Welcome to the Pentair First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Shelly Hubbard, Vice President, Investor Relations. Shelly, please go ahead.

Thank you, MJ, and welcome to Pentair's first quarter 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 first quarter's performance as outlined in this morning's press release. On the Pentair 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 should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP. 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. Before we begin, let me remind you that during our presentation today, we will make forward-looking statements, which are predictions, projections or other statements about future events. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Pentair. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors in our most recent Form 10-Q, Form 10-K and today's release. Following our prepared remarks, we will open up the call for questions. Please limit your questions to one plus a follow up then reenter the queue in order to allow everyone an opportunity to ask questions. Before I hand it over to John, I wanted to highlight Slides 4 through 6 in our earnings slide deck that illustrate our strategic framework, Pentair at a glance and a Pentair overview. We believe this information is helpful to understanding who Pentair is, especially for those new to Pentair. Our strategic framework states our purpose, mission, vision and values that drive our performance as a smart sustainable water solutions company. Pentair at a glance on Slide 5 provides a great snapshot of our company, our performance, our installed base and our 40-year track record – 47-year track record of annual dividend increases, which places us in a small group of companies. Lastly, the Pentair overview on Slide 6 provides our historical sales and ROS performance on a consolidated level and by segment. This information was first disclosed last quarter in the supplemental data section and is now illustrated on one slide. As you can see, over the last three years, we have grown sales by a compound annual growth rate of nearly 12% and ROS has expanded by 110 basis points on a consolidated basis. I will now turn the call over to John.

Thank you, Shelly. Good morning everyone. Let's begin with our strong Q1 results in the executive summary on Slide 7. We are very pleased with our first quarter performance, which reflected a strong start to our fiscal year as we help the world sustainably move, improve, enjoy water, life's most essential resource. Q1 sales rose 3% to over $1 billion, segment income increased 23% to $211 million, and ROS expanded by 330 basis points to 20.5%. Adjusted EPS rose over 7% to $0.91. Segment income and ROS each achieved record levels post the nVent separation in 2018. I'd like to thank our talented Pentair employees for once again delivering for customers while creating value for shareholders. Strong results reflect the strength of our diversified water portfolio and progress on our transformation initiatives, which drove greater efficiencies across each segment. For example, growth in our Industrial & Flow Technologies, or IFT, and Water Solutions segment more than offset the expected volume declines in Pool year-over-year. We improved ROS expansion across the enterprise and realized operational efficiencies as our transformation initiatives accelerated. We are driving these actions at the revenue stream or category level, which not only provides the go-to-market and customer insights, but also the ownership and accountability to realize savings and other opportunities that we have identified. Let's move on to Slide 8, titled Q1 Highlights. Within our IFT segment, growth was driven primarily across our commercial, industrial and even residential and irrigation verticals. We are excited about the near and long term growth and margin profile of this segment as our transformation is taking hold. We are focused on capturing the right projects with improved offerings to drive margin expansion. We realized benefits in pricing, sourcing and operational excellence, and we expect more opportunities ahead. We also had customer…

Thank you, John, and good morning, everyone. Let's start on Slide 13, titled Q1 2023 Pentair Performance. We delivered better-than-expected first quarter sales growth of 3% driven by pricing benefits across all three segments and the contribution of our Manitowoc Ice acquisition, which were partially offset by volume declines in our residential businesses. Our higher-than-expected sales in the quarter were driven by better performance in IFT and Water Solutions, offset by slightly lower-than-expected sales in our Pool segment, primarily due to unusual weather in the West. Core sales declined 3% mainly driven by a 16% decrease in Pool after Pool grew 23% in last year's Q1 and 48% in Q1 of 2021, partially offset by core growth of 11% in IFT and 2% in Water Solutions. First quarter segment income increased 23%, and return on sales expanded 330 basis points year-over-year to 20.5%, driven by price more than offsetting inflation, productivity benefits from our transformation initiatives and accretive margins from our Manitowoc Ice acquisition. As John mentioned, both segment income and ROS in Q1 hit record levels post separation of nVent. We delivered better-than-expected adjusted EPS of $0.91, up 7% versus the prior year. Net interest and other expense was $33 million, and our adjusted tax rate was 15% during the quarter with a share count of 165.8 million. Our better-than-expected segment income and adjusted EPS were driven by higher sales, price offsetting inflation and better contribution from our transformation initiatives. Please turn to Slide 14, labeled Q1 2023 Industrial & Flow Technologies Performance. IFT sales increased 9% in the quarter, which included two points of FX headwinds. Core sales increased 11%, segment income grew 25% and return on sales expanded 200 basis points to 16.6%, marking the third consecutive quarter of equal to or greater than 200 basis points…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Mike Halloran with Baird. Please go ahead.

Hi. Good morning everyone. Really nice quarter, really nice quarter. So a couple of questions here. First on the Man Ice side of things. Maybe can you just talk a little bit about where you're seeing the outperformance from and then also a little bit of context on how you're looking at the forward outlook? What kind of visibility you have? What customers are saying? Any kind of context around that?

See the Manitowoc Ice performance has been significant from our perspective. We – I often get asked the question. So this year, in Q1, we drove roughly $95 million of sales in Manitowoc, and that's versus them doing around $75 million last year. And again, think of that business as high 20s from a margin perspective. I would say one thing that's helped is they have significant backlog in the business. They're clearing that. But probably more importantly, if you think about the go-to-market strategy, as we combine ice services and our commercial filtration business, my view is that one plus one plus one adds up to more than three, and the opportunity to go-to-market in that way has really helped the business.

And then on the pool side of things, obviously, the margins were particularly impressive given where the volume levels we're at. Maybe you can just frame, provide a little bit more context around the drivers behind that? I know you commented on price transformation, but a little more detail on that. And then how should we think of the sustainability of this margin range, particularly given you still have a lot of volume variability ahead of you?

Yes. Mike, I'll tag team this one. And I think we talked openly last couple of years about the inefficiencies in our manufacturing process from not having our supply chain aligned to the volume demands. And those inefficiencies came from freight premiums to get product in and out as well as the overtime that we were running in our factories. As we were able to have more visibility and clarity on the demand throughout the channel, Mike, we were able to eliminate most of those inefficiencies. And spot buys are a big piece of what we are dealing with, too, and we saw huge positive impacts in Q1 regarding that. I share that because while we're getting some of the transformation benefits in pool, what really ups our confidence as most of the transformation benefits around the ongoing sourcing savings and the operational efficiencies really are in the later quarters and we have a lot of confidence that we're going to realize those in addition to these inefficiencies going away.

The only thing I would add is I think pool has done a really nice job back in Q3, Q4 of last year and seeing the channel correction ahead of us, they did a nice job of rightsizing to those lower volumes.

Thanks John and Bob. I appreciate it.

Thanks Mike.

The next question comes from Bryan Blair with Oppenheimer. Please go ahead.

Thank you. Good morning everyone.

Good morning.

Good morning.

Actually wanted to follow up on Mike's question on the Manitowoc outperformance. Obviously, pacing ahead of plan. You mentioned the strong pro forma growth year-on-year. Is high 20s margin an EBITDA or ROS figure, just to clarify on that? And how should we think about that phasing through the year, whether there's lift possible? And are you willing to speak to a new accretion range for 2023?

It is a ROS number to answer your first question. And again, our view is that Manitowoc Ice is an extremely well-run business as part of our portfolio. Our goal is to continue to keep the margins in that high 20s range and have them take advantage of the transformation initiatives as well. But we don't want to get ahead of ourselves with that business either. For now, the performance is going exceptionally well.

And as a reminder, when COVID evolved, I mean, the space that we're in took one of the bigger hits across the Pentair portfolio, right? So we're still dealing with global openings of restaurants, hospitality, gyms, et cetera. And that's really driving the trends in our foodservice operations, both with Manitowoc performance, but also with our Everpure filtration and our services operations as well. So really feel good that we've got visibility in this space and that we're coming together to solve some customer solutions in a way that make those customers want to continue to work with us.

All makes sense. It's good to hear. And within Water Solutions, resi weakness to start the year, that was obviously anticipated. Any update you can offer, insight into current channel trends and whether over the next couple of quarters, we may be more in balance in terms of channel inventory?

Yes. As a reminder, we've had – part of this delta negative year-over-year is driven by our exits of our direct-to-consumer initiatives. But when you look at the core underlying residential water treatment trends, they're still positive and encouraging as people are looking for the best water that they can have in their homes. And when you look across your channels, we're still seeing modest growth across most of our end channels.

Understood. I appreciate the color.

Thank you.

The next question comes from Brett Linzey with Mizuho Americas. Please go ahead.

Hi. Good morning all.

Good morning.

Hi. I want to come back to wave two of the transformation. It sounds like you've got a lot of organizational muscle around these opportunities. With regards to wave two, is there anything unique about the phasing or the timing of the benefits relative to wave one? Or should we think of this as sort of linear through 2024?

Yes. And just as a reminder, we have the four major initiatives in transformation. They all have different waves, in particular, around sourcing the wave one negotiations is complete now. So we're moving on to the wave one implementation, and at the same time running a parallel activity around the next $500 million, $600 million of spend in wave two. So our view is it's a really nice runway that benefits more significantly in 2024, but then also gives us upside in 2025 and beyond.

Okay. Got it. And just on price, I mean, the traction continues to be very strong there. Was Q1 in line with your Q1 expectation? Or did that realization come in a little bit better? I'm just curious if there might be a little upward tension on that 5% assumption for the full year.

It was a little bit better than we expected. We always knew that Q1 would be our better price quarter and that it would slowly come down throughout the year. But we have seen less discounting than we thought. So we're certainly comfortable with pricing and had a little bit of upside in the first quarter.

All right, got it. Great quarter. Thanks.

Thank you.

The next question comes from Andy Kaplowitz with Citigroup. Please go ahead.

Hi. Good morning everyone.

Good morning.

Hi, Andy.

I am just focusing on the overall pool market for a second. Can you possibly quantify how much weather impacted your pool equipment business in the quarter? And are you still thinking normalization of pool markets occurs, end of Q2 or Q3? And I think you've been focused on attempting to take share back this year as supply chains have improved in pool? Have you been able to do that?

So to start the question, it was a couple of points relating to weather in Q1. So it did cause us to come in slightly lower than what we thought. We – our belief is still that we are back to normal inventory levels by the end of the pool season, which will be the third quarter. So that continues to be our assumption there. Third part of your question, Andy, was what?

Share. As supply chains have gotten better, have you been able to sort of get more equipment into the market and take some share?

Yes. I mean we're excited about the new product offerings, as I mentioned, and getting the industry and the market again focused on those new products. I think when everybody is busy and things are active, you just kind of want to put in more of the products that you know very well. So we've been very actively training the dealer channels on the new IF3 Pump, as I mentioned in my comments, which was really the first product that has the Internet capability and WiFi and Bluetooth built into the pump itself, which allows us for some basic features that can be run without the full automation pad. The second one that we launched is – we're excited about our new IntelliCenter and the improvement in the IntelliCenter app, which we've been able to, again, get the channel excited about. And then the third element that we still have coming is a new filtration capability both for safety and clarity of space. So I think if we talk about winning, it's going to come from new products and having, again, the most innovative products for the channel and getting the channel excited to be partnered with Pentair to bring those to the consumers.

And then, John, your CapEx businesses, such as industrial solutions, continues to look strong. Can you talk about the durability of the CapEx cycle? What are your conversations like with customers at this point across that IFT segment?

Yes. I'm extremely impressed with the IFT team both under Jerome's leadership when he was there and the way that De'Mon has continued to lead it. Our business leaders know that what we want is predictable growth and growth that comes both profitable on the project element but also brings with it the aftermarket and services component. So we've limited the growth opportunity to those projects that we feel like we can bring forward at a positive margin for Pentair and also then bring on those future businesses. So I think we feel good about the engagements we have with the customer space, the investments that are happening and the solutions we're providing, which again are taking waste to value. So, in most cases, these projects are bringing value to our end customers while they are investing in it. So, we're keeping an eye on it. You would expect higher interest rates to slow that industrial investment. But right now, from what we can see, the pipeline remains strong.

Appreciate the color, nice quarter guys.

Thank you.

The next question comes from Saree Boroditsky with Jefferies. Please go ahead.

Thanks for taking my questions. Just kind of building a little bit on Pool. You talked about inventory normalizing after the Pool season. So if you could just update on how you're thinking about the early buy potential as we get into 4Q and what that should look like as we get into 2024? Thanks.

We expect early buy to return to normalized levels. It was roughly at normalized levels as we closed out 2022. So no significant difference there. Again, as we said, from our perspective, the inventory correction should be done by the end of the Pool season, and then we can return to more normalized growth.

Thanks. And when you talk about the demand normalizing for 2024, I know it's really early, but any color on how we should think about new pool construction versus aftermarket if we are entering a weaker macro environment? And then how are you thinking about price increases, does that normalize after the recent high levels we've seen?

From a new pool construction perspective, we mentioned that we assume that new pools would be down in that kind of 25% to 30% range. So, again, think of new pool construction around that 80,000 mark back in 2018, and 2019, and 2021 declined to around 115,000; 2022, about 100,000 new pools; and this year, we're estimating kind of in that 70,000 to 75,000 range. Our view is that a lot of this is predicated on interest rates and the macroeconomic environment, but we do expect growth in new pools next year, more normalized demand across the aftermarket, really the inventory correction done. So, when you think about 2024, you are looking at normalized growth against 2023 that has significant headwinds. So, we are optimistic that as we turn the corner here in 2023, we have a positive story for Pool. And just as a reminder, we had started the year saying that Pool would be down low double digits. We did change that assumption to down low mid-teens. And if you think about that, we are absorbing about $100 million more of a headwind than what we thought at the beginning of the year. So, if you take the low end of double digit down and you take the high end of mid-teens, there is $100 million that we think will work its way through this year, again, setting ourselves up for a better 2024. And that, again, is one of the reasons why we were pleased to bring up the midpoint of our guidance this year that even with that headwind we were able to increase with the strength of IFT, Manitowoc Ice and the great start to the year.

I appreciate the color. Thank you.

The next question comes from Nathan Jones with Stifel. Please go ahead.

Good morning everyone.

Good morning.

Follow-up on Manitowoc Ice to start with, Bob, you talked about them working down backlog in the quarter. Can you quantify kind of that increasing sales from 75 to 95, how much of that was burning off backlog? And are we going to be talking about a difficult comp there next year with that backlog reduction contributing to the performance in the first quarter?

A piece was backlog, Nathan, I don't have the split between what was backlog. As we mentioned last year, backlog has been strong in Manitowoc Ice at the – since we acquired the business in July. But overall, our view is to go-to-market not only with Manitowoc Ice but with commercial filtration and services. And historically, this business has been a very consistent grower. So our view is Manitowoc Ice will continue to perform well.

Yes. Nate, and if you look at order rates, our order rates there continue to be strong in the space. I don't think we would believe that our normal organic growth rates in the ice business will maintain at these levels. But right now, the visibility would suggest that getting back to being able to ship at the same order rates is where we're at today, and we'll begin to work that backlog down as we exit the year.

Thank, that's helpful. And then maybe a broad one across the portfolio. We've talked a fair bit about lead times coming down across a lot of your businesses. Are there businesses that still have lead times that are longer than where they were before COVID 2019 kind of timeframe? Are you back to more normalized lead times across all the businesses? You're going to see normalization of order rates, normalization of inventory levels, and we should be basically done talking about this stuff by the end of the year?

In the majority of our businesses across the majority of the high-running SKUs, we're back to normalized lead times. We still have a few specialized products and SKUs, but those are becoming fewer and fewer quarter-by-quarter.

Great. Thanks for the color.

Thank you.

The next question comes from Brian Lee with Goldman Sachs. Please go ahead.

Hey everyone. This is Miguel on for Brian. I just had one question, maybe high level. For the – for your commercial end markets, have you seen any concerns out there on financing just given everything going on with the banking sector? I guess, what are you seeing in real time there, if anything at all? Thanks.

Yes. I mean, I think, we're all expecting it. We don't have a huge commercial building offering. We generally provide the fire pumps and then the aftermarket service pumps into that space. And then we do have some pumps that connect the building of commercials back into the city water aspects. And yes, I think, we're anticipating that higher interest rates will put pressure on those buildings and the REITs that own them and the challenges in that space. But it's going to be a modest impact to Pentair just because of the size of the business offering we have there.

Okay, fair enough. Thanks a lot. I’ll pass it on.

The next question is from Steve Tusa with JPMorgan. Please go ahead.

Hi guys, good morning.

Hi Steve how are you?

Hi Steve.

On the IFT growth, I know you guys went through it a little bit. I might have missed it at the beginning of the call, but the commercial and industrial solutions up mid-teens. Any more like any deeper color you can give on like the types of end markets that were driving the growth there and why that was so strong?

Yes. So I mean, first of all, relative size, this business has been really focused. We're talking about those two markets, Steve, being roughly around 300 and some change on an annualized basis for us, so just to frame what the teens growth would be. And I think these are projects that we won primarily to our focus around the aftermarket, the services. And again, as I mentioned, we're into larger irrigation, we're into industrial wastewater, and we're also into commercial buildings. That would be the end markets.

Okay. And those were – I think that was stronger than you guys had expected in the quarter? Is that right?

Well, I think it's probably in line with our expectations, but it's stronger than historical averages. Correct.

Right, okay. And then as far as the behavior of your customers on the Pool side, any color seasonally on how you would expect 3Q and 4Q to play out EPS-wise? And you've given us the 2Q guide, but the third and the fourth quarter, anything to note kind of seasonally there? I guess this goes to kind of like the pre-buy question in the fourth quarter?

No doubt that that pool will face down 16%. They will be down a little more than that in Q2 and Q3 and then should be turning the corner in the fourth quarter. So, from an EPS perspective, we think Q3 will probably be the most challenging quarter, and then Q4 EPS will improve as a lot of these transformation initiatives kick in and then Pool starts to improve.

One more…

Steve, we don't anticipate that there is hardly any dealer inventory out in the channel anymore. And obviously, the financing that they are paying, they are working more of their jobs in the sense of how do they bill and pay in the same cycle. And so the inventory we are referring to is the channel inventory distributors. And based upon feedback and conversations, everybody is aligned to try and burn all that inventory by the end of Q3, which would mean for us, our normalized Q2 will be a lot lower than normal. And then we'd expect that to be gone and behind us by the end of Q3, meaning we're growing sequentially from Q3 to Q4 for Pool and then continue to grow from there as we head through 2024.

One more question. When it comes to pricing, are you approaching this year any differently than you have in the past? And is there – like what's the exit rate on your price capture into next year? Should we assume that that's a normal price capture? Or is there – are there signs that with the downturn that people are getting maybe aggressive in pockets?

I think we would be going back to really normal areas, Steve.

Which is what, like a couple of percent?

Low single digits, like more normalized based upon – I mean way too early to call it, but I mean, your general assumptions are making sure that you're selling the value, that you're going out and you're pricing effectively and you're being able to handle any fluctuations in commodity or labor wages.

Yes, okay. Great. Thanks for the color as always.

Thank you.

The next question comes from Scott Graham with Loop Capital Markets. Please go ahead.

Hey good morning all. Thank you for taking my question. I was – just on Slide 20, where you break down the Pool view for the year. So the new remodel went from 20% to down 25%. How much of that was the first quarter weather was there, I mean, how much of this is sort of rest of the year versus what's already happened?

It really wasn't weather-related as much as it was just the economic uncertainty, the higher interest rates. So that was our assumption was that by bringing new and remodel down 5%, it was more related to that.

Yes. And then, Scott, it's Q2 and Q3 and Q4, not Q1. I mean, Q1 related to the West weather, but most of all this adjustment is in Q2, Q3 and Q4.

Okay. Got it. Makes sense. And to the same end, well not the same, the aftermarket inventory. Last quarter, you were kind enough to sort of parse that out between impacts of aftermarket versus inventory. Could you give some color on that this time?

Yes. Our view is the mix of that, so the down 20% is roughly two-thirds relating to the inventory correction and a third relating to the aftermarket or items that were bought in advance over the last couple of years, so think heaters, lighting, those types of products.

Yes. Got it. Thank you. And last question is kind of going back to the commercial water. We've kind of had some fits and starts in that business with varying distribution plans and different channels and what have you. Could you kind of tell us, what is Manitowoc Ice doing for you in commercial? I know you have, you sort of lined up that in Everpure when you first bought this, but we're now kind of into this thing. What are you guys doing in the market right now to really leverage the three pieces of this business?

Yes. I appreciate the question. I mean, first of all I'd say the fits and starts are more on the residential side. Global business and always experimenting or trying to think about how to go to market differently. We're now convinced that just accepting where we are with our pro channel, partner with their pro channel, drive leads to pro channel, that's our strategy in residential, and that's going to be consistent as we go forward. On the commercial side, we've always had a strong offering with our filtration products in Everpure and the RO systems that we sell into our commercial customers. What Manitowoc brings is added strength and capability across a wider selection of customers. And ultimately, we're able to discuss the end-to-end solutions that really drive productivity and value to our core OEM customers. So very excited and very pleased with the progress. And as a reminder, I mean, we're using the Manitowoc team to run that combined business. And we've integrated all those go-to-market strategies under one leadership team, and I believe that that's going to drive sustained value for our customers.

Thanks a lot.

The next question comes from Deane Dray with RBC Capital Markets. Please go ahead.

Thank you. Good morning everyone.

Good morning, Deane.

Hi Deane.

Just a couple of cleanup questions here. Just a follow-up on the banking turmoil question, you answered it with regard to commercial construction. Interested in hearing if there's any sort of impact on the Pool side or consumer water side, maybe dealer financing. Some customers finance a pool construction with a personal loan. Just is there anything at the margin that you would call out there?

Yes. I think it's going to vary by geography and demographics. I think all of us that serve the channel, Deane, believe that there is some economic turmoil that could come from these current interest rates and the impact it has on varying degrees of consumers and buyers. And I think that's in Bob's expectation of the lower new Pool sales. Also, I think we're going to see it slightly impacting the remodeling space as well because a lot of those remodel pools might have used some form of home equity or some type of borrowing to do it. I think the bigger uncertainty is what happens to where interest rates are and when they settle out. So we're hopeful that we get clarity as we exit this year and people can predict what the longer-term interest rates will be.

Yes. That's really helpful. That's the way we've been thinking about it. And just to clarify on the Pool outlook, a year ago or so we were talking about how you were supply constrained on the number of construction capacity. Where does that stand? Is it – are they able to fill all the demand? Is the supply of labor at all part of this equation?

Yes. We believe that they'll be at the more normalized areas. I mean, I think they're finishing up the backlog that they had that was pre-bought and they're out then probably trying to sell the remodeled pools and the upgrades on the pool equipment, which will bring us back into more, what I call normal pattern of how our dealer channel works to provide value for us and our consumers.

Great. And just last one for me, for Bob. Gross margin was significantly above our expectations. I know that's a high-quality problem to have to answer. But if you could just take us through what the impact was, maybe – is there a carryover pricing? Just how do you give color there, please?

Yes. I couldn't have been more pleased with the margin expansion. From our perspective, it was a number of different drivers that should drive sustainable margin expansion in the future. So to the earlier point made, we did a much better job of removing the inefficiencies that existed last year. So think about logistics, think about air freight, think about even spot buy on electronics, all getting better in the first quarter. Again, our price read out better than expected because we didn't have to do the discounting that we had perhaps put in as an assumption but felt good about how pricing read out from the carryover activities that we had done. The accretive nature of Manitowoc; and then finally, just the transformation initiatives, including rightsizing to those lower volumes in pool. Those are all things that we got significantly better at in Q1 and should be sustainable as we go forward.

The next question comes from Julian Mitchell with Barclays. Please go ahead.

Hi. Good morning. I just wanted to look at the sort of the EBIT bridge assumptions that you've got laid out. Just trying to understand, when I'm looking at that first quarter on Slide 13, you've got that sort of close to $60 million headwind for the year from inflation, the productivity tailwind very narrow in the quarter at $6 million. As you look at the year as a whole, how are you thinking about those two pieces, inflation and productivity, kind of as we go through the year? Does inflation narrow as a headwind steadily and productivity move up steadily? Sort of anything you could flesh out on those two pieces, please?

I think you nailed it. I think our year-over-year price contribution starts to anniversary some of the price increases we've put in midyear and three quarters away through last year. And you got it; we continue to see productivity sequentially getting better. And we think inflation starts to slide off here as it wraps around on year-over-year headwinds that it compares to.

And then just my quick follow-up. The pool market, I realized there's been about 82 questions on it, but just your revenue guide down mid-teens for the year, it's not that different from kind of what you did in Q1 year-on-year. So just trying to understand sort of the year-on-year cadence, like what's the kind of exit rate in Q4 – the Q4 sort of sales decline rates, assuming that you have succeeded in getting those inventories back to normal by the beginning of Q4? Because I noticed that in, say, the water piece residential there, you're down 25% in Q1. The year has guided only down 10%, so we can kind of understand the steep rate of narrowing declines through the year and makes sense given the comps and everything else. Just want to understand in Pool how we think about that down mid-teens off the kind of down mid-teens in Q1 already?

Yes. Think about the biggest impact to Q2 and Q3 just being the inventory headwinds that we're experiencing. We'll still run up in Q4 of last year, some of the year-over-year challenges with early buy but will generally be slightly positive. And we'd expect to then have the tailwind of not having that inventory burn as we head into 2024.

The last question comes from Joe Giordano with TD Cowen. Please go ahead.

Hey, good morning guys.

Good morning.

So on IFT, I mean, obviously what's going on there is interesting in a macro uncertain environment to have the margin expansion that you can have here. But it's been exclusively driven by on the top line by price like three quarters now. So as we get into a different type of market eventually where we want to see the growth side, how do you position that portfolio to be able to capitalize on like an up-cycle rather than right now capitalizing on like a flat down-cycle?

Yes. I mean real quickly. I mean there's several revenue streams in IFT. And we've got our focus on the ones that are higher value. And yes, to your point we're being very critical to what projects we take on, which ones we don't. And as we start to work with our customers, I do think you'll be able to see this business produce on a regular basis low-single digits, in line with our expectations with more of that being value and less being a price contribution.

Fair enough. And then we've kind of danced around this, but like in Pool in the fourth quarter possible that, that's up, right, organically?

It's possible. Our view, roughly flat to up slightly would be our view now after that inventory correction makes its way through in Q2 and Q3.

Yes. That’s all I had. Thanks guys.

Thank you.

All right. Well, thank you for joining us. We know this is a busy earnings day. I just want to reiterate our earnings call key themes in case some missed part of our call. First, our diversified portfolio and transformation initiatives drove Q1 sales growth with margin expansion across all three segments. Second, we expect strength in our Water Solutions and IFT segments as well as transformation efficiencies to drive upside. Third, we raised the midpoint of our adjusted EPS guide due to Q1's strong start as well as our confidence in the sustainability of our performance, while acknowledging that we expect Pool to be softer than we had initially expected. Fourth, our transformation initiatives are expected to drive greater benefits later in full year 2023 and beyond, and we implement actions towards identified savings. And we expect to continue to deliver value creation beyond this 2023 fiscal year. Thank you, everyone, and enjoy your day.

The conference has now concluded. Thank you for your participation. You may now disconnect.