Good morning, and welcome to the Pentair Third 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 of Investor Relations. Please go ahead.

Thank you, Anthony, and welcome to Pentair's third 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 third quarter 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 and Form 10-K. Following our prepared remarks we will open up the call for questions. Please note that we will limit your questions to two, after which, we ask you to then re-enter the queue in order to allow everyone an opportunity to ask questions. 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. Please see the slide titled Strategic Framework, Pentair at a Glance, Pentair Overview and Making Better Essential for more information. In reference to Slide 7, Making Better Essential, we are proud to share two recent recognitions that Pentair has received for its work in social responsibility and ESG. We've been recognized as a constituent of the FTSE4Good Index Series and we have been named one of America's Greenest Companies 2024 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. Pentair's achievement supports our purpose to create a better world for people and the planet through smart, sustainable water solutions. 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.

Thank you, Shelly, and good morning everyone. Let's begin with the executive summary on Slide 8. We are very pleased with our third quarter results, which surpassed the guidance that we provided on our last earnings call. Q3 marked the sixth consecutive quarter of sales over $1 billion, and the sixth consecutive quarter of adjusted margin expansion. Segment income increased 3% and ROS expanded by 140 basis points. Adjusted EPS was $0.94 versus our previous guidance of $0.84 to $0.89 and year-to-date free cash flow was $453 million, up 115% over the prior year. As we look to the full year, we are updating our 2023 adjusted EPS guidance range to $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. The 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. 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 have 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 the transformation, innovation and M&A. In fact, we've seen great results…

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 continued 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. 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. Third quarter segment income increased 3% to $212 million 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 million and our adjusted tax rate was 15% during the quarter with a share count of 166.6 million. Please turn to Slide 13, labeled Q3 2023 Industrial & Flow Technologies Performance. Industrial & Flow Technologies 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 fifth 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 two years. For example, within our industrial businesses, our strong reputation and industry expertise is driving above-industry growth. We've…

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

Hey, good morning all.

Morning.

Hey, first question just on pricing in Pool. So it sounds like you're going to have two 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. 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 covering the inflationary aspects. Not aware of anything incremental than that and those price increase, they're already been announced to the market.

Yeah, our comment towards 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.

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 billion plus for our particular opportunities. And I think that's a conservative estimate, Brett.

Okay, great. Best of luck, thanks.

Thank you.

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

Hey, good morning everyone.

Morning.

Morning.

John, can you update us and 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 in the $150 million 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 the higher interest rate environment?

Yeah, 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 focused on the metrics of our channel partners and I think that data is providing clarity of what's going on. 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 for the best possible 2024 that we can have. So it's a modest participation in early buy, it's making sure that we're not continuing to build inventory ahead of next year. And it's setting ourselves up for a really good 2024.

That's helpful, John. And then you beat your forecast for Q3 sales overall, were down 4%. I think you were 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 in IFT or Water Solutions that stopped you from raising your forecast at all? I would imagine you want to be conservative as you talked about, but any more color there on current economic conditions, how they're affecting the other segments?

No. I mean I think Water Solutions has benefited from significant performance at Manitowoc Ice and 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.

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

No, but I think it's only fair to suggest that higher elevated interest for longer makes 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.

Appreciate the color, John.

Thank you.

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

Hey guys, good morning. Thanks for taking my questions. I know there's a lot of questions around Pool. I'll just throw another one in there. And lot of moving parts and the macro is still uncertain, 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 '23 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? And then just from a volume framework perspective, assuming all those things, do you 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?

Yeah, first, I think we're feeling really good about the ability in 2023 to have -- continue to raise our guidance through the diversified portfolio, offsetting really consistent performer in Pool. I mean Pool has generated a lot of income and growth for us over the years and I think it was a little bit worse this year than we anticipated coming into the year, primarily because that inventory was larger and the overall market wasn't as strong as we had hoped it would be. 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 inventory correction. 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 has been 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.

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. 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 sort of cost of capital environment and just financing condition is getting a little bit tougher here? Anything you can speak to at kind of a high level? Thanks.

Yeah. I mean I think you're calling it. 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 a $100 million or a couple of hundred million, but I think you're going to see financing be tougher on the building side. And so an elevated higher interest rates for long, just I think produces a sluggish 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 the 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.

All right. Appreciate it guys. Thank you.

Thank you.

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

Thank you. Good morning, everyone.

Morning.

Just 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, et cetera. 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?

There's no doubt that commercial water solutions has had a excellent 2023, going to market with 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 being solid for us. The challenge for us is bumping up against a tough compares next year. But overall, the markets that we serve are doing well.

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 2023 is about 8%-ish or slightly a little bit higher than that which we had slightly normal than -- or higher than the mid-single digits that we had forecast the business to have. So just a reminder that the markets, as Bob mentioned, are recovering globally and they continue to participate in that recovery.

I appreciate the color. That's very helpful. You mentioned the end-to-end solution and there's no doubt that the value proposition combining Everpure, KBI, Man Ice, 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 to Man Ice?

Yeah, I mean I would I would quantify that value is 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. More importantly, just understand what the service provider is 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.

All makes sense. Thanks for the color.

Thank you.

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

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

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

Thanks for that. And then on the balance sheet side of things, you're two times levered now on a net basis. Bob talked to debt paydown is still the priority. Maybe you could just talk to, given the changes in interest rates, how your financing terms are. Is there a -- has there been any shifts 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 see before you became more aggressive using your balance sheet, whether it's for buybacks and M&A, whatever it is?

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.

Yeah. 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 and the 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. 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.

Thanks for that. All very reasonable. I appreciate it.

Thank you, Mike.

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

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 of inflation number was close to zero. It seemed 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 zero like it was in Q3?

No, I think the way -- it's a good observation. I would remind you that the inflation as we showed in our bridge is as 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, that's the model going-forward. If you recall, we were benefiting quite substantially earlier 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.

Yeah. I would just add to that, that while inflation did -- the change in inflation and increase in Q3 versus Q2, the nice thing was that price was able to cover that. We do expect inflation to moderate significantly in the fourth quarter 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. So the team has done a nice job of understanding inflation and factoring in the impact of that. So overall pleased with what we're seeing and that'll moderate in the fourth quarter.

That's helpful. And as you said, hopefully, that productivity piece 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.

Yeah, 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 ROS expansion. So we were pleased to see the $29 million read out in the third quarter, up significantly from the single-digit in Q2 and expect to have a significant transformation benefit in the fourth quarter. 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. And so that will start to read out to an even greater extent next year. So overall pleased with the momentum going into 2024.

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 year, I suppose. And then maybe the sort of the comps get a bit tougher on productivity.

Well, and then that's when the Wave 2 kicks in, Julian. So you -- 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 supply community. 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 will be close to two-thirds of the wave through that in 2024. So that's kind of how the waves that Bob mentioned start to unfold. And we start to benefit from that performance inside the businesses.

That's great. Thank you.

Thank you.

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

Hi. Thanks for taking the question. Just building on the transformation initiative comment, discussing and benefit from Wave 2 in the second half of next year. Can you just quantify how we should think about that as contributing to margin performance?

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

I appreciate the color. Then, just kind of going back to Pool, and a lot of questions today, but -- and you talked about some of the early buy programs having modest participation there. Maybe as you think about 4Q delivery versus 1Q, is there any way to think about how you thought about the delivery patterns and what that means for 1Q sales? Thank you.

Yeah. 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, end of Q2 next year finally being a normal seasonal pattern, which should be the strongest full quarter of the year. And as a reminder, Q3 is modestly less than that. And then again Q4 starts the pre-load for the 2025 season. So we feel like we 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 into this inventory situation with our channel again.

Appreciate the color. Thank you.

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

Hey, good morning, guys.

Good morning.

Hi, Jeff.

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 it 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.

Yeah. 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. 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 key distributors and end-market providers, Jeff.

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 and 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 other markets are maybe starting to see more normal growth as well.

Yeah. 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 third quarter and for the full year, Manitowoc will be up roughly 20%. So they've had a very strong year. 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's 20% growth. But overall, the business remains very healthy. The end-to-end approach in terms of going to market is resonating well. So very confident in the Manitowoc business.

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 have hoped that, that is a 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 is putting into their restaurant. So it gives us the ongoing service and relationship with that customer. But this is not normal as we've said all year.

Okay. Appreciate it, guys.

Thank you.

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

Hey, thanks, good morning, everyone. Want to go back to the Pool pre-buy. I think you might have said you're 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? Thanks.

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 in 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 are incentivized more to take it. 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 a 2024 growth year.

Got it, thank you. And just for the 4Q guide and the implied margins for the total company and marked a pretty meaningful step-down sequentially. I think historically you've been more flattish from 3Q to 4Q. And I know it isn't necessarily a normal year but just seems a little, perhaps, conservative, especially with the cost actions starting to come through. So maybe if you could unpack that and if like any segments in particular you think the margins are weaker than normal for 4Q. Thanks.

What we implicit in our guide is significant ROS 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, that is returning back to more normalized levels. So overall pleased with the ROS expansion in Q4 versus last year's Q4 and it will be the momentum we need exiting the year.

Thank you.

Thank you.

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

Hey, guys, good morning.

Morning, Joe.

I wanted 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 the fourth quarter into next year, that 30% kind of feel good still as probably kind of a bottom level?

I'd say yes on the second part of your question and I think delivering the margin that we did despite the year-over-year decline in volume is what I'm most proud of the team having accomplished. And yeah, 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.

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 third quarter 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% level there?

Yeah. I would remind you that Water Solutions has a residential component 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.

Okay, that makes sense. And if I could just sneak in one last one on just the volume. So I mean your Pool volumes this quarter came in better than what we were thinking about when we spoke three months ago. Commentary from your largest distributor calls for like fourth quarter, their inventory levels in dollars are going to go up from the third quarter. 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 can look like for Pool in the fourth quarter?

Well, I think we're a piece of their puzzle. So we'll start there.

Yeah.

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.

Thanks guys.

Thank you.

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

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

Morning, how are you?

Morning.

Hi, Scott.

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?

Well, 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.

Okay. Back on to Pool, sorry, but historically, these numbers kind of shook out as 40, 30, 30 new remodel and then sort of the maintenance of the aftermarket. As we look at a weak 2023, kind of, what does that -- where do those numbers kind of end the year at? Is that an estimate you can make?

Yeah. I think they're generally in that ballpark. And we could argue, weak -- I mean 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 a more normalized area. Scott, I think the learning is, across the channel is there is high-end pools there is low-to-mid market pools and the interest rates are definitely impacting the more low-to-mid and the high-ends are continuing to be built. So I think that we'll all probably start to refine the numbers to try to break it out by the demographics that its serving, but I think generally, the model is still working.

Okay, thank you, John. Last one, you indicated builds, you are assuming kind of flattish. We're modeling flattish and then aftermarket up. Were you referring to the fourth quarter or a period of time longer than that?

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.

Okay. So your mid-single-digit plus long-term thinking on Pool, it's not going to be that next year, based on that.

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

All right, thank you. Had to try.

Yeah, you tried. Thank you.

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

Good morning, this is Jeff Reive on for Dean. Maybe my first question, you talked about your innovation, the 25 new products this quarter, 100 for the year, over the last 12 months. Is there any internal metric you target? Like, are you targeting new product vitality? And what are the typical margin differential on new products?

Yeah. I mean we do. We have all those. Vitality is obviously the right product line by product line. When we create new valuable products at the market or that our customers want, we tend to see margin lift from those new products, not usually at its initial stage, it usually takes probably a year or two for that to recognize. But that is the model we work to.

All right. So nothing to quantify. And then maybe on IFT, you kind of mentioned the Build America, Buy America provision in infrastructure spending. Are there any products that you offer where you are on -- or virtually 100% American-made where your competitors aren't? And is that a meaningful piece of the business?

Yeah, we have today with the Born in America where a lot of our historic brands 120, 130 years old are -- 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.

Got it. Thanks.

Thank you.

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

Good morning, everyone.

Good morning.

Hi, Nathan.

Couple of questions on Water Solutions. I think first one is probably on Manitowoc Ice. I think you guys have shipped out of 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 of a low-end 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?

That'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 then we'll 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.

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 against that, as we go into next year, might have without looking at the fundamental outlook of 2024?

Yeah, 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 in 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.

All right. Thanks for taking the questions.

Thank you.

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

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 million full year guidance?

That would be an easy commit.

Now, we had talked at the beginning of the year of that $370 million but the business has done significantly better than that and will grow roughly 20% this year.

Got it. And then just going to ask another one about Pool and maybe if you could give some color on the pricing number because I know you are returning to the regular discounts in 4Q. Any color on what we should think about the pricing in 4Q '23, given that the past couple of year, you were not having normal pre-buy?

Yeah. I don't know how to answer the question. I mean I think, as a reminder, we put 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 the pre-buys are term extensions, but they don't include a price increase necessarily because there is a discount to what the price increase would be. So it's not like we're discounting partly to sell it, we're just not having to -- we're just not getting the full raised prices in that early buy.

Got it, thanks.

Okay. Thank you. Okay, so thank you for joining the call today. In closing, I want to reiterate some key themes on Slide 22. First, solid execution within our diversified portfolio and transformation initiatives continued to drive significant margin expansion in Q3. Second, we updated our 2023 guidance due to strong performance year-to-date and confidence in our strategy. Third, 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.

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