Pentair plc (PNR) — Q1 2019 Earnings Call Transcript

Thanks, Zetania, and welcome to Pentair's first quarter 2019 earnings conference call. We're glad you could join us. I'm Jim Lucas, Senior Vice President of Investor Relations and Treasurer. And with me today is John Stauch, our President and Chief Executive Officer; and Mark Borin our Chief Financial Officer. On today's call, we will provide details on our first quarter 2019 performance, as well as our second quarter and full-year 2019 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 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 Investors 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 limit your questions to one and a follow-up in order to ensure everyone 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. As we shared earlier this month, our first quarter of 2019 reflected cold, wet weather in many parts of the country, and this had an adverse impact on our first quarter sales of our high-margin pool and specialty ag spray businesses. This weather pattern combined with distribution inventory that was created to avoid our heavier-than-usual price increases related to 2018 tariff impacts created a significant impact on the bottom line. The slower pull-through of demand in Q1 related to weather and pool means that we expect inventory will now be worked out of the channel in Q2 and Q3, causing a further reduction to our full-year guidance. While these two events created unique impacts on the business, we feel that this situation is isolated to 2019 and our overall thesis for our pool business remains healthy and intact. On a more positive note, we completed two strategic acquisitions during the first quarter that further our strategic initiative to accelerate residential and commercial water treatment. Both acquisitions are performing well, and the integrations are on track. I will now turn the call over to Mark, who will provide more detail on Q1, Q2 and the full-year forecast.

Thank you, John. Please turn to slide 5, labeled Q1 2019 Pentair Performance. For the first quarter, we saw core sales decline 4%. Segment income fell 16% and adjusted EPS is down 12%. We'll provide more color on the individual segment performance shortly. Below the line, we saw an adjusted tax rate of 18%, net interest other expense of $8.5 million, and our average shares in the quarter were 172.5 million. Net interest other expense was a bit higher than planned due to the two acquisitions closing earlier than expected. Please turn to slide 6, labeled Q1 2019 Pentair Segment Performance. This slide lays out the first quarter performance of our three segments. Following robust growth in 2018, which we believe was somewhat elevated as distributors bought inventory ahead of price increases as we commented on our fourth-quarter call, first-quarter core sales in Aquatics declined 6%. Segment income in Aquatics declined 13% as the produced top line led to under-absorption in the quarter. Core sales declined 6% in Filtration Solutions, but segment income was flat due primarily to positive mix. Within the core residential and commercial business, we saw two areas of softness that we believe are short-term in nature. First, we experienced lower component sales as Aquion is now represented as intercompany sales and is no longer reflected as external sales. Second, Europe saw ongoing weakness but the comps are easing. While this had an impact on our first-quarter sales mostly due to timing, we continue to see positive growth prospects for the key residential and commercial piece of Filtration. We note that the food and beverage and industrial businesses were on plan for the quarter. Flow Technologies reported flat core sales, but that does not capture the story of the 22% segment income decline. While price helped the residential piece of Flow, we saw our specialty business, which is exposed to agriculture crop spray, faced significant top-line pressure. Specialty is one of the most profitable product lines within Flow, and the sales in this contributed to the income decline in the quarter. We are rightsizing the cost structure of specialty to the adjusted demand levels now expected for 2019. Please turn to slide 7, labeled Balance Sheet and Cash Flow. Our first quarter saw cash flow usage in line with seasonal trends as we tend to build working capital in advance of the important residential selling season primarily in our Aquatics segment. In addition, we closed on two strategic acquisitions during the quarter and saw our debt level increase as a result. While our debt level increased from the end of 2018, we expect cash flow to turn positive in the second quarter, and we anticipate debt levels coming down as cash flow improves throughout the year. While we did not repurchase any shares during the first quarter, we remain committed to buying $150 million in 2019. Please turn to slide 8, labeled Q2 2019 Pentair Outlook. We anticipate second-quarter core sales to be flat to up 1%. We expect Aquatic Systems to be flat to down 1%, Filtration Solutions to be flat to down 2% and Flow Technologies to grow 2% to 4%. We anticipate segment income to be down approximately 5% to 7% as some of our more profitable businesses continue to see short-term top-line pressure. We expect adjusted EPS to be in a range of $0.63 to $0.66 per share. Below the line, we expect corporate expense to be approximately $14 million to $16 million. We expect our second-quarter tax rate to be 22% as we anticipate a true-up during the quarter. We also expect net interest other expense of roughly $11 million and shares to be approximately 171 million. Please turn to slide 9, labeled Full Year 2019 Pentair Outlook. Slide 9 looks at the different components of our updated 2019 outlook. For the full year, we expect core sales to be flat to up 1%. We continue to expect price of roughly 3% for the full year. We expect total sales growth of roughly 1% to 2% with roughly 3% contribution from the recently announced acquisitions offset by a 2% headwind from FX. We anticipate segment income to be flat to up 2%. Our full-year adjusted EPS range is $2.30 to $2.35 per share. Other items embedded in our guidance include corporate expense of $60 million to $65 million, a tax rate of 20.5%, net interest other expense of $38 million, and an average share count for the year of 171 million shares. I would like to turn the call back to John.

Thank you, Mark. Please turn to slide number 10, labeled Full Year Guidance Update. Before I discuss our longer-term outlook, this slide is meant to be a helpful look at what has changed since we provided our initial 2019 guidance. While we do not like to use weather as a reason for sales miss, the reality is that cold wet weather had a pronounced impact on two of our businesses, pool and agriculture precision spray. The main change from the original forecast is our very profitable Aquatics business. In 2018, Aquatics delivered higher than average growth of 11%. We anticipated that some inventory was pulled ahead of the price increases, but it is worth talking about what has happened to the start of the year. Wet and cold weather delayed pool construction activity in several key markets such as California, Texas, and Arizona. The inclement weather also impacted pool openings in other parts of the country, primarily the Sunbelt. As a result, sell-through in our distribution channels was impacted, and therefore inventories were not reduced at the levels we would have expected if the pattern would have been more consistent with historical trends when weather was not a factor. Of importance is that we have not seen any significant changes in demand trends within the key Aquatics markets. Our dealers continue to report strong backlog, and while weather created delays, we expect inventory levels in the channel to come down as activity resumes in the second and third quarters. Within Flow Technologies, we saw our higher margin agricultural precision spray impacted as many parts of the country were underwater at the start of the planting season. Given these delays and the limited number of months in the season, we are not anticipating a rebound in activity and are adjusting the cost structure of this business accordingly. With Aquatics and the specialty business in Flow experiencing slower topline growth rates in 2019, this has led to reduced expectations for segment income and adjusted EPS growth. We do believe this is a short-term issue, but unfortunately, the weather-related delays were compounded by the higher inventory levels in the distribution channels. Please turn to slide 11 titled Segment Positioning. We wanted to take a moment to speak to our three segments and why we believe we are well-positioned for the longer term. Aquatic Systems is a leading franchise where we believe long-term demand trends remain in place. We expect to continue to invest in dealer engagement and consumer pull. We have been expanding aftermarket products, including in the faster-growing automation space. We have built a strong business and while the growth rate in 2019 is not up to historical standards, we believe that averaging 2018 and 2019 is more reflective of the longer-term growth rate of this attractive business. As we mentioned earlier in the call, we strengthened our residential and commercial water treatment business with two strategic acquisitions. Aquion brought water treatment systems capabilities and an affiliated dealer network, while Pelican brought a water conditioning systems capability and an established e-commerce platform. In 2019, we will experience some modest impact to the topline as former component sales to Aquion are recognized as inter-company sales. We continue to focus on digital marketing and engaging consumers to build our brand. Flow Technologies continues to be a business where we are focusing on leveraging our core PIMS competencies and improving margins. While parts of the Flow portfolio have been impacted by inventory and weather issues, we are accelerating operations, sourcing, and structural changes to improve our overall cost structure to create a solid foundation for 2020. Please turn to Slide 12 titled Long-Term Value Creation Goals. This is an updated version of a chart we have referenced in the past, but an important slide as it highlights our longer-term goals. With last year's separation and our emergence as a pure-play-focused residential and commercial water treatment company, we remain committed to delivering more consistent performance. We continue to believe that we have a portfolio capable of delivering low to mid-single-digit core sales growth over this cycle. With a portfolio capable of delivering positive price coupled with the relentless focus on productivity, we expect segment income to grow mid to high single-digits. We generate strong free cash flow and have committed to repurchasing $150 million of our shares annually. We believe that this should result in top-quartile EPS growth and disciplined capital allocation would add upside to a strong base performance. We recognize that consistency is the key to being recognized as a top-quartile performer and we remain committed to achieving these long-term goals. I would now like to turn the call over to Zetania for Q&A after which I will have a few closing remarks. Zetania, please open the line for questions. Thank you.

Hey guys, good morning.

Hey, Steve.

Good morning, Steve.

I'm curious about what changed from the guidance you provided in late January or early February to now. I may have missed it, but Pool clearly indicated they weren't expecting a strong first quarter, and given the destocking impact, your guidance was even higher than what they projected. I'm not sure where the disconnect is, but what led to this? Why didn't you communicate back in January that the first quarter would be weak due to these factors?

I think it's a fair question and a good question, Steve. I think the different dynamics are it's easy to sit here now and look backwards at what inventory is in the channel. But as we raised prices last year, primarily related to the tariffs, we knew there was a little bit of inventory in the channel being built. But that's all based upon what the expected sell-through is through our dealers into the markets that they serve. And so we had anticipated that the inventory would be dealt with in Q1. But the significant drop in the sell-through produced more inventory in the channel and therefore it didn't make sense to continue to sell into the channel. And that was really what happened later in the quarter, Steve.

No, I understand that. And I'm just saying, like is there something in the FP&A function here that you guys aren't kind of picking up what the channel is saying? Because again like it was a public company telling you what the growth rate was going to be. And if there was destocking in the first quarter, then you guys would have been below that growth rate instead of guiding to something like 4% to 6%. And then going around to conferences and kind of not really insinuating at all that things were weak over the course of the quarter. Because I think visibility here is a question that I'm getting from investors all the time. And I think there's just a bit of a confidence issue that people have that you guys aren't picking up the right PVs in the channel.

Yes. Again, I wish it was that easy, Steve. I think we're looking at four days of inventory on hand and there's a lot of inputs in there. And I do want to remind everyone there's more than a distributor, right? I mean the pool market and also part of this is distributors in Flow as well, it's not just all pool. And there's lots and lots of distributors and lots of estimates that go into four days of inventory on hand. And I think we didn't know till late in the quarter that we were in the situation we were. And as soon as we knew, we went out and told people and we dealt with it accordingly. And we're taking out the cost and we're taking all the actions we can to position ourselves the best we can for next year. I don't want to damage a great business like pool and I think we're off doing all the right things to grow share and pull demand in that particular business. And I think it's demonstrated that success consistently over a series of years. And I do want to remind you that the tariff changes and the significant price increases were part of this issue as well, and those don't happen often.

Sure. Can you explain why Filtration was weak? We anticipated some declines in Flow sales due to flooding, which is a valid concern that everyone is experiencing. However, Filtration's performance was notably poor. Could you elaborate on what happened there? Additionally, I noticed you adjusted guidance and revenue projections.

It definitely was slightly weaker than we expected, Steve. I think weather impacted it as well primarily on the service and the installs. The timing of the acquisition was positive as far as the reported acquisition, but it also changed the way the intercompany sales moved from us to those two acquisitions because we sell to both of them. And then we did experience slightly weaker European demand which we have adjusted our full-year guide to reflect.

That also would have been helpful to know that you're going to kind of like have a little bit less of an organic impact from these deals that could have been communicated better probably at the time of the deal just some feedback. That's about it. Thanks a lot.

Thanks.

Good morning, everyone.

Good morning, Nathan.

I'm going to follow up on the pool business here. I understand it's seasonal. I would have thought that customers would be making these spending decisions on an annual basis. If we had cold weather in the first quarter, that might defer revenue from the first quarter to the second or third quarter. Can you discuss the dynamics and explain why revenue wouldn't just catch up? I understand why the spray business doesn't catch up, but I'm confused about why the pool revenue wouldn't simply shift from one quarter to another instead of disappearing altogether.

Yeah. It does. I think clearly, if we didn't have the inventory situation in the channel that we have, part of the Q1 miss would be made up in likely Q2 and Q3, Nathan. I mean, there is limited labor. So people don't go out and necessarily hire more. They're going to slide job's a week or two, or so in the schedule. And so they tend to do as best they can to make them up in the season. What we're really reflecting in the outward quarters is the fact that we still have to deal with the inventory in the channel. So, I do think the dealers will make up the demand. I do think that our channel partners will see that demand come through and it's more muted on us because of the inventory build that occurred from the Q1 sell-through.

So does that mean there was more inventory in the channel than you guys had predicted when you reported 4Q? I mean, you said you thought there was $30 million of pre-buy in 4Q 2018 ahead of the price increases. Did that end up being higher than you expected which is part of what contributes to this 2018 was higher than it should have been and 2019 is lower than it should be?

Yes. I mean, what we anticipated to be about a point of headwind for overall Pentair is now a couple points of headwind. Now again, I'm reminding you that it's not just pool. There's a little bit in the Flow Technologies distribution channel as well related to the weather, but yeah as I was mentioning, we were looking as you looked at days of inventory on hand forward-looking in Q4 it felt like 30. Because of the lack of sell-through that happened in Q1 that number expanded and it's got to be dealt with in Q2.

Okay. I just want to follow up on Steve's question about maybe looking inwardly at your own forecasting tools. Have you run a root cause analysis on this thing kind of looked at the FP&A processes to see if there's things that you guys can do to improve the predictability results here?

Nathan, as you might expect, we have our PIMS toolkit, which applies not only to our operations but also to our back office functions. We are utilizing our root cause countermeasure tools to identify what we could have had better visibility on and addressed sooner. However, as John mentioned, it can be easier to analyze this with the benefit of hindsight. We need to focus on how we can bring this information to the forefront instead of reviewing it after the fact. We are definitely working on this and seeking improvements across the organization.

Is there anything you discovered that you could share that might enhance those processes? Are you still making progress?

That would be such an easy answer, if that was it. I mean, there's no way we could predict the Q1 weather patterns.

That’s fair.

I mean, California, Arizona, and Texas I mentioned are such significant markets to the pool business. And what happened there was so unusual as far as the wet cold weather and that stops production or stops pool builds for a period of time because they can't move machines in. So, I don't know what we could do. I mean, we always run sensitivity analysis on our forward-looking analysis, but that's not one we would've predicted.

I should have clarified that question to focus on factors beyond weather effects and other unpredictable events.

The answer is no. We learned afterwards, as mentioned in our Q4 call, that there was inventory in the channel which would typically have been depleted by Q1. The specialty ag business was also significantly affected, and these factors contributed to the Q1 challenges. We haven't forecasted a recovery in the pool business or the specialty ag segment in our outlook. We have adjusted demand to reflect the lower end of our forecast models and are implementing cost actions to establish a foundation for 2020. That’s how I would respond to the situation.

Okay. Fair enough. I'll pass it on. Thanks for taking my questions.

Hey, guys. Good morning.

Good morning, Joe.

I don't want to keep asking the same question, but I'm a bit confused. Heading into the quarter, I understand that inventory levels fluctuate daily due to weather and changes in demand. However, on a broader scale, the inventory is a fixed number. If we're indicating that revenue will shift across quarters, I don't understand why the overhang wouldn't resolve itself more quickly. We might adjust our thinking from what we believed was 40 days to 50 days because the denominator changes, but the total inventory remains a fixed number of units. That's where I'm struggling to grasp the situation.

That's fair. I mean, I think the one thing I'll remind you is that if it was just a product sale it was not dependent on labor required to install it. I do think you'd see a quicker recovery. But the labor is not excessive, right? I mean, it's not going to like you're going to go out and add more labor to build more pools in the short-term. So it will come through the channel clearly, and we do think that will spread itself over Q2 and Q3. But the Q1 hit to us is going to be reflected as an inventory reduction in Q2 and Q3. It won't affect the channel that same way.

How much is that affecting our actual construction elements? I always thought that this business isn't significantly impacted by that. I'm just curious about the extent of it.

Every dealer is either installing a new pool or handling the aftermarket aspects, including scheduling the aftermarket pool product installation. Those involved are typically the same individuals, and they will work hard to ensure the pools are completed. As a result, there will be delays for both the aftermarket and new pools.

The guidance for the second quarter suggests a more typical seasonal increase than usual, possibly due to a slight shift in demand. However, the forecast for the second half of the year remains about the same compared to last year. We have noted the considerable pull-forward, which was a 12% increase. How confident are you in the second half being flat year-on-year, and what level of visibility do you have regarding that?

In Q2 and Q3, we anticipate that the reduction in inventory will have an impact, but we expect a sequential improvement in Q4, leading to a recovery. For the entire year, we are confident that our expectations are accurate. As John mentioned, we have taken into account all the information we have so far when considering the upcoming quarters.

Okay. I want to address the last point on Filtration related to Steve's earlier question. The magnitude of the miss was quite surprising. It’s not related to the pool or Flow, and it was a significant miss compared to the initial guidance. Your mention of lower component sales not being intercompany makes sense, but I assume those were taken into account since you announced those deals before providing the initial guidance. Could you provide more detail on this?

Yes. Let me just frame that. I mean, the intercompany sales are roughly about a point overall total Filtration Solutions for the year, okay? Which will give you an impact on kind of what it is per quarter. Keep in mind we did not have the acquisition as a contribution in Q1. We had it closing after Q1. So these two things you're seeing the benefit of the acquisitions. But we had not forecasted in the quarter the impact of the intercompany sales. But the real impact that we saw was a little bit slowing in Q1 where the weather impacted us. We do expect to catch that up in Q2. And then the European trends are not where we'd want them to be. And that's really the reflection that we added to the full-year forecast. I don't think we know that. I think we're anticipating it and we're planning for it.

Good. Thanks guys.

Hey, good morning guys.

Hey, Mike. Good morning.

So question on the margins on the Flow side. So talk a little bit about the inefficiencies in the mix side please? And then also when do you think that can normalize back to what your previous run rate suggestions were? And how long do some of these headwinds render?

The primary factor impacting the margins in Flow is the mix effect stemming from the downturn in the specialty ag spray business, which has a higher profit margin in the overall portfolio. This is the key driver. Additionally, the timing of how pricing is implemented throughout the year as price changes take effect is another contributing factor. Last quarter, we discussed a couple of factories that are stabilizing, and we expect them not to negatively affect margins this year and to improve as we progress through the remainder of the year.

Sounds good. And then when we think about the second half of the year here, just explain what's changed now versus your previous guidance. Obviously, so, on the Aquatic side, the assumptions on the top line have come in a little bit. Obviously, we're adjusting a little bit through some of the costs on the Filtration side that are no longer external sales. Anything else you would point to that's changed in the back half of the year versus the previous guidance?

Sure. Overall, not much has changed. That's how I would summarize the main point. We previously discussed the timing of inventory and how it is expected to work out. Additionally, we mentioned softness in a particular business, which we do not anticipate will improve as we progress through the remainder of the year. These are likely the two main factors contributing to any differences. However, the latter half of the year remains largely in line with our earlier expectations. We have not factored in any benefits from tariff relief in this outlook, keeping it consistent with previous forecasts. Most of our operations, sourcing, and targeted initiatives this year are not projected to yield benefits until 2019, but we do expect them to contribute in 2020. Essentially, we are implementing these activities now, recognizing it will take longer to see results, and positioning them as foundational for 2020.

So in other words, if you hit your plan, your expectation is that the run rate exiting 2019 is slightly lower than what you were originally expecting, but not meaningfully lower like the front half trajectory would imply?

Yes. That's correct.

Good. Thanks guys. Appreciate it.

Thank you.

Thank you. Good morning, everyone.

Hey, Deane.

Good morning, Deane.

I might have missed this, but are you able to separate and quantify the impact of weather this quarter from the inventory dynamics?

We didn't specifically quantify it earlier, Deane. But think of it as $30 million to $40 million. So if you think about the majority of the Q1 impact is really driven by weather, which as John said delays the bleed-off of that excess inventory that then happens in Q2 and Q3.

Got it. I just wanted to make sure that part had been quantified. And then just is there any ripple effect on pricing? I know you called out the 3% pricing assumption. But with an incentive to work inventory down, is there going to be any compromise on pricing? And what might the dynamics be there?

No. No. The overall pricing profile stays the same as you referenced, we talked about 3% for the year, and so nothing changing from a price perspective.

I understand. My final question pertains to the business model, and it's more of an observation. Since Pentair has shifted its focus to being solely a water company, you've lost the earnings diversification that existed when nVent was part of the organization. This change has resulted in a heightened vulnerability to weather conditions compared to the previous company structure. Is this increased variability something that naturally comes with a more focused portfolio? Has this been considered in the evaluation of Pentair as it exists today?

Deane, I think it's a great observation. The answer to the first question is yes. This definitely exposes more vulnerability to weather impacts. Now, what we need to do is build more diversification into our portfolio to account for that. We did see some instances of this; we had a strong quarter in China, and I believe conditions there have improved. We also experienced a bit of softness in Europe, which is unusual. However, focusing on portfolio diversification is essential to ensure we do not expose ourselves to these types of weather patterns and the variability they can cause.

Got it. Thank you.

Thank you.

Hi. Good morning.

Good morning.

Good morning.

So kind of a follow-on to that question. Would it be fair to say that even though Aquatics is really the flagship, the best business, the highest margin and all of that that the business will be built more going forward through organic means retailer, consumables that kind of thing and then your acquisitions would be more focused on the other two segments?

Yes. I mean, I think the pool business is well-positioned, and I think we have a lot of organic growth runway remaining. And I think we continue to innovate there from a new product perspective, and we continue to have good intimacy with our channels and our consumers and understand what they have. So I think that's going to be more of our organic strategy as we go forward. As evidenced by the two acquisitions that we just did, our goals in Filtration Solutions is to build out a closer-to-customer model and also make sure that we're doing our part to drive demand in the channel. The overall penetration rate of Filtration systems in homes is relatively low. And, although, it's better in the commercial office space and/or commercial restaurant space, it's still not where we think it should be or can be. And so, most of our acquisition activity will be focused on how do we drive that demand and how do we get closer to the customer to drive that demand in Filtration.

Good. Thank you for that, John. That helps. My follow-up is, really, not to beat the horse even deader here, but would you be able to maybe answer this question, because you indicated that there doesn't seem to be a much of a change in demand on the pool side. I'm not quite sure what you meant by that. And maybe, the question specifically would be, what was sell-through by your dealers in the quarter?

Yes. When we talk to our dealers and hear from the builders, we understand that backlogs remain high and business remains solid. Our insights from these discussions indicate that we are not seeing signs of a slowing market. Sell-through, based on the information we have, remains strong. We anticipate some impact in the first quarter due to weather, but we expect things to improve as we approach the busy season in the second and third quarters. Overall, we are not observing any trends in demand that suggest a slowdown.

So what I'm understanding is that your distribution channel is somewhat normalizing right now?

I mean, I can't speak to that. But I can tell you, what Mark is saying is, the sell-through is accelerating, right? The March sell-through was definitely towards the end high from the dealer channel and then we also know the dealer channel is going to make up. As we mentioned, most of that whether loss in Q1, they're going to do their best to make that up in Q2. Why that's muted to Pentair is because there is that inventory in the channel that needs to be worked out before we're going to see the benefit of that recovery of the channel shift.

That makes sense. Thank you.

Thank you.

Hi, Josh Pokrzywinski.

Good morning, Josh.

Just a follow-up, just a finer point on pool that I think Mark raised earlier, I want to not miss it in passing that the business should normalize by the fourth quarter. I guess, just given everything we've seen from tariff pre-buy and even your callouts about the inventory position exiting the year. I guess, mathematically looking at guidance, you do have to pick up the growth rate by the fourth quarter. Is that explicitly something that you're calling for? And, I guess, why not take a more conservative track, just given some of the surprises this quarter?

I believe we have a good hold on the situation. When we evaluate our new estimates regarding the sell-through demand for the year, we're planning to reduce inventory to at or below typical historic levels. The market is still growing, and the industry is expanding as well, which suggests that inventory should actually increase during this time. Our intention is to forecast on the conservative side. While it may seem like the fourth quarter is an anomaly, we expect our typical patterns to persist, and historically, Q4 tends to be a strong quarter for Pentair.

Got it. And then, I guess, just following up a little bit on Deane's question on pricing. Looking holistically at price-cost productivity, I know you kind of think about that, those three different legs of the stool. I would imagine there was some drag there from all the disruption this quarter. But thinking about that total bucket the rest of the year, how should we think about that gap closing, improving, or getting worse? I would imagine something happens in the world as it pertains to rebates or pricing power, given volume. But just thinking about it holistically, should that get better or worse from here?

Yes, you hit on it. It does get better as we move through the year, which is in line with sort of how we expected it to move. Just with the timing of when price is impacted with rebates and other things. But as we said on our earlier guidance, we continue to believe that effectively price and inflation will offset each other. So we continue to view that as the overall way to look at the guidance, and that's a full-year statement, so we see that and we sort of see that starting to turn as you get into Q2, Q3 and Q4.

Got it. And if I can just sneak one more here, more of a question, philosophically, on how you guys get impacted from a weather perspective. If I think back to 1Q of 2018, I think, some other folks in the broader construction ecosystem called out weather then in January. Was there anything in the comp that would have said, 1Q of last year wasn't particularly smooth sailing on the weather front?

No, Josh. Last year's Q1 actually was one of our stronger organic growth quarters of the year. I think we benefited from some of the tax changes that occurred and demand was strong out of the gate. So I'd say, we don't think that weather had a significant impact on Q1 of 2018 at all. And usually if it happens earlier in the quarter, it's not as big of a deal, because those things can get made up. I mean, really, what we're talking about is the end of January and February was six significant weeks in a row of a consistent pattern in the states where it matters to us.

Got it. All right. Thanks, John.

Hi, good morning everyone. So a follow-up on Aquatics, you highlighted some of the areas of U.S. that were most impacted by the colder weather and the inventory destocking. Just thinking about your expectations for the further destocking over the next one to two quarters here and then what ensues. Could you give us a sense on whether you're really expecting a similar level of activity across all these regions? Or could there be some dispersion or any unique regional circumstances that you're perhaps factoring in?

We're not considering any unique circumstances or variations. Our focus is on addressing the inventory situation and bringing it down to the lower end of the range. We anticipate that the inventory will be resolved, although it's not ideal or perfectly balanced across regions. We believe it's crucial to clear this inventory from the market. We have a strong business that has historically shown growth in the upper single-digit range, and we expect that to continue in the mid to upper single-digit range. Our goal is to right-size our inventory, enhance consumer demand, advance our new product development, and leverage our marketing and sales efforts to restore our business to the strong position it held in 2020 and beyond. That is our plan.

Okay, sounds good, makes sense. And just on CapEx. So you've guided that $10 million higher. Just wonder, if you can give any additional color on what led you to up the budget there and just any color on where you're planning to spend this?

Yes, I think we've ensured that our businesses recognize the significance of capital in boosting productivity. It is relevant whether it's related to software, marketing and sales activities, or automation and capital investment in factories. Mark and I believe in using capital to enhance productivity, and we want to ensure that our businesses have the necessary capital to achieve this.

Got it. Thanks for clarifying.

Thank you.

Thank you for joining us today. We continue to invest in our prioritized growth initiatives around advancing pool growth and accelerating residential and commercial water treatment. We're driving operations, sourcing, and cost-out actions where appropriate, particularly in our Flow Technologies segment. We have a strong capital structure, solid free cash flow generation, and we will continue to invest in our strategy to be the leading residential and commercial water treatment company. Thank you for your continued interest. Zetania, you can conclude the call.