Pentair plc (PNR) — Q3 2021 Earnings Call Transcript

Thank you, Stephanie, and welcome to Pentair’s third quarter 2021 earnings conference call. We are glad you could join us. I am Jim Lucas, Senior Vice President, Treasurer, FP&A and Investor Relations. And with me today is John Stauch, our President and Chief Executive Officer; and Bob Fishman, our Chief Financial Officer. On today’s call, we will provide details on our third quarter performance as outlined in this morning’s press release. Before we begin, let me remind you that during our presentation today, we will make forward-looking statements. 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 and today’s release. We will also reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found in the Investor Relations section of Pentair’s website. We will be sure to reserve time for questions and answers after our prepared remarks. I would like to request that you limit questions to one and a follow-up in order to ensure everyone has an opportunity to ask their questions. I will now turn the call over to John.

Thank you, Jim. And good morning, everyone. Please turn to Slide 4, titled executive summary. I’d like to start by thanking our Pentair teams for delivering an outstanding third quarter in the face of unprecedented material shortages and inflation. We were pleased to once again deliver strong double-digit sales and EPS gains. While it was easy to focus on the supply chain and inflation challenges that we all currently face, it is also important to appreciate how strong 2021 has been for Pentair. Year-to-date, we’ve delivered 25% sales growth, nearly 40% segment income growth. We’ve expanded margins 170 basis points and grown EPS 40%. We have said that we view our businesses as more seasonal than cyclical and our robust backlogs give us further confidence in our ability to continue our strong momentum in Q4 and into 2022. In addition to the strong sales and earnings growth, we have generated over $500 million of free cash flow this year. And our balance sheet is strong. We ended the quarter under one-time levered, and I am especially proud of our 19% ROIC. We have completed two acquisitions this year that further advance our strategy. We acquired KBI earlier this year, which added commercial services capabilities to our growing water treatment business. We recently completed the Pleatco acquisition that brings strong aftermarket filtration products, not only to our flagship pool business but also to our industrial filtration business. Given the strong third quarter performance, we are tightening our full-year guidance range, which Bob will give additional color on shortly. There remains a lot of uncertainty as we end the year, given the ongoing material shortages, logistical challenges, and inflation. In fact, we experienced more inflation in the third quarter of 2021 than we did in the full year of 2020. We have implemented multiple price increases across most of our businesses this year. There’s a lag from when price increases are announced and when we recognize them, particularly given our strong sales and backlog growth this year. The good news, however, is we expect strong pricing tailwinds entering next year. This has been a great year and we believe we have a lot more runway ahead to become an even stronger company. Please turn to Slide 5 labeled building a track record of consistent growth. We believe our strong performance over the past several quarters reinforces that we are in the right spaces for the future. Our portfolio of industry-leading products and now services helps consumers move, improve, and enjoy their water in addition to a growing industrial filtration business focused on faster-growing niches, such as sustainable gas. We are building a track record of consistent growth. Our residential businesses have enjoyed robust growth, and we believe there’s more to come. Our commercial and industrial businesses have been recovering back to 2019 levels, and backlogs have been building in these longer cycle businesses. We’re making great progress in building out our strategic growth initiatives. As I mentioned previously, we have completed two acquisitions this year that further our pool and our water treatment strategies. We are also driving transformation to both unlock value and to fund growth. While some of our businesses are further along the journey, we have identified a strong funnel of opportunities to help us become more productive, better serve our customers, and drive growth and margin expansion. Our balance sheet is another lever available that offers great flexibility to invest in our core, return cash to shareholders, and to fund strategic acquisitions. 2021 has been a great year for Pentair, and we believe there’s a lot more yet to come. I would now like to turn the call over to Bob to discuss our performance and our financial results in more detail, after which I’ll provide an update on our overall strategic position. Bob?

Thank you, John. Please turn to Slide 6 labeled Q3 2021 Pentair performance. Third quarter sales grew 21% with core sales increasing 18%. Consumer Solutions grew core sales 26%, and Industrial and Flow Technologies delivered core sales growth of 8%. Segment income was up 28% and return on sales expanded 90 basis points to 18.5%. Adjusted EPS increased 27% to $0.89. Inflation continued to be a significant headwind, but we saw price nearly offset it in the third quarter. Corporate expense was $17 million in the quarter, and our tax rate was 16% in the quarter. Overall, the third quarter was another solid performance across the enterprise as our teams continued to deliver in the face of material shortages, logistical challenges, and inflation. Please turn to Slide 7, labeled Q3 2021 Consumer Solutions performance. Consumer Solutions sales growth was 30% as both businesses continued to perform at record levels. Segment income increased 27% while return on sales contracted as price did not fully keep up with a significant inflation headwind. While we have implemented additional price increases, our record backlogs and strong double-digit growth create a lag from when the new prices read out. We believe this creates a tailwind on price entering next year, but inflation does not appear to be moderating. Pool experienced sales growth of 32% in the quarter and was up 5% sequentially. The demand in the industry remains strong even as the pool fiscal year ends and activity begins to moderate. In fact, dealers are booked well into the third quarter of next year, which we anticipate will result in another strong pool season next year. Favorable mortgage rates continued increases in home equity and the ongoing trend of suburban migration are all contributing to robust demand for the industry. We continue to see strong demand for our variable-speed pumps as new efficiency regulations drive transition from single-speed pumps. The majority of our mix has shifted to variable-speed. 2021 has been a good year for new products, including our IntelliBrite, HD Light and higher energy-efficient tiers. We expect next year to be another strong year, including advancements in filtration and continued expansion of connected products. Demand for new pools remains strong, with many builders reporting backlogs into the later half of next year. Our record backlog and favorable demographic trends give us increased confidence and momentum as we look to next year. Water treatment delivered 28% sales growth as residential demand remained robust, and commercial showed strong signs of post-pandemic recovery. We saw our direct-to-consumer business improving leads and closings in several new markets and we continued to evolve our business model. We’ve made great progress in rebranding the business and are also building out our service capabilities. The commercial recovery continued, and the integration of KBI is going well. We had total water management winning the quarter. That was a great example of taking a product sale and adding installation and services with an existing KBI customer. While restaurant foot traffic is still not back to 2019 levels, average ticket prices are up, and the result has continued improvement in orders and backlog for what has historically been a shorter cycle business. While Consumer Solutions has felt the biggest impact from inflation and material shortages in the short term, we have successfully implemented multiple price increases that are yet to fully read out and strong backlog levels point to anticipated continued growth for the segment. Please turn to Slide 8 labeled Q3 2021 Industrial and Flow Technologies performance. Industrial and Flow Technologies increased sales 8% in the quarter while segment income grew 23% and return on sales expanded 180 basis points to 14.8%. Residential flow grew at a double-digit rate for the fourth consecutive quarter. This growth was accomplished even in the face of supply chain constraints that are not showing signs of mitigating. Our customers have continued to experience strong sell-through, which gives us confidence that we will continue to grow. Price is also beginning to read out further and should create a tailwind entering next year. Commercial flow increased sales 6% in the quarter. The focus in commercial flow continues to be on complexity reduction, better price realization, and building out the aftermarket business given the large installed base. Industrial filtration delivered 8% sales growth that was once again underpinned by recovering the shorter cycle business of food and beverage. We continued to see strong orders and our sustainable gas business had strong backlog growth and a growing order funnel where we experienced an improvement in our win rate. IFT is building momentum on return on sales expansion, and our transformation initiatives coupled with price realization improving, we believe should drive more improvement going forward. Please turn to Slide 9 labeled balance sheet and cash flow. Free cash flow continued to be a great story, as we have generated over $500 million year-to-date. We have returned $200 million to shareholders through dividends and share repurchase during 2021. The balance sheet ended the quarter exceptionally strong with leverage remaining under one time. The return on invested capital ended the quarter at 19%, a number we are particularly proud of. We had a higher than average amount of cash on hand at the end of the quarter, as we awaited the completion of the Pleatco acquisition, which occurred last week. Our balance sheet gives us a great deal of flexibility to invest in our strategic growth initiatives, both organically and through strategic acquisitions like KBI and Pleatco. Please turn to Slide 10, labeled Q4 and full year 2021 Pentair outlook. We are initiating fourth quarter and updating our full-year 2021 guidance. For the fourth quarter, we expect sales to grow 15% to 19%. Segment income to grow 16% to 24%, and adjusted EPS to grow 16% to 24% to a range of $0.81 to $0.87. Our forecast reflects ongoing material availability headwinds and higher inflation. For the full year, we expect sales to grow 22% to 23%. Segment income to increase 32% to 34%, and adjusted EPS to grow 34% to 36% to a range of $3.34 to $3.40. In addition to supply chain and logistics challenges, we would also remind investors that the fourth quarter historically incurs a seasonal slowdown for many of our residential businesses, as the weather turns less favorable for outdoor activity, in addition to fewer workdays around the holidays. Below the operating line, we continue to expect corporate expense to be around $80 million. We now expect net interest to be around $15 million, and our tax rate assumption remains around 16%. We anticipate the share count to be around 167.5 million, both for the quarter and the full year. Capital expenditures are expected to be around $60 million, while depreciation and amortization is anticipated to be about $80 million. We continue to target free cash flow to be greater than net income.

I would now like to turn the call over to Stephanie for Q&A. After which, John will have a few closing remarks. Stephanie, please open the line for questions. Thank you.

Hi, this is Eitan Buchbinder on for Andy. Good morning.

Good morning.

Good morning.

So inflation in I&FT appears to have been balanced with price in the quarter. Should price cost for the segment inflect positively in Q4? And what is your expectation for price cost positive in Consumer Solutions?

As we said in the prepared remarks, price is reading out nicely in both of our segments. Unfortunately, inflation continues to be a headwind as we look at the fourth quarter. I think that Consumer Solutions probably has the bigger impact of the margin challenge with the bigger backlog. And the fact that prices are reading out a little bit more slowly in that business. I think we’ll continue to see a challenged margin at least in the fourth quarter. For I&FT, they have some really nice productivity improvements. And so margins should continue to improve even though inflation continues to be a challenge.

The other point I would make is, and you saw a little this in the quarter, despite KBI being a very strategic acquisition, it is a services business. Services businesses don’t have the large margin profile, and so it’s not going to have the same margin profiles as Consumer Solutions. So, it is slightly dilutive to margins. And as we bring Pleatco in as well, even though it’s a really highly valuable asset and one that we think is going to have great runway in the aftermarket side, it will also have a lower margin profile than Consumer Solutions today. So both of those will be a slight drag on the margins, but on both are various strategic tuck-ins that we think add significant value over the long term.

That’s helpful. Thank you. And you called out improving capacity in pool as supporting results in this quarter as well as in Q2. Where would you say capacity utilization stands now relative to its potential within your existing pool footprint?

It’s hard to answer that. I mean, I think we’re not the capacity challenge, right? Our factories have capacity to meet the demand. We’re still working through the supply chain. And as we mentioned in Bob’s remarks, I mean the supply chain is hugely volatile right now. Even when we can get supply, we have to worry about ports. We have to worry about freight. We have to worry about transportation. So, we’ve got a real lumpiness as far as what’s coming in each day and we’re doing the best we can. And the teams are, I’m really proud of the team’s agility to move forward and deliver again a really solid quarter in the wake of challenged supply chain areas. So, I can’t answer the capacity issue, but we have plenty of capacity lost within our buildings.

Thank you. I’ll pass it along.

Hey guys. Good morning.

Good morning.

Hey, so sorry. I joined on a couple minutes late, so apologies if you covered this. But in our checks that we’re doing with the pool sector, it seems like price next year is comfortably in the double digits. I think I saw you guys plus eight or so in consumer. Do you expect that to kind of be a lagging indicator? You see that kind of going up with what’s currently in the market?

Yes, I think we, obviously, it’s too early to guide on 2022 right now, but given where we are with inflation and, as I said, more inflation in Q3 than all of last year combined, and even though we planned for doubling inflation, we’re in the quadrupling and quintupling range, which is startling, right? And so I do think with the supply chain logistics, we should anticipate that inflation continues to grow in the next year and therefore, we would continue to price to hopefully offset that inflation. And so, yes, I think the ranges that you’re suggesting are more the probable direction.

And if I can sneak in one more just on pool, if you were to categorize your business, I know we talk about like new builds versus retrofits versus just your traditional kind of break and fix. Like, how would you categorize the growth that you’re seeing now? Does anything in any one of those seem like just way off of what you would expect or is it kind of balanced across those three verticals there?

It’s really balanced. I mean, we’re seeing new pool builds, which is obviously driving pool growth. We’re seeing expansion of the pad, as we’ve been mentioned all year, which is driving pool growth and adoption and usage, which is driving pool growth. So it’s across the spectrum of both new pools and aftermarket consistently.

Thanks guys.

Thank you.

Good morning gentlemen. So on the comments that Bob made about some seasonal slowing, which is normal going in the fourth quarter, just digging on that a little bit, is the thought that you can get pretty normal sequentials across your business units going in the fourth quarter, or is there some sense of any weakening or strengthening demand in any of the two area, any of the areas you sell into or are there areas where the supply chain might be a greater headwind going into the fourth quarter than maybe what you would have saw in the third quarter?

The guide for Q4 from our perspective is roughly flat since sequentially is kind of how we think about it. We have a little bit of challenges in terms of the seasonality of some of the residential businesses, but honestly, the backlog is so healthy going into the fourth quarter, that it’s really about the supply chain and the material challenges that we face. So the business continues to be very healthy from a demand and backlog perspective. We are seeing some seasonality in the fourth quarter about residential. It really does come down to the supply chain.

So in other words, there’s nothing long that you’re assuming in guidance versus normal seasonality.

No, nothing, no.

Okay. And then follow-up, balance sheets in a great spot, sub one times levered and so twofold. One, could you just talk about actionability of pipeline, obviously done a couple of good deals so far this year, and then secondarily, what would the calculus be to increase the rate of share buyback at this point?

Yes. Mike, it’s John, I think without a doubt, you mentioned, I think the funnel is healthy and there’s a lot of M&A activity. While we’re not going to necessarily accomplish everything, I think we want to be active and we want to be focused on our SGI activities. So that’s where we’re at right now. And if in fact those prices get too lofty or they’re not the right deals for us, I think we’d lean back into utilizing the cash on the share buyback side. In addition to our normalized targets that we publish as $150 million a year.

Appreciate it. Thank you.

Thank you.

Hey guys. Thanks for taking the questions. Maybe just a bit of a follow-up on the last one, the revenue guidance for the year is up $15 million at the midpoint for 2021. I guess first question is, does that include Pleatco now and if so, how much are they adding? I think you said $95 million in the press release when you announced the deal. So it does seem like something maybe falling out or coming down maybe about $70 million, $80 million, if we’re adding that relative to the original guide. So maybe about two percentage points, can you help reconcile a bit what’s going on with the guidance there?

Yes, just to clarify, we have just completed Pleatco. The contribution is roughly $20 million in Q4, so it’s relatively modest. On a full-year basis, we think that’s close to $100 million, but we’re not going to have it this whole quarter. It’s about two-thirds pool and about one-third Industrial Filtration that’s where I would share with you what that contribution is. As Bob said, we don’t think we see the supply chain ramping up between Q3 and Q4 while there’s still this strong demand. We don’t think it’s prudent to anticipate that we would ship more in Q4, given that there are holiday seasons that are also clamoring for the same ports and the same freight routes that we’re trying to get to. So, we’re doing the best we can to sequentially improve every single quarter. And I think we made great progress from last year into Q1 to Q2 to Q3. And now what we’re suggesting is it’s wise to think that we’re flattish in our ability to get product out the door from Q4 to Q3. The seasonality of the businesses, which is normal, is more of our service businesses. The businesses that go into people’s homes to treat water treatment. And those businesses are seasonal. Not too many people look to do that over the holiday season. As Bob mentioned, that’s why we usually see a Q3 to Q4 dip in those particular offerings. So normal seasonality with the belief that we’re not going to raise our expectations beyond what we delivered in Q3.

Okay, fair enough. And then, I know you don’t want to get into a 2022 guidance and quantifying the pricing here, but can you maybe give us a sense of what recent or anticipated price actions are in terms of timing and then even into early next year? And then, when you think those start to really read out as you say. Thank you guys.

As we’ve mentioned in the prepared remarks, we have had multiple price increases this year to offset the inflation. We’ll continue to follow that process into next year, where as inflation trends higher, we will pass along that price increases.

Good morning. Thanks for taking my question. Could you just talk through what you’re seeing from an early order program and how you’re thinking about those deliveries in the fourth quarter versus the first quarter, and then any commentary on what you’re seeing in the channel from an inventory perspective?

Yes. We don’t expect a significant early order program in the fourth quarter. There might be pockets, but at this point, nowhere near the size that it’s been historically.

Part of that is with the significant backlog we have, it’s not prudent to think about adding more to it. So, we worked with our channel partners around certain stocking areas differently than we worked with our channel partners around where they already had significant demands on us. And we were just trying to meet those demands. So that’s the point that I want to make sure we emphasize that program is usually a level of the factories. And there’s no need to do that since we’re trying to be full out on the supply chain right now.

Thanks. That’s helpful. And obviously, you’ve had strong sales in the quarter and it talked a lot about the supply chain headwinds. Could you quantify any lost sales that occurred in the third quarter or that you expect to occur in the fourth quarter? That’s being pushed out to 2022?

I would suggest that, the incremental backlog over last year that we’ve now reported would be the gap that we’re trying to get through. Right? I mean, we have typical backlog businesses, and then we have more book and ship businesses, and then the book and ship businesses, which is primarily the residential. We’re not able to get everything out that our customers want every quarter. And so we start the quarter off and in a backlog situation, continue to add orders to it, ship as much as we can. And then we’re still having those rich backlogs, which are a combination of demand and the inability of the supply chain to meet that demand.

Great. Thanks for taking the questions.

Thank you.

Thanks. Good morning, guys.

Good morning.

Good morning.

So that sort of a follow-up on Joe’s question, I guess, to ask more directly, is there anything that you can see today? Are there any meaningful watch items that would prevent pool from posting solid growth again next year?

No.

All right. No, that’s what I wanted to hear. And it looks like Pleatco essentially paid for by your second half cash flow. So that’s a pretty good setup. Is there anything you can offer in 2022 base case outlook growth rate relative to the $95 million ROS level? Anything else that would help us to gauge a reasonable accretion range for year one?

Again, we’re not in a position today to provide the 2022 guidance, but what we do have a number of tailwinds in place, we talked about that the strong backlog on entering the year. We’ve also, as you’d expect with the supply chain challenges, having the number of inefficiencies this year and that’ll help the P&L. And then probably most importantly, the transformation initiative that we talked about should be a tailwind as well for 2022.

Yes, and just Pleatco specifically, which you asked, just think about it roughly a $100 million of revenue give or take and around and think about roughly 20% and a little bit of interest headwind given the fact that most that’s cash and you can get yourself into what you think accretion might be, obviously we’ll be doing some integration work, which will offset that slightly, but that gives you a general direction of that asset.

Okay. Appreciate the detail. Thanks again.

Hi, good morning guys.

Good morning, Jeff.

Good morning.

I noticed in both businesses you got productivity was in the green, and I’m just wondering what’s driving that just given all the crosscurrents and headwinds on supply chain that would be, I guess, eating into that.

Operating leverage, I mean, these are some pretty significant growth rates, Jeff, and when you leverage your fixed costs factories, and generally what’s been a very productive variable labor and fixed cost labor, the factories, that’s where we’re getting that productivity front.

Okay. And then just on a lot of questions on kind of price in the next year. And I think he has mentioned how substantial the carryover is, is the thought that that price cost dynamic, it looks like it’s a little bit negative, 3Q and maybe into 4Q, but is there a point where you start to see that flip positive or should we continue to think about this trend of those being pretty close as the trend into 2022?

Yes. Jeff, I think, it’s fair to say that when you take a look at the rate that we’re exiting at, from an inflation standpoint, that creates an inflation headwind into Q1, right. And level it off in Q2 and Q3. And that’s where we got to get the incremental price to try to mitigate that. So full year, next year, I think we would feel like we’re in a position to offset it. There might be some lumpiness by quarter, some tailwinds and some headwinds, and that’s what we’re working through. And have you announced your January 1 price increase magnitude?

No, not yet.

Okay. We’ll stay tuned for that. Thanks.

Good morning everyone.

Good morning.

I kind of like tact this a little bit from the gross margin side. So the real inflation started reading through in the third quarter. Gross margins in the first half were a little bit over 36%, about 34.5% in 3Q. Do you expect to be able to get those gross margins back to that kind of 36% range when you’ve offset all of the inflation increases with price, assuming inflation stops going up at some point here? But will there be a just some of the math of adding the same number to the top and bottom that will keep you below that 36% level that we saw in the first half?

No, that is our goal is to get back to that as quickly as we can. And certainly, doing better from a price and inflation perspective is important, but also the transformation is a key part of our margin expansion story.

And Nathan, I’d like to use the opportunity to share that I have desires to have a four in front of that gross margin as we exit the transformation period that we talked about and most of the levers that we’re pulling, we believe that pricing is a big initiative and we’re leaning into that with outside help, looking at our value-adds and looking at end-to-end costs and trying to think about even our partners' costs and how we help mitigate some of the expense. And we agree that logistics and end-to-end freight costs are pretty sizeable, not just for us, but for our partners. So, how do we get after that with price? The second one, sourcing, how do we lean in on sourcing and really look at global supply chains on a total landed cost basis, and make sure we’re making the best choices and SKU rationalization is a big enabler there as well. The third one is the manufacturing and distribution footprint, I think the distribution one gives us a big opportunity. And the fourth one is the organizational enablement. And that’s really about making sure that as we find new channels, new adjacencies, we’re getting productivity from the old way of doing things to fund the new way that we want to do things. And so those are the four big pillars of transformation. We made a lot of progress and we hope to create tailwinds to 2022 from those initiatives.

I was actually going to ask about the transformation initiatives next. I know when you announced these things back in June, there was a period of planning that needed to be gone through in order to finalize what exactly you needed to do. Can you talk about where you are in that process and when you should really start to see the benefits in these things?

Yes, really rich funnel, and I’m really proud of the way the teams drove the brainstorming, the ideation around what we could do and should do. And ultimately the opportunity is significant. And I want to make sure we set those targets against those new gross margin levels that you mentioned, because we have gone slightly backwards here, which means we have more that we have to go get. And then we also have to look at it pre-inflation, currently in the inflation environment and post-inflation to make sure that these are really contributing to the end state of Pentair. So really pleased with the progress and the team. And as I mentioned, we expect it to start contributing in 2022.

Great. Thanks for taking my questions.

Thank you.

Boenning & Scattergood is the name of our firm. Thank you. So, yes, I don’t want to jump across the valley prematurely here. But obviously, we’ve seen what a difference a year can make. So kind of a big picture, structural question around price costs. You’ve gotten a lot of price to pass all this stuff through. So let’s just say hypothetically the Fed does tap the brakes early next year. Inflation pretty quickly comes down. Some of your raws go down, your freight goes down. How should we think about price in that scenario? Do you keep a lot of that price and that scenario and realize the margin upside, at least for a while, or, and how long could that be, or do you think that the competitive dynamics in that kind of a scenario would dictate that the price has given back pretty quickly? And I know that the answer might differ by business, but just interested in your perspective on it from that kind of point of view?

Yes. I mean, the way I look at it is that if you think of that decision tree, you take that scenario, or do you take the scenario where the inflation continues to go forward? I’m going to choose the one where inflation continues to grow, because if that happens and we’re out in front, because we’ve been trying to catch up on price all year long, but if we can get out in front of it, then the worst-case scenario is that we start to turn back pricing to our channel to basically reflect the lower inflation rate that we have. That’s an easier mitigation strategy than trying to get new price in an area where people are anticipating the inflationary pressures to subside. So, I think those, that’s the scenario planning that we’re going through, which is why we’re not ready to share 2022 with yet, but I’m going to lean towards that. We think inflation and supply chain challenges continue. And the worst-case scenario is we dial back from there.

Okay. But then in terms of different businesses, I mean, which would be the ones where based on the competitive dynamics you think you could hold price and, which are the ones where you think would be a little more competitive and the give-back would be quicker?

Well, I mean, we’ve always said that we’ve got three general business models at Pentair, and our manufacturing build the stock, make the stock that goes through dealer distributors are the most responsive to inflationary pressures and price increases normally. This year is literally unique in the sense that we’ve had these large backlogs, and it’s hard. We’re not going to go back and reprice backlog, right? So there’s a little timing delay related to that backlog. Another business model we have is project-based, and you’ve got to predict where your price increases need to be to reflect the inflationary pressures that are out there, six to nine months in advance. And that’s always the hardest to get, right? Especially in these environments. And then the third one would be more OEM or larger customer base business models where, again, you’re in a process of negotiation and before those price increases go in, you got to get both sides to agree on what that partnership looks like. Those are the three basic premises. And so obviously the make to stock a little easier. In most normal times, the project, you have to be more careful, and the OEM system negotiation ensures that everybody got the best productivity in the cycle.

Got it. No, that’s really helpful perspective. Thanks for your time.

Hi, good morning everybody. Thanks for the informative responses and I’m sorry for one more on price cost, but it’s obviously a hot topic and I’m just curious on a couple of things. Is the volatility and variability in the supply chain getting more predictable? I mean, can you get your hands around what the endpoints might be on where it is or is it still kind of unpredictable in the next year? Have you changed the way you price? You just mentioned not repricing the backlog, which I understand if you changed the way you, the way the cadence or anything else about the way you do pricing for more inflationary environments?

The headlights into the business on material challenges and inflation could continue to really be a challenge. I would say, getting the material that we need to drive the demand that we’re seeing is as much a challenge in Q4 as it was in Q3. Inflation continues to trend higher and maybe a little bit more visibility on that, but not a whole lot better in Q4 than Q3.

Yes. I think that this has taken our entire skill set, which is one of the reasons I want outside help on this. When you think you’ve got the raw materials side right, which I think we’ve gotten closer to more accurate throughout the year, the surprises have been more on the freight and logistics cost of availability and oils continuing to be volatile right now. And then there’s actually a cost of the routes. So that’s been a little trickier to get right. And then, I think when you get into these ranges, it’s retraining everybody that these are the appropriate coverage ranges because these are not ranges in price increases that we’ve historically sought. So it’s been a journey and a lot of learning, and I think we’re getting better at it, and I’m really proud of the way the teams are leaning in.

Okay. That’s helpful. Thank you. And then just for clarification, when you’re looking at sold through into dealers are taking orders in 3Q, et cetera, I want to assume volume is up next year then, right? I guess maybe that’s partly the ability of what you can deliver and then price ought to be up what mid-high singles, sorry if that’s going too far and I’ll stop there.

It is going a little too far. I mean, I think we’re not ready yet to commit to anything next year other than we do believe that demand is relatively strong. We do believe inflation is going to continue, and we do believe we got to put price increases out there to cover inflation and not just the raw materials I mentioned, but covering the freight, covering the raw material, and also covering anticipated wage inflation as well. So that’s the work we’re going through right now. And we want to get as close to accurate as possible.

Hey, good morning guys. This is Trish Gorman on for Julian. So a lot of questions in on price cost, maybe looking at the other side is on productivity. I know you guys have made some investments here and you got the transformation savings coming, and it’s stuff that nicely in Q3. So just wondering how we should think about this kind of moving forward, is this Q3 rates sustainable or does it step up further from here?

Yes, as John mentioned, a lot of the productivity improvements that we’ve seen in Q3, and we’ll see in Q4, are related to the operating leverage as 2022 plays out. It’s really seeing some of the benefits around the pricing, the sourcing that the manufacturing and distribution efficiencies and the organization as John described it. So those would continue to be the levers as we move into 2022.

Okay, great. And then just at the Investor Day, as you’ve talked about some of higher investment spending to support these strategic growth initiatives, just wondering if you can give us an update on kind of how that spending has trended to date and what we should expect for that in 2022?

Yes. So then we continue to invest in these throughout 2021. And as we lean into 2022, I think it’s fair to assume that, as I mentioned in the organizational enablement side, that we would expect that some of the traditional ways that we did things would be the funding mechanism for the new ways that we need to do things. So, I don’t see it stepping up significantly from here. And I think we have to find a way to self-fund it as we look into next year and then into 2023.

Thank you everybody for joining us today. We have delivered on commitments in 2021, whether measured by sales, income, EPS, or cash flow. And the good news is, we believe there’s still more to come for Pentair. And it’s becoming a pure play sustainability-focused company in 2018; we have been building a track record of consistent growth while also driving our commitment to creating a longer-term shareholder value. We have focused on portfolio and aligned around attractive secular trends, and we believe our strategic growth initiatives should contribute to us growing at rates even faster than the markets we serve. Our focus on transformation should help us not only unlock additional value but also fund these growth initiatives. Our balance sheet provides us a lot of flexibility and our 19% ROIC demonstrates our focus on being disciplined with our capital. Stephanie, you can conclude the call. Thank you.