a little bit if you guys could, can you quantify a bit on some of the trends here heading into Q4? I know you got a point of pricing in Q2, but then nothing in Q3 and then productivity did swing from being kind of a good guy to a slight bad guy, as well in the quarter. Can you kind of talk about trends on those metrics in the context of Q4 expectations? And then, I guess, separately any early read on those two heading into 2021?

Yes. I would say that, from a pricing and productivity perspective, a lot of the benefits in those two areas were somewhat masked, pricing by the rebates and then productivity by some of the compensation-related cost and some of the expedited and ramp up cost relating to pool. So below that, it was very much in line with kind of what we saw in Q2 and as I mentioned, price and productivity to do return to more normalized levels in the fourth quarter.

Okay. Fair enough. So, maybe, not to put words in your mouth, but a point – a positive point on each if we are thinking about putting that into quantified terms for Q4 and heading into 2021?

That would make sense at this point.

Okay. Fair enough. And then, just a second question on the guidance here would imply low-single-digit revenue decline implied in 4Q year-on-year. Can you give us a sense of how that breaks down between Consumer Solutions and IFT? And then also, I know you guys just put up a very big 3Q. So was there some pull forward activity or just trying to get a sense for the sequentials here into 4Q? Thanks guys.

Okay, I view, last year’s Q4 as having been a solid quarter. This year’s Q4. Pool will continue to grow significantly. Demand is good. We satisfy the natural demand here in the fourth quarter. So, pool continues to do well. The residential businesses continue to grow, so outside of pool and the residential piece within IFT, we continue to face headwinds on volume within commercial and industrial. And so, that is what’s bringing the overall growth rate down. We are hard at work in terms of addressing productivity challenges within the IFT business. And so, as I mentioned, again in my prepared remarks, we expect that the demand to continue for full in the early part of the year and we expect that IFT productivity will improve as well.

All right. Thanks. I’ll pass it on.

Your next question comes from Steve Tusa with JPMorgan. Your line is open.

Hey. Good morning guys.

Hey, Steve. How are you doing?

Sorry if I missed in the – missing the bell.

No worries.

This morning, I guess, just getting out of bed here. So, just as we – I am not going to ask you to make a call on the weather or COVID next year. But when you guys kind of look out to what’s coming your way in particular on kind of the regulatory driver, when we turn the corner the next year, is it’s just like a really hard comp or is there something that kind of bridges you into future years and you can kind of keep this growth at a reasonable level obviously per pool, not saying that 20% is sustainable, but maybe just curious as to how you kind of gauge next year?

Hey. This is, Bob. Let me take a shot at it and then I’ll let John add to it. He is probably better at predicting the weather than I am. But yes, we had to net Q1, Q2, Steve, basis easier comparisons, obviously within the pool business. Demand is strong in the fourth quarter and we expect it will remain strong in the – as we go into 2021. So, feeling good about that. As we face the tougher comparison in the back half next year, primarily in Q3, we should have a number of things going our way. We will have a number of new product introductions. We’ll have the DOE regulation. We’ll have the IFT business that’s facing softer compares and hopefully an improved capital spending outlook. So, those are the things that could help us in the back half. But in terms of the first half of the year, again, much of it is pool and residential-driven.

Got it.

I think, Steve, we don’t guess the weather and COVID. We are expecting pool to have a very strong year next year, as well based upon the dealer activity and the pools and the pent-up capacity. Don’t know what it looks like by quarter yet. But I think Bob has given you a pretty good look at Q1 and Q2 easier compares and Q3 obviously we’ve discussed the growth maybe slightly more challenged. But at the same time, we’ll probably have the same desires of the dealers in the channel to ensure the rebate is matched and I think we are expecting good year. And what we are doing now is, how do we get the IFT margins roll in. How do we get the year-over-year contributions of IFT to produce a lot of value next year. That’s how we are thinking about 2021, Steve, and we are excited about the way we expect to end.

And then, just on the earnings bridge, productivity was little weak this quarter. Is there anything in kind of price and productivity in the fourth quarter that would influence the result there? Is it really just kind of a function of the volumes?

It really is volume related as was mentioned, our guide suggests, that’s down low single-digits in the fourth quarter. A strong pool offset by continued challenge in commercial and industrial. But price and productivity will return to more normalized levels, because they are facing the Q3 headwinds that we saw around rebates and catch-up compensation.

What I don’t quite understand about the fourth quarter is that, IFT wasn’t that bad this quarter. I mean, is there something that makes it worse next quarter year-over-year?

Well, I think, we are starting to see the – we had the backlogs in – carried in from Q2 into Q3, Steve, that we’re able to shift through the backlog that we have and now we are trying to build the backlog, but mostly orders that we’ve taken in Q3 are really shippable next year. So, we are not seeing our customers step up and want most of their products in IFT in Q4. And I think they are looking out in the horizon and trying to work more their deliveries in the next year. So, we’ll weather the storm in Q4 with IFT. But I do think we are starting to build the order rates and coming off the bottom as we look at IFT going forward.

Right. So it shifts from kind of a weak 2Q into 3Q and then, I guess, the step back down, it seems like with the economy where it is, to go from positive 10 to negative 5 or negative 4 even is, it seems like a real kind of step back and it doesn’t seem like the trend in the business supported that step back.

Yes. I agree you, Steve. I also just – I know where it’s usual compared to the most of the industrial companies. But Q4 is not a highly strong quarter for Pentair. What mitigates that a little bit is the pool early by in the shipments of pool into the channel. Other than that, we tend to have a slightly weaker industrial end sales.

Yes. Makes sense. All right. Thank you.

Hey, Steve, I know you’ve always been focused on cash. I did want to mention that we felt that linearity of operations to drive great cash flow and I just want to make a note that that came through this quarter.

Got it. Got it. Sorry. I meant to say great quarter guys. Great quarter. I meant to say that really. Thanks.

Cash matters.

Next question comes from Brett Linzey with Vertical. Your line is open.

Hey. Good morning guys. Congrats on the quarter.

Thank you.

Thank you.

Hey. I appreciate the color on the top-line for next year, but just want to focus on the cost side, you talked about some catch-up here on incentive comp here in the quarter. How does that roll into next year? And then, as you think about the temporary cost that come back, some of the restructuring savings you are going to have that do rollover. What sort of the netting effect of those next year and what that inform for incremental margins for the total company?

At this time, now we continue to be hard at work driving those productivity improvements. I mean, the fact that we are booking compensation this year means that will be a headwind next year which can be a good thing. I had talked earlier about opportunities within G&A. We had a benchmarking study done and it’s apparent that our G&A structure is really sized more for a much larger company kind of post-spin. And so, we have, call it a three to four year runway here to not only improve how we spend our G&A dollars but to get back closer to benchmark. That study suggested that our spend today is roughly 150 to 200 basis points higher than our peers. And so we’ve got an opportunity within G&A. We’ve got an opportunity within complexity reduction within the IFT business primarily in skew reduction. There is also opportunities within supply chain and procurement to become more efficient. So, plenty of things that we are working on now that should drive margin expansion next year.

Okay. Great. And just as a follow-up on the IFT margins, you mentioned the negative mix in backlog. Was that a one quarter year-over-year event? Or should we expect some drag there for another couple quarters before it starts to normalize?

We are seeing a little bit of mixed challenges within the commercial and infrastructure space. We are hopeful that that then normalizes going into 2021.

Okay. Great. I will leave it there and pass it along. Thanks, guys.

Thank you.

Next question comes from Joe Giordano with Cowen. Your line is open.

Hi, guys. Good morning.

Morning.

Morning.

Hey, I just wanted to kind of follow-up a little bit on the regulatory pushing to next year and how do you think of the positive benefits on the price that you are going to get versus what maybe the volume benefit that you’ll get ahead of that from pull-through a single speed? How should we think of all this in totality and maybe are you entering 2021 with a higher level of kind of visible backlog into the first half?

Well, two different answers. I mean, firstly, we are heading into next year, still catching up with the demand that we feel the dealer is trying to satisfy for the consumers. So we feel like we are going to be catching up for several quarters on the demand pull-through in pool. As it relates to DOE, I am always cautious on these transitions as to how the industry reaction and smooth that these transitions over time. So, I don’t think there is a huge windfall necessarily in any one particular quarter. I think it plays out thoughtfully over time as people work around state-by-state and building out the inventory and still putting in the older product. The margin, actually the operating margin or the drop through margin on the variable speed is slightly lower, but the variable speed pump in itself is almost 1.8 times more expensive than the single speed. So, overall, from a content and a simplification of our business model and giving people quite frankly a better pump, we think those things will work their way out over 2021 and 2022. But I think it will be a smoother transition over those periods.

Fair enough. And on the IFT, as you look through your total company and new product introduction being very focused on some of the resi applications and your capital deployment likely targeting there. What’s the business evaluation process looking out on IFT, like, how core are all these businesses are you thinking about them? Has that changed at all over the last two years?

I certainly understand that the margins in IFT at this point in time are not where we want them. They are definitely not where leadership wants them. But I do want to complement the team. This is a truly global business. This is a hugely complex business. It’s an engineering oriented business and if COVID has been hard from a manufacturing standpoint across one part of the portfolio, it’s certainly been really hard to the IFT team. That could be more proud of how they stepped up and they are answering the bell as far as getting their customers the products. Those are lot of inefficiencies in the way that you ship product or you deliver a product in an engineered order business when you got challenges as we are experiencing with stay home orders and COVID. So, again, I just want to say that I think some of this is going to work its way out over time naturally as we get better at working through the new rules. The second piece is, we are seeing the activity around the focus in the portfolio. We believe we have a really investible industrial business where we provide technology, especially smart technology, the membrane technology to a lot of sophisticated customers around the world that we are getting a lot of momentum on IoT related to those products. We are also participating in CO2 recovery and CO2 use that’s getting a lot of push from the regulatories and it’s environmentally-friendly product. So really excited about some of those growth aspects. We got a good RNI business. It’s not going to be a rapid grower, but it’s got high margins and contributes nicely to the cash in the P&L and we got some project challenges in C&I. But we got a new leader there and we are focused on what we need to do to write the shift there and make sure that we are going more after the aftermarket products, so less after the projects. But either we are going to see recovery in 2021 in a meaningful way in margin and IFT and I think over the longer haul, this is going to be a good contributor to Pentair’s portfolio.

And if I could just sneak one for Bob, it’s near about six months now, obviously interesting time to be starting a job anywhere, just curious as to – as you look about what you thought going in, in terms of how to budget and how do view this process like, what’s gone most according to plan? What’s been a little bit different and what kind of changes do you – are you kind of adapting to?

Yes. Thank you for asking that. It’s been a great decision from my perspective to join Pentair. I could not be more pleased with the people that I work with on a day-to-day basis and the opportunity for the company. So, for me, that I have joined the company that has a great foundation. But there are opportunities for improvement. The things that I am probably more focused on is around helping to drive consistent organic growth. We’ve implemented a number of processes around driving growth on a category level. We are developing better analytics. So think of analytics of products and customers as opposed to necessarily just P&L. We have opportunities to drive efficiencies and margin expansion. And I am excited about both Consumer Solutions and IFT. So, from my perspective, a really great future here at Pentair and look forward to the start of 2021.

Thanks guys.

Your next question comes from Rob Wertheimer with Melius Research. Your line is open.

Thank you. Good morning, everyone.

Good morning.

So, you’ve talked on this in a number of different ways, but just to sort of get a broader overview, you mentioned just trying to catch up with the strong demand that’s being going on with pool. Can you just sort of talk across the segments on the backlog/channel inventory versus normal. They are mostly fully caught up or whether the channel has a bit bunches on gains, just sort of characterize that across segments. Thank you.

I would say that the catching up is generally a theme that applies across the portfolio. I think right now, we believe that inventory levels are correctly right sized with the exception of what we think is still a channel that needs more inventory for pool. But I think most of our distributors and dealers are being prudent even in areas like commercial filtration where there hasn’t been any pre-stocking ahead of the expectation of restaurants opening or hospitality opening. So, I think right now, we are seeing a really nice situation where the demand is equal to the shipments that we are experiencing.

Okay. That’s perfect. And if I may just ask a little bit more of a structural question, you mentioned, a consumer water treatment how you guys are able to get into homes again sort of – I know, you are working on education and just people aware of the good solutions that there are for the home. Can you touch a little bit on what the structural growth drivers are there? Whether it’s signing up dealers or how you are getting that education out and how you really sort of take advantage of a reasonably lower opportunity? Thanks.

There has been tremendous search demand. So people on the internet searching for water filtration or water treatment needs and Pentair isn’t a brand that you recognize if you do that and we are going to be. And the consumer cold demand that we think people want is the right solution for their particular need. Water is not consistent both from an input across the world and it’s certainly not consistent from the way that you desire your water and Pentair has all the technology capability to take whatever input water you have and deliver the quality and the pace of the water that you want and that’s what we think the biggest opportunity for Pentair is and we think we have to build out the channel and the consumer pool and the demand and we have a lot of new products we are launching next year to do that to make you aware. And the second piece would it be make sure that we are aligned with our service channel to be able to meet the demand and then give you the technology you need. So we’ve been at this for a couple of years. We’ve learned a lot from the Pelican and the Aquion acquisitions. And we are poised to really make a lot of progress in 2021 and 2022 around the residential water treatment side. So we are excited, excited about the progress, excited about the learnings, and excited about the future.

Excellent. Thank you.

Thank you. And our next question comes from Deane Dray with RBC Capital. Your line is open.

Thank you. Good morning everyone.

Hello, Deane.

Hi, Deane.

Hey. Hearing some more about this total water management initiative you have in commercial water treatment, just by the sound of it, what seem to be some of what you be doing at one of the major coffee chains globally. So, could you just size for us what the applications would be, what the opportunity is, what kind of investment? Thanks.

Yes, Deane, I mean, that’s really a reference to – there are franchises and/or restaurants mainly that don’t necessarily the higher wealth of the company-owned stores in which franchisees are buying a lot of equipment and we are really giving them an expertise and allowing them to lease those solutions from us, right. And really building a connectivity between us and that end-customer and renting them or leasing them the solution instead of them buying the solution. That’s what total water management is about, Deane.

Great. And is there an investment – a front investment that you need to be making? And can you give a commentary?

Yes. We are obviously putting that unit into the field and instead of collecting the revenue from that unit at once, we are collecting that revenue over time as a way to promote our solutions. So, I mean, it’s in its infancy right now. Several million dollars of revenue, Deane. And we just want to make sure it’s a solution that we have out there for our customers that they choose to rent that model and we are doing them an IoT enabled. So we know if they are being used and how they are being used and we have the ability to work with that partner to make sure they are optimizing their water experience. We are excited about that.

Good to hear. And then, on capital allocation, just given the strength in the balance sheet, given the cash flow and the line of sight on your cash flow, where do buybacks that in priority the stock sitting right by our calculations at the low end of its relative PE range for last three years. So, it really does look attractive if you want to make that case. So, just update us on buyback plans.

From a buyback perspective, we start most years with the goal of buying back roughly $150 million of shares. This year we have done $115 million in the first quarter and then we suspended our buyback period our buybacks as we set free cash flow and liquidity. Obviously, as free cash flow has been robust the last two quarters, we – you’ll see in the Q later today, we’ve removed the suspension around buybacks and certainly have that opportunity as we close out the year and move into next year.

Great. That makes sense. Thank you.

Thanks, Deane.

Your next question comes from Jeff Hammond with KeyBanc. Your line is open.

Hey, good morning guys.

Hey, Jeff.

Good morning.

Just want to go back to pool and kind of the momentum in the fourth quarter. I mean, I think if I hear you, you are seeing strong underlying demand and you expect that next year and inventories are still low. So, just, any read on further catch-up on inventories in the fourth quarter and what your distributors are saying about that early buy?

I’ll start on that one. Again, I view Q4 as being satisfying natural demand. So, really not dipping into early buys, which is a good situation as we get into 2021. And so, Q4 is all about delivering on the orders that we have. That then sets ourselves up for a good start to 2021 as we deliver on early buys and more of the standard orders that will come.

And is it fair to say, like, underlying demand is, if you kind of put 2Q and 3Q together is like high-single-digit is kind of the order runrate into 4Q?

I think it’d be higher than that, Jeff. I, for sure believe it’s double-digit as far as the underlying demand – actually double-digits.

And are you doing something different with early buy incentives to disincent early buy or?

No.

Okay. Okay. And then just quick on IFT, in your presentation you talked about growing the entire portfolio about GDP which would include IFT, but in the earlier question, the focus kind of continue to be more on the margin and margin improvement. So just talk about what changes to kind of drive the growth profile for that segment going forward?

Yes, I can just focus. I mean, there are some of these businesses that it’s just doing the basics that’s going to generate 2% to 3% of growth and that’s okay. I think some of them are margin opportunity and let’s just do the 2% to 3% consistently and predictably every single quarter and let’s do it well. There is other businesses as I mentioned stable gas and our IoT offerings in F&B that have an opportunity to be high-single-digits over a cycle. And that’s where we want to focus and so it’s really disciplined, Jeff. When you have projects in front of you, you could chase whatever projects you want and by the time you realize the lower margins, you are challenged and some of that still exists in this portfolio and we are working through that. And that’s what we don’t want to do anymore. So we want each business to play its role in Pentair and by choosing what that is and making sure they are focused on it, I think they can be a big contributor to Pentair’s outcomes.

Okay. Thanks guys.

Thank you.

Your next question comes from Scott Graham with Rosenblatt Securities. Your line is open.

Hey. Good morning. Very nice quarter guys.

Thanks, Scott. Appreciate that.

Morning.

So, I wanted to understand a little bit about, I guess maybe I am just kind of not put a final point on this for the fourth quarter. The low end of the EPS guidance suggest a quarter very similar to the second quarter yet, your highest margin businesses, demand is up double-digits, you are saying productivity is going to be better or the tax rate goes little bit the other way perhaps, maybe there is some cost to push things out the door because of COVID and bottlenecks. But is there something that I am missing here? I mean, typically, they are a like a flood factor in the fourth quarter?

No, Scott, I mean, it is simply this. The hardest thing for companies today is to produce a low end of the guidance range when incorporates which you think a hiccup related to COVID could be that is it. We are guessing at that end of the range to, how a second wave or a third wave how wanted to describe the COVID might impact Pentair. We know nothing today that would suggest it. But when you put a range out there, we want to have a range that we can address throughout the quarter, that’s simply what it is, Scott.

Understood. Thank you for that. A further question about your capital allocation, but maybe more from the M&A side you talked about water treatment being an area of potential targeting. Could 2021, your - the residential businesses are doing better, you have a better – you have a better understanding of what consumers are buying off of your kind of very long and elaborate study of consumer buying habits and desires. Could 2021 be a pretty big year for M&A with you guys in water treatment?

I hope so. I mean, we are continuing to look at options, Scott. I definitely look at M&As and accelerators to what we can do organically. Water treatment is definitely a focus area. I think where – that’s where the funnel is more robust and I certainly hope it’s accelerated.

Got it. Last question. The productivity number obviously being a bit of net number was depressed by the things that you guys talk about. What was the gross productivity for the quarter?

It was more in line with what you would have seen in Q2. So, and then again, I had mentioned that that will return in the fourth quarter. So, productivity continues to be a consistent enhancer of the margins. It’s just unfortunate that that in Q3 we caught up on compensation and on the pricing side had higher rebates. But behind the scenes or underneath that, our gross number is very much in line with what we saw in the second quarter.

Right, which I also know I think includes some of your productivity, your cost out actions that you talked about two quarters – or a quarter and a half ago, and I guess, I am wondering have enacted any of those that we need to enact any of the, call it 80 plus million dollars that you had identified as the potential to lower cost this year?

Yes. We – our goal was to take out cost in line with the volume drop and we’ve done a reasonably good job there. A lot of hard work has gone on within manufacturing and supply chain. We continue to spend less on what we call purchase spend, discretionary spend. We’ve renegotiated. We took a hard look at policies across the board from travel and entertainment all the way to how we train people, recruit, relocation. And so, those are finding their way through, as well and on a full year basis will help 2021.

Understood. Thanks. Appreciated.

Your next question comes from Nathan Jones with Stifel. Your line is open.

Good morning, everyone.

Good morning.

Great cash flow quarter there, John.

Thank you. Thanks for noticing.

No worries. A follow-up here on pool. You guys got off to a slow start to the selling days in 2Q 2019 around some of the bad weather in the southern states and the big states where pool installations happened. And last year you were pretty cautious telling that being there was labor constrain, it was difficult to catch-up with some of those things as the year went by. This year, in 2Q, 3Q of 2020, you are probably closer to 20% overall growth. Can you try to square those comments from last year to this year? You were expecting to be on a catch-up because of labor constraints in the later part of 2019, yet the industry is being able to support such fantastic growth this year over the last six months. And I am sure there was some inventory restocking, I know you did pool cope and now that is where selling out their own inventory in 2Q. I am sure you were catching up with some inventory refill into them in 3Q. But just if you could square those comments?

Yes, I can, Nathan. Let me just give you some – the way I think about it. I think, given the weather we know happen this year, because there was a good weather year. So let’s say nothing abnormal happened against this. We would expect it a double-digit full year, primarily because of the challenges we had last year and where we thought overall inventory was, I mean, overall double-digit. I think, let’s say, we were close to mid-teens. I don’t think we are seeing more than the 5 point tailwind, in my opinion from what would be the COVID order rates, because I do think there is a constraint in the industry anyway. I think what we are hearing and feeling is the demand is going to extend and that extension will be managed through the capacity that you are mentioning. So, that’s why we are sitting here today relatively confident we are going to have a good year next year.

It does seem like there is still plenty of demand left going into next year to continue to see growth in the pool business in 2021. I know it’s a long way out to look at 2022, but do you think we are pulling some demand forward there and potentially that your below average growth for a year or two after we get past COVID if that ever happens?

Nathan, I would not guess – I haven’t figured out 2021 yet, so to – just I am feeling 2022 is - like a COVID, I got elections, there is all kinds of things that have to unfold first. But I think which is being in people, I think people are really vacations might not be in the horizon and they are choosing destinations for second homes that they can retreat to and I think that has been a unique pull across the entire industry and most of those states are where a pool is in the backyard.

I think that’s a fair evaluation. Just want to follow-up on Jeff’s question about the grow – all your business greater than GDP. Does the number of business, primarily the industrial businesses that – the last number of years have not been able to do that. Do you have different strategies that you are going to deploy that now to get those businesses up to growing GDP? And what are the plans to those businesses if you are unable to get those up to growing at GDP levels? \

Yes. I think, just to put in perspective, we have product categories that sit below our businesses and there is some 23 of them and when we talk about that, we're talking about averaging and if something is not able to grow, we would look at how it's doing across its cycle and is it still doing well relative to the cycle that it's in. But we want to make sure predictably and consistently that we can deliver that core every single year and that it starts with a positive contribution to our shareowners. The second piece is now let's talk about the strategic growth of our plan on top of it and we are trying to get both and that's not something we've done consistently over time and I want to be consistent with both of those. We need a stable core growing and then a few incremental things you can put on top of it. And then if you could put M&A on top of that, now you are really – you are really lightened up and that's our goal.

And just one clarification. I think I heard you say you believe that the inventory levels in per pool in the channel are balanced at the moment?

No, I think we're still catching up. We are balanced across the rest of the portfolio, that's enough in pool. Yes.

Okay. Thanks very much for taking my questions.

Thank you.

Your next question comes from Andrew Obin with Bank of America. Your line is open.

Hey. Good morning. This is Emily Shu on for Andrew Obin. Thanks for squeezing me in.

No problem.

Were there any supply chain adjustments made in the quarter to deal with the outsized pool demand and the catch-up? If you could just give some color on the overall state of your supply chain, that would be very helpful. Thanks.

I'll take that. We've talked about emerging from COVID stronger. I would say that's an example. We've added second suppliers where it made sense closer to the markets we serve. But generally speaking, Q3 was a quarter of ramping up manufacturing productions, adding a second shift, adding more people. So, I do think we've addressed the supply chain challenges, but also given us more optionality around manufacturing production.

Okay. Great. And then – and my last question is just with the federal election coming up and potential change in administration, have you guys assessed if there could be any impacts to the business from a potential green new deal? Thanks.

While we are obviously, we are learning how to balance risks or opportunities all the time between tariffs and COVID and now election. I think, we are a sustainable solutions provider. So we would expect to benefit from any movement in green initiatives or societal changes that affect the environment in a positive way.

Okay. Thanks so much guys. And congrats on the quarter.

Thank you.

Thank you.

Your next question comes from Saree Boroditsky with Jefferies. Your line is open.

Hey. Thanks for squeezing me in.

No problem.

So with the implications that pool demand remains strong next year, how are you thinking about the opportunity to push through pricing since it was really not a contributor to sales in the quarter given rebates?

Yes. I think, listen, we – as Bob mentioned, we are deep in the planning cycle right now and one of the key inputs to any pricing decision is what are you seeing with inflation and what's going on with suppliers and material. And we'll make those assessments and based upon those assessments, we'll make sure that we're pricing effectively. So, this is the time we do that and if we need to make adjustments, we make adjustments.

Great. And then just following up on the 150 to 200 basis points in G&A opportunity. Can you touch on how you're thinking about the timing on this and how we should think about if any benefit into next year?

We think of it as a three-year runway more or less linear, so not back-end loaded. So improvements. And again, as the improvement in margins will come in two forms, it will be some cost out, but also avoiding cost as revenue ramps. So, I think it's good that we've got a three-year past year and we are hard at work at operationalizing that improvement.

Great. Thanks for taking my questions.

Thank you.

Your next question comes from Julian Mitchell with Barclays. Your line is open.

Hey, good morning. This is Trish on for Julian. Maybe just one more follow-up on seasonality, I know you mentioned perhaps there is some contingency in the guide. But the implied Q4 guide suggests sales decline kind of high-single digit sequentially and then, versus normal seasonality at mid-single-digit increases. And so you mentioned IFT kind of normal seasonality it's typically down into the fourth quarter versus the third. Should we expect consumer to follow normal seasonality as well? I know you said those satisfy kind of natural demand. But I think that's typically up quarter-over-quarter into the fourth quarter.

Yes. So – so simply stated, I think our normal seasonality is Q2 is our strongest quarter followed by Q3, Q4 and then Q1. And pool is the strongest in Q2 and Q3, because that - how it ramps for the season and then it usually has what's called an early buy, which is a level loading of the distribution base so that we can maintain our employment levels and satisfy the industry demand. Other than that, we tend to see a tail-off with the Christmas season meaning that we've only produced probably to mid-December and shipping products in mid-December. So, the natural tendency is for Q4 to be a little soft across our particular lines. As Bob mentioned, we had a good Q4 last year. And so our IFT businesses, they are still experiencing that headwind on a year-over-year basis and that's simply what the challenge is in Q4.

Okay. Got it. Thank you. And then, just maybe one follow-up on free cash flow, given the strength to-date, as we look out, how should we think about working capital movements? And maybe free cash flow into 2021, do you think it's possible to grow free cash flow next year, given the products have built some supply in pool?

For free cash flow, again, our starting point is 100% of net income and that will continue to be our goal. I mean, to me, it speaks to the quality of the earnings that we have in here at Pentair. One thing as John alluded to was, there is nothing like linearity to improve free cash flow, either from a quarterly perspective or from an in-quarter perspective. So, with the strength that we are seeing in pool, our factories are busy from the start of the quarter to the end of the quarter, and that revenue that comes in early in the quarter allows us to collect that by the end of the quarter. So, I would say linearity will continue to be in our favor. We'll continue to drive free cash flow at or higher than net income. And also remain disciplined around things like CapEx.

Got it. Thank you.

There are no further questions at this time. I will now turn the call back over to John Stauch for closing remarks.

Thank you for joining us today. We continue to believe that Pentair has a strong foundation and portfolio of businesses to build upon. We have a strong purpose, mission, and vision, focused on delivering smart, sustainable solutions that empower our customers make the most of life's most essential resources. We believe that we are in attractive spaces that are expanding. We are a leader in the pool industry and our Water Treatment business is helping us become an even more integral player in both residential and commercial water treatment. We believe we have the right enterprise strategy, businesses, talent and culture. For our “Win Right” values to our Pentair Integrated Management System, we are enabling all of our employees to continuously improve. Finally, we continue to prioritize providing superior customer experiences and delivering more predictable and consistent results. Thank you for your continued interest. Mariama, you can conclude the call. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.