Good day and thank you for standing by. Welcome to the Q1 2021 Pentair Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jim Lucas. Thank you. Please go ahead..

Thanks, Stephanie, and welcome to Pentair's First Quarter 2021 Earnings Conference Call. We're glad you could join us. I'm Jim Lucas, Senior Vice President, Treasurer, FP&A and Investor Relations. 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 first quarter performance, as outlined in this morning's press release.

Before we begin, let me remind you that any statements made about the company's anticipated financial results are forward-looking statements subject to future risks and uncertainties such as the risks outlined in Pentair's most recent Form 10-Q, Form 10-K and today's press release.

Forward-looking statements included herein are made as of today, and the company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances. Actual results could differ materially from anticipated results.

Today's webcast is accompanied by a presentation, which can be found in the Investor Relations section of Pentair's website. We will reference these slides throughout our prepared remarks. Any references to non-GAAP financials are reconciled in the appendix of the presentation.

We will be sure to reserve time for questions and answers after our prepared remarks. I would now like to turn the call over to John..

Thank you, Jim, and good morning, everyone. Please turn to Slide 4 titled Executive Summary. I would first like to start by thanking the entire Pentair organization and the contributions they have made to help deliver on our commitments to all of our stakeholders.

I would also like to take this opportunity to thank all of our global channel partners and suppliers for their patience and efforts and working with us and our consumers to meet our commitments despite the effects of decreases in the South, canal blockages, supply chain constraints and, of course, the ongoing pandemic.

Building off the momentum from last year, we started 2021 strong, with sales up 22%, adjusted EPS increasing 56% and free cash flow improving significantly from the comparable period last year. Our residential business has led the way as Consumer Solutions experienced a 34% increase in sales.

Encouragingly, we saw sales in all three businesses in Industrial & Flow Technologies return to growth for the first time in over a year. We announced the acquisition of Ken's Beverage earlier this week.

This is a strategic bolt-on acquisition that provides Pentair a valuable national direct service network to expand our commercial water treatment business.

We believe we will be in a position to seamlessly manage the full customer experience from product development, sales, installation and service to ensure the best quality products are matched with the most reliable and dedicated service network for all commercial applications.

We believe Ken's provides us a platform to grow from as well as an opportunity to continue to expand our products offered to this important channel.

Our balance sheet remains in excellent shape, and we are well positioned to fund organic growth and inorganic growth opportunities and return capital to our shareholders through dividends and opportunistic share repurchases. With a strong start to the year, we are raising our full year adjusted EPS guidance to a range of $2.80 to $2.95.

While inflation remains high, we have instituted a number of selling price increases across the portfolio that we expect to help mitigate inflation in the second half of the year. The strong start to the year and continued strength in our Residential businesses gives us confidence that we will have another strong year of growth for Pentair.

Equally important are the signs of recovery in our commercial and industrial businesses. We plan to continue to invest in our strategic growth initiatives, and we will remain disciplined with our balance sheet. Please turn to Slide five labeled 2021 Execution Expectations.

As we highlighted at the end of last year, we understand the importance of delivering the core while we also build our future. The focus has been and will remain on consistently making our commitments. Our actual results for the past three quarters have come in significantly better than our expectations as residential demand has been very strong.

While we have experienced robust sales and EPS growth, we have also improved our cash flow and our balance sheet is the strongest it's been in years. Building our future means focusing on the things that are within our control. We look forward to providing more depth on this topic at our June 10 Investor Day.

However, this is a continuation of the hard work we have been undertaking for the past several years. It starts with our focus growth initiatives primarily in our Consumer Solutions segment. We are a leader in the pool industry, and we continue to build on our leading position.

Investments in this area include automation, smart and connected solutions, energy efficiency offerings and now better filtration solutions. Within water treatment, we have expanded from components into systems and services within both residential and commercial.

We have made significant investments in digitally building our brand and expanding our reach. We recently created a transformation office as we embark on the journey to drive growth while being more agile and flexible. Transformation can have many meanings.

But to us, it means that we will have the right strategy, organization, leadership and culture while accelerating growth and driving margin expansion by leveraging our internal capabilities and reducing complexity. This is not an either or but a both and.

We recognize that we must grow and drive productivity in order to maximize our ability to deliver for customers and create value for shareholders. We plan to continue to accelerate our digital innovation, technology and ESG investments, and we expect to fund many of these initiatives through our complexity reduction efforts.

We believe that we are better positioned to deliver consistent growth and margin expansion while also generating strong cash flow. Our goal has been and continues to be delivering consistently for our customers, employees, shareholders and the environment.

I would now like to turn the call over to Bob to discuss our performance and our financial results in more detail. After which, I'll provide an update on our overall strategic position.

Bob?.

Thank you, John. Please turn to Slide 6 labeled Q1 2021 Pentair Performance. First quarter sales grew an impressive 22%, with core sales increasing 19%. Consumer Solutions grew in excess of 30%, and Industrial & Flow Technologies returned to growth for the first time in five quarters.

Segment income was up nearly 50% as we saw strong drop-through, and return on sales expanded 330 basis points to 19%. Adjusted EPS jumped 56% to $0.81. We saw price and productivity offset inflation in the quarter. This was the third consecutive quarter of strong double-digit sales growth within our residential businesses.

But just as encouraging was our commercial and industrial businesses showing sequential improvement and some pockets of growth. We were very pleased with our first quarter performance, and we believe the momentum should continue. Please turn to Slide 7, labeled Q1 2021 Consumer Solutions Performance.

Consumer Solutions sales growth was 34% as both businesses delivered double-digit growth. Segment income increased 54%, and return on sales expanded 330 basis points to 25.1%. Pool experienced remarkable growth of almost 50% in the first quarter.

Traditionally, the first quarter is preparing for the upcoming pool season, but we saw strong demand flow through the channel as we believe pool dealers continue to do their best to keep up with robust demand. The theme of consumers investing in the backyard as part of their home oasis continued.

Demand for new pools remained strong as many builders saw bookings well past the current pool season. An already strong pool maintenance space grew only stronger as the freeze earlier this year in the Southern U.S. caused many premature equipment failures due to water freezing within the equipment.

Pool has experienced strong double-digit sales growth for three consecutive quarters, and this would not be possible without our operations and supply teams and their ability to continuously increase capacity and execute at historically high-volume levels.

We saw strong demand for pumps during the quarter and continued to see broader adoption of our variable speed pumps as a new DOE regulation goes into effect later this year. Demand for heaters remains quite high, and we have significantly increased our production capacity.

Water treatment delivered 12% sales growth as residential demand remained robust and the decline in commercial volumes showed further sequential improvement. Within residential products, we saw strong growth in valves, tanks, pitchers and faucets. We experienced strong growth in the U.S., Europe and especially in China.

We're in the early stages of integrating Rocean, but we believe the acquisition will greater enhance our product offerings going forward. Within residential services, we continue to experience strong demand and healthy conversion of leads into actual orders.

We've made good progress on our journey to become the trusted, nationally branded experience, led in part by our brand transition to Pentair Water Solutions.

We are launching a number of new recurring revenue services, including preventative maintenance programs, service bolt-ons for plumbing services, cartridge change-outs and extended warranty programs. We are seeing continued signs of these foundational building blocks coming together, leading to more consistent, predictable growth.

We believe that commercial demand is finally finding a bottom and expect comps to get easier going forward. We continue to build a strong new business funnel, particularly for our total water management offerings. We believe the addition of Ken's Beverage will help strengthen these offerings.

Please turn to Slide 8 labeled Q1 2021 Industrial & Flow Technologies Performance. Industrial & Flow Technologies sales increased 7% in the quarter, led by another quarter of double-digit growth in residential flow, and both commercial flow and industrial filtration encouragingly posted modest growth in the quarter.

Segment income increased 12%, and return on sales expanded 60 basis points to 14.5%. Residential flow grew at a double-digit rate for the second consecutive quarter as demand remains strong across residential, irrigation and ag spray. We also experienced strong growth across retail, Pro and OEM channels.

Commercial flow returned to growth, with backlog growing for the first time in many quarters. While infrastructure remains soft, we were encouraged by a growing backlog within commercial. We were pleased to see industrial filtration return to growth in the first quarter and improve its backlog both year-over-year and sequentially.

While headwinds remain in our longer-cycle businesses due to caution in larger capital investments, we saw solid improvement in short-cycle component demand. Within our food and beverage business, we are beginning to see orders for our beer membrane filtration systems, including a new system for beer stabilization.

In addition, we continue to expand our IoT offering with existing beer customers. Finally, we have seen a substantial increase in backlog for our biogas systems. Industrial & Flow Technologies remains focused on reducing complexity, selective growth and margin expansion, and we are encouraged by the improving top and bottom line to start the year.

Please turn to Slide 9, labeled Balance Sheet and Cash Flow. While the first quarter is historically a period of cash flow usage due to seasonal working capital being built, we were very pleased to see only minimal usage this year and over $150 million year-over-year improvement. This was driven primarily by our pool business and improved linearity.

We expect another good year of free cash flow driven by strong demand and continued disciplined working capital management. We ended the quarter at 1.3 times leverage, and our return on invested capital was a strong 16.3%.

As we look at our cash flow needs going forward, we have a bond maturing in the second quarter, and we will be paying our quarterly dividend. Beyond that, we will continue to be disciplined in our capital allocation as we continue to work the M&A pipeline, and we continue to have in our plan a buyback of at least $150 million of our shares this year.

Please turn to Slide 10 labeled Q2 and Full Year 2021 Pentair Outlook. We are initiating second quarter and updating our full year 2021 guidance. For the second quarter, we expect sales to grow 13% to 16%, segment income to grow 12% to 20% and adjusted EPS to grow 17% to 25% to a range of $0.69 to $0.74.

For the full year, we expect sales to grow 6% to 11%, segment income to increase 10% to 16% and adjusted EPS to grow 12% to 18% to a range of $2.80 to $2.95. We continue to work through material shortages and inflation that is impacting the second quarter.

We believe that our pricing actions taken in the first half will help mitigate full year inflationary pressures. We have not factored in Ken's Beverage into our forecast as we are awaiting finalization of the transaction.

Embedded in our full year sales guidance is anticipated low double-digit growth in Consumer Solutions, with pool expected to be up mid-teens and water treatment up high single digits to low double digits. Within Industrial & Flow Technologies, we expect the top line to be up low-to-mid single digits, with residential above the segment average.

While we are experiencing an increase in orders for the short-cycle parts of our commercial and industrial businesses, we have not yet seen larger capital spending materialize.

Below the operating line, we expect corporate expense to be around $65 million, net interest to be in a range of $16 million to $18 million, our tax rate to be around 15%, and the share count is expected to average between 167 million and 168 million shares for the full year.

Capital expenditures are expected to be around $65 million, while depreciation and amortization is anticipated to be about $80 million. We continue to target free cash flow to be greater than or equal to 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..

[Operator Instructions] Your first question comes from the line of Andy Kaplowitz with Citigroup..

Good morning, guys. Nice quarter..

Thank you..

John, just focusing on your Q2 guide for a second, I think we all understand that pool was unusually strong in Q1 versus normal seasonality, but is there any reason why pool would be down sequentially in your usually seasonally strongest Q2? How much of a boost did you see from Texas weather-related issues in Q1? Or are you worried at all that supply constraints could get worse? Maybe just give us some more color because for the overall company, you're still forecasting lower year-over-year growth in Q2 than Q1 despite easier comparisons..

Andy, totally understand. I'm going to have Bob answer that one..

Yes. While we're pleased with the Q2 guide versus the prior year, it's not lost on us that with the demand that we're seeing in the overall business, not just pool, why couldn't we have done as well sequentially versus Q1. We look at that, and we do face some material shortages in key components, resins, motors, circuit boards.

And while we have shown an improvement over the last couple of weeks, it is an impact to the second quarter. We're also facing some inflationary pressures in the second quarter. And while we have increased prices, most of that will read out in the back half.

So we're doing everything we can to catch up and basically satisfy this increased demand, but there are some supply challenges that we are facing in the second quarter..

Thanks, Bob. And then just focusing maybe on that inflation, it looks like you got a nice uptick in productivity in Q1 and productivity plus prices more than offsetting inflation. It seems you've been able to get over the labor availability issues you talked about in the past.

And we know your guidance in the past was for price and productivity to offset inflation, but is it possible for you to actually stay ahead of the inflation despite all these constraints?.

That is certainly our goal. Obviously, in the second quarter, we have the inflation challenge. But for the back half of the year, what you just mentioned is our goal. I did want to congratulate the operations team, the supply chain. A lot of the issues that we saw in 2020 as we ramped up production, we really addressed head on and did a nice job.

So a lot of that productivity improvement is driving the leverage over a fixed cost base and driving the efficiencies in a really cost-effective manner..

And Bob, you're able to get the labor you need to meet this ramp up?.

Labor continues to be a challenge, and it's something that we need to address. It's -- in many places of the business, it's a challenge, to be totally honest. But we -- our guidance should not be impacted by that, but it's certainly on our radar screen..

Appreciate it, guys..

Your next question is from the line of Brian Lee with Goldman Sachs..

Hey, guys. Good morning and thanks for taking the questions. Great job on the quarter..

Thank you..

You alluded to this, John, during the prepared remarks, but can you quantify a bit what your exposure is to Texas? We know it's one of the top three pool markets in the country, but specific to kind of your, I guess, indexing there versus other parts of the country, can you give us some sense? And it sounds like that's driven some near-term demand, just the winter freeze and the fallout of that.

But do you see kind of with pool backlogs and how busy dealers are that some of that's even having to push into 2022 for people that are needing to go to their pools in Texas and fix things or outright replace them?.

Yes. I think it's fair to say that there's an industry capacity constraint in overall pool that we're always working to the dealers, the pool builders, the availability of that as it relates to the consumer demand.

As far as Texas goes, we did get a little nearer term on some of the break and fix that happened in Q1, but most of that will also be satisfied here in Q2 in the normal course of shipments. What I also alluded to in -- that Texas was more related to material supply chain challenges, and many of the resins are produced in that area of the country.

And those -- that capacity is coming back online. It's getting better every day, but that's what Bob was referencing as well. So with that net, I can't call Texas a win for either Q1 or Q2. And I think it just goes into the overall demand being a large pool state that we always serve..

Okay. Fair enough. That's helpful. And then I guess, just a second question here and I'll pass it on. Clearly, we've seen a good housing market here. We've seen the new pool number steadily ticking up for the past several years, especially here recently.

Can you give us a sense of -- I know you're heavily aftermarket-levered, but percent of new pool mix versus retrofit, how much has that changed here of late? And do you have kind of an expectation on that trend continuing to shift maybe a little bit toward new pool even through the balance of the year and into next year?.

roughly 20%, new pool; 20%, remodel; and roughly 60%, aftermarket..

The new pools are definitely up large on a year-over-year basis, and we still see that trend continuing. But as an overall impact to the business, it's not as beneficial as continuing to build the aftermarket growth and the remodeling growth for us.

That being said, every new pool that goes in, we want to convince those consumers and the pool dealers to put all the new content in and make those smart automated pools. And that adds to the aftermarket opportunity later as well..

Alright. Thanks a lot, guys..

Thank you..

Your next question is from Mike Halloran with Baird..

Hey. Good morning, everyone..

Hey, Mike..

So just some questions on the guide here, the first one at least. Obviously, good answer to understand why 2Q may be a little bit more muted relative to what 1Q would imply from a pool perspective.

But inventories, lean in the channel, I mean, how do you think that plays out through the balance of the year then? I mean it seems like you're implying that there's some pushouts into the second half of the year. Supply chain constraints are kind of rampant throughout the industry. Not like that demand goes away.

So maybe just help with some of the cadencing and how you're thinking about the year and what all of these challenges can equate to as you move over the next few quarters, not just 2Q..

In terms of the year, when you look at the -- what we guided for in Q2 and what that implies for the back half, it has slight revenue growth over some pretty big compares. So business did well in the back half last year. So we're pleased to see growth. Can we do better? Potentially. For us, we're also focused on margin.

And while we will win the price cost war, there are continuing to be an element of strategic growth investments in the back half that are putting a little bit of a impact on our overall margin expansion.

We think it's money well spent that will benefit 2022 and beyond, primarily in the pool space, in the water treatment side, but that does have an effect on our overall margin expansion..

Just a point of clarification on the first part of that.

Are you implying pretty normal sequentials from 2Q into the back half of the year on the pool side?.

I think, Mike, we're -- the way I'd say it right now is we're still trying to catch up. I mean the inventory in the channel is relatively low. We've been catching up since last year. We made -- I think you could see that we probably met sell-through demand in Q1.

And we've got to do our best in Q2, Q3 and Q4 to catch up with the demand in the channel as well as continue to rebuild those inventory levels..

Thanks for that. And then switching gears to a different part. The more cyclical parts of your business where you've had a few more headwinds, how are you thinking about the recovery curve where you sit here today? Obviously, prepared remarks imply that trends are starting to get a little better.

Aren't seeing the bigger stuff yet, but at least we're starting to see some progress. Maybe just some thoughts on that cyclical progression and what level of optimism there is right now..

Yes. I think the biggest level of optimism we referenced is it's nice to see commercial filtration starting to at least move sequentially better. And I think we said for this particular full year, it's still not going to catch up to where it was, but it is good to see the openings and things starting to drive that commercial filtration space again.

So that was encouraging in the quarter. We saw some sell-through better than Q4, and we think that continually sequentially gets better throughout the year. As far as Industrial & Flow, I think we saw more break and fix and certainly, the recovery of some of the break and fix in those spaces.

But we also started to see quote activity, order activity and backlog start to really move sequentially, Mike. So I think those are definitely where I was referring to encouraging, and we weren't ready to call that earlier, and I think we're now saying that we're sequentially seeing ourselves come off the bottom in the IFT side..

Good stuff. Appreciate it. Have a good one..

Thank you..

Your next question is from Steve Tusa with JPMorgan..

Hi, guys. Congrats on the execution in a kind of a challenging supply environment, I guess.

Just first of all, what are you assuming for price for the year?.

We should see an improvement in price to, call it, 2.5% to 3%. I think earlier in the year, we were probably down in the low 2s. So we are seeing a nice uptick there..

Okay.

And when is the timing of that increase going in? Is there kind of a -- are there a couple of bites at the apple here? Or are you kind of one and done in the spring? Like what's the timing of the price increases?.

Yes. Steve, I'll take the first part. I'll have Bob give you a little bit more of the details, but we've increased those prices across the board where we're going to. But we're still servicing some backlog on the old pricing that works its way through in Q2. So we don't expect to realize those price increases fully until Q3 and Q4..

Yes, I would agree with that. We'll start to see them, Steve, in Q3..

When are you putting it through, though? Like when would that guy -- when would the guys -- when would the [guide be in] the channel?.

We already have put it through, Steve. But we're still -- people bought -- we're still servicing the backlog, the product that -- yes, we took orders at preprice increases, so we're still servicing that in Q2..

Okay. And then just on the second half, I mean, it kind of looks to me at the midpoint like you guys are just kind of flat across the board, right, like flat on sales, flat on profits. I mean actually, margins might kind of be a tick lower year-over-year.

I mean with that kind of price coming through in the second half, I would think things would be better with that on the margin front.

Or is that -- is there just a -- maybe just for the year, give us what the kind of price productivity -- you expect that to be neutral for the year, that kind of price productivity -- sorry, inflation productivity equation? Maybe just give us the annual, what you expect there [Indecipherable] inflation..

Yes. For the back half of the year, so the headwind we are facing is continued higher inflation. But when you look at what we've done with price and the productivity that we're seeing, we will offset the inflationary headwind.

So really, what it comes down to is if the higher end of our guidance does show some revenue growth, but the margin expansion is really impacted by the strategic growth investments that we're making in the back half..

Got it. And then one just last one for you. I guess this kind of complexion of the second half, if you're going to be reasonably flat, the toughest comps are obviously in consumer.

So if your business is flat, should we think about the IFT business as being up and consumer being down? Is that kind of the right profile for second half?.

Yes. For the second half, overall, again, if you take the higher end of guidance, you will see our Consumer Solutions grow. And then IFT, as we mentioned, will grow in the back half and for the full year, which is good to see. The question, I think, we have right now is can we drive have a better back half.

And so again, not wanting to get ahead of ourselves, we have the natural demand that continues in many of our businesses. So at this point, I think our guidance is very prudent on the top line. And the question is can we do better..

Yes, great. Thanks, guys. Appreciate the details..

Thank you, Stephen..

Your next question is from Josh Pokrzywinski with Morgan Stanley..

Hey, Josh Pokrzywinski. Happy Earth Day..

Happy Earth Day, John. Thanks for taking the question. So I guess maybe just to start off here on the pool front. No surprise. Any way to talk about kind of what's happening under the surface with whether it's kind of replacement versus new or wallet share versus like-for-like as -- yes, 50% is a lot of growth.

I can appreciate that the last year has been kind of a unique environment, and comps play into it as well. But at the end of the day, I don't know if we've seen that much more kind of utilization in breakage. In theory, the stuff is always kind of out there, spinning around somewhere.

Yes, how much of the strength that you're seeing right now kind of speaks to that upsell of the pool pad that you guys have been talking about versus the volume side of the equation?.

Yes. That's a good question, Josh. And it's mostly on the upgrades, candidly. I mean we've got two things happening. We've got the sale of homes in warm weather climates have done really well, right? So we've seen a change and a big push to get to warm weather climates.

And I think people are not traveling as much and using their backyard more as their vacation destination spot so they become more aware. Without a doubt, and we shared this, we've seen a lot better penetration than we've ever seen before as people want to extend the season and make sure that their pool water is the temperature that they want.

But where we've been excited is we've seen the upgrades around the energy-efficient lighting, the automation and also the self-chlorination and the self-saltwater capability. So the maintenance of the pool side is well, Josh.

So it's been a really good situation because the more we made those consumers aware, the more they were able to expand the offering. And we think the more that expands, the more people talk about it, and I think we believe that's a trend that's going to sustain..

Got it. That's helpful. And then maybe a question or a toss-up between you and Bob on the supply chain element for 2Q.

Might be a little hard to answer, but if you guys could get infinite supply, what is that worth? Like how much is that bottlenecking holding back near-term results?.

Yes. So I think we'll tag team that one, Josh. I mean first of all, I just want to thank our supply team, and we've been doing everything we can to just, first and foremost, just try to access material -- and the raw materials that we need. And so I mean, I'm bringing that up because I think we're seeing two things happen.

I mean we're doing everything we can to get the volume out. And we're not really spending time on negotiations as much as we're spending time on trying to get the available material, which leads into the inflation issues that Bob referenced earlier. And then Bob will give you the art of possible here..

Yes. Where we started with was the $866 million that we just did in Q1. And with the backlog we're seeing and the demand, the question is why couldn't we see that -- our top end of our guidance is closer to $830 million.

So we really view it as in that space, the $30 million to $35 million as the art of the possible if the supply shortage weren't there. Now again, I'll echo John's comments and congratulate the supply team because two weeks ago, that number was double, and they're doing a nice job of improving the allocation that we're getting for those materials.

So that's how I view it. Then on top of that is the inflationary headwinds that we're seeing in the second quarter..

Got it. That is awesome detail. Really appreciate the color there, guys..

Thanks, Josh..

Your next question is from Rob Wertheimer with Melius Research..

Hey, good morning, everybody..

Hey, Rob..

So a lot of things went right in the quarter. I know managing through this isn't easy. I just wanted a little bit more breakdown on water treatment, which is growing nicely. I don't know if you can characterize or split resi and commercial stabilizing, you said, I think.

And just whether you're on a sustainable path there on penetration, et cetera, just talk about the drivers there. Thank you..

Yes. I appreciate it, Rob. Thank you. I mean I think water treatment has been doing really well and also is residentially exposed. I would say our R&I flow business has also seen a nice pop on the IFT side relative to demand. And obviously, they're being overshadowed by the strength in pool and the success of pool. So it's great to talk about it, Rob.

I mean I think we've got several things going on. We've definitely spent a lot of time upgrading our capability around our products to sell to the independent dealer channel.

And people are more aware of the water in their home these days, and they're doing things to try to make it better, either to -- either for base reasons or trying to improve the overall benefits regarding their water. So we've got a lot of interest, and we've been expanding our portfolio to be more consumer-friendly.

We've also, through the acquisitions that we purchased, through Pelican and RainSoft, have the direct access to the consumer through the affiliate channel and/or building out the services network ourselves. And so thank you for noticing that growth. We feel we're making great progress there, and we're excited. And that's why I'm excited about Ken's.

I mean we just now put a services extension on top of our ability to sell products into the foodservice space, where we've always had a nice product offering. And that allows us to create end-to-end solutions, inclusive of the service and the ability to take care of the customer when the customer needs us to show up.

So really building out that part of the portfolio, and we really like the momentum, and we're seeing the fruits of the work..

Great. Thank you so much..

Thank you..

Your next question is from Jeff Hammond with KeyBanc Capital Markets..

Hey, guys. So a lot of moving pieces around inflation and supply chain investments.

Can you just remind us how you're thinking about incrementals in Consumer Solutions before and how you're thinking about them now, kind of given all that, those moving pieces? Is it same, better or worse?.

It's generally the same, Jeff. We're comfortable in that 35% drop-through, which we actually did in Q1. And it might vary a little bit based upon the price cost squeeze. And then the only thing that's different in the back half of the year is those accelerated investments as Bob mentioned. So that's it. And you might ask why is those investments delayed.

It's not like we did anything differently. We're trying to get those people in place and the assets that we're at to, digital, IoT, smart connected solutions, I mean, those are tight labor markets with a lot of people chasing the same skill set. So it's just more of a timing issue to put them in.

And then we're also expanding the markets that we're serving. And so that's the investments that we're really talking about in the back half of the year. We think about it as that 35% is drop-through, and then it's only muted by any incremental investment that Bob mention.

Okay. Great. And then it seems like the early buy shifted for the industry from 4Q to 1Q.

Is that more a function of just the demand environment we're in today? Or do you think this is kind of a new paradigm or a new structure where you kind of persistently do the early buy a little bit later? And just on the $35 million, is that just shift into 3Q as you catch up?.

The answer to the second one is yes. We're hopeful we catch up throughout the quarter. And if we're not, we're expecting that to be early Q3 when we get that supply chain. As Bob said, the supply chain issue is getting better every single day. It's just a matter of how we muted them or mitigated enough to be able to solve it by the end of Q2.

As far as the early buy, I mean, just remind you, I mean, this is a seasonable business. It's not necessarily cyclical where we do the early buy in pool. And we're trying to manage our capacity levels. So we're not spiking our labor and then laying the labor off. So we work to trying to fulfill those labor outlets.

And basically, when you get this type of demand, there really isn't room for that early buy because you're full out trying to meet the ongoing demand and you're working through that season, Jeff. So you're right. I mean it feels like it didn't necessarily happen, and I would just say that it didn't shift.

It just got to the need to sell to the market need..

Okay. Great. Thanks..

Thank you..

Your next question comes from Saree Boroditsky with Jefferies..

Hi, good morning. So just a follow-up on Ken's.

Could you provide us with some more detail? You said it's not built in to guidance, but maybe some color on the sales and margins in the business? You talked about the service benefit, but any other commentary on what you're excited about there?.

Yes. I'll let Bob give you the details. I do want to say one more thing. I have had a partnership with Ken's for some time. And Ken is someone we admire in his ability to have worked with his customer set and built intimacy around real needs for foodservice customers and the projects and the services that he provides.

And he's built this business over his career, and we're excited that he's going to come and partner with us and be a part of our team and help us expand this. And as I mentioned in my prepared remarks, it's not just growing his service levels, which I think we can do.

It's also about them having the insights as to what other products those customers need and expanding our offering beyond just our water treatment that we sell to those customers. So I'm really excited strategically.

And some of the best deals take the longest to get to the finish line, and we're just really happy that he trusted us and he's willing to be part of the Pentair family. And Bob, do you want to give the....

Yes. We mentioned in the press release that we spent about $80 million or we'll be spending $80 million for Ken's. Think of that as about 1 times sales. And then from an EPS contribution perspective, it's -- in 2021, it's minimally accretive. We need to invest in the growth platform in that business.

We really do believe it's foundational for bigger things in the future. So that's how we're thinking about Ken's contribution in 2021..

That's helpful. And then maybe you could just update us on what you're seeing on the foodservice side. We've obviously been hearing some pretty positive comments from the restaurant space as things have opened up. Thank you..

Yes. I mean the percentages seem exciting, right? And I just want to keep reminding us that we're not anywhere near where we were pre-pandemic levels. But sequentially, as things open up, we're seeing things definitely feel better. And I think sometime in the 2022 time frame, we expect to be back to where we were.

While restaurants are opening across the United States, they're a little bit slower to open in Europe. They have been opening very rapidly in China. But we've not yet seen the hospitality play, and that's the one that we'd also like to see, the hotels opening to the levels that they were before.

But sequentially, definitely better and working our way toward hopefully getting back to where we were sometime next year..

Perfect. Thanks for the call..

Your next question comes from Joe Giordano with Cowen..

Hello.

Can you hear me? Can you hear me, guys?.

Yes, we can..

So I just wanted to touch on industrial. I mean it's good to see backlog building, and you've made a lot of changes to that business over the last couple of years.

Do you feel comfortable that throughout all of that, share is being maintained? Because I feel like just listening to other companies talk, it sounds like a little bit more like spending is coming back. So I know you guys are being cautious here, but just curious to how you feel about share maintenance as you transition that business..

Yes. So first of all, I'm really proud of Jerome and team for the discipline because, as I said many times, I mean, we could chase growth here with some of the lower-margin projects, and that's not what we want to do.

We want to use our configure to order and specification capability to win projects that either meet our margin potential or provide the aftermarket opportunities that we want to invest in. So we're trying to be disciplined.

And I don't want to say we're muting because we're focused, and there's a lot of growth to be had around our core capabilities and skill sets. And I think where we have the right to compete and the right to win, that's where we're focusing.

And I think that's going to produce a better set of business opportunities for us that produce the margin profiles that we desire. We've seen these businesses that are more cyclical in nature come back really strong. And then all of a sudden, you get all these projects, and then your cost to serve gets higher than the actual quote.

And that's not what we're doing here. These are projects that we feel confident with and comfortable with and that they meet our skill sets, and that will lead to the profitability profile, for one..

Yes. That's fair. Last for me. Just I think some of the deals you've done here seem interesting, very strategic and make a lot of sense for what you guys are trying to accomplish, fairly small. So when I look at your balance sheet, just curious to what your appetite is for larger M&A.

And what's the target environment out there? Are there larger assets out there that kind of meet -- fit in with your strategic profile right now?.

Maybe. I mean I think my focus has been and our team's focus has been that we've carved out some specific areas that we think we want to grow. And we think we've got the organic capability to really grow.

Now we always have to trade the make versus buy, right? Are we better off doing it ourselves? Or are we better buying the capability needed? Sometimes you don't have the channel reach, sometimes you don't have the brand or the skill sets.

When we look at our spaces, there isn't really a large one that we need, and there's not really a large one that's available. And so I kind of like the path we're on, and I'm hopeful that more of these start to accelerate and that they add to our capability but don't distract us from the strategy that we're embarking upon..

And so just a quick follow-on that.

If that's like the -- yes, how comfortable are you like getting leverage down? Like do you -- at what point do we think about more aggressive buybacks just to kind of -- from a capital allocation standpoint?.

Yes. I mean I think we're really pleased with the cash flow generation progress we've made. I think Bob mentioned in his prepared remarks, we had a couple -- we have bond maturing and we had a little bit of cash flow need, and we usually utilize cash in Q1.

But given where we sit right now, I think we're committed to the buyback that we said we would this year. And I think that still gives us capacity to do any strategic bolt-on deals that become available in the near term..

Thanks, guys..

Thank you..

Your next question is from Deane Dray with RBC Capital Markets..

Thank you. Good morning, everyone..

Hey, Deane..

Hey. I would love to get an update on the pool app soft launch that you talked about last quarter.

What's been the receptive rate? How many installations? And is it really pulling through the products that -- at a rate that you were expecting?.

Yes. So I mean, just to clarify, Deane, I mean, we've always had our pool ScreenLogic app that's been out there, and we're pleased with the progress on the pool side. And it's -- where we've launched that new app was on the water treatment side. And yes, we've got a couple of new exciting products.

We got the under sink Easy Flow, and we've got the salt sensor that we've launched. And we feel good about those and the connectability. Growing pains? Yes, right? We're servicing a new customer, and we've got tweaks.

I think the soft launch, I would describe as successful, but now we've got a little bit of work to do to make it the ultimate product that the consumer desires..

Good to hear. And then how about new product introduction expectations for the year? I think you had talked about a number of new IoT products.

Any updates there on launches? And any impact on 2021?.

Yes. Deane, and I appreciate it. I mean I'm really excited about one in pool, and this might be where you were focused. We launched a side stream filtration product in a soft launch basis. So we're seeing amazing results as far as the clarity of the pool water by putting what was the CPT X-flow membranes on the side of a regular pool filter application.

And that smart filter capability that we have in the soft launch applications has really demonstrated superior results. So that one, I'm really excited because that's a category that we haven't really seen new product introductions in pool for some period of time.

And then on the Consumer Solutions side, it's really about connecting to that app that we mentioned around the smart product launches, the technologies. And then the most exciting one we have is this acquisition, Rocean, that we purchased and more of a countertop POU unit that will be launched either later this year or early next year..

Great.

And how about any sneak preview on format, topics for the upcoming analyst day?.

Well, we're going to make you wait because we want you there on June 10. But I think you can expect that we're going to talk about the fact that we think we have great well-positioned businesses.

I want to talk a little bit about the strategic growth investments we're making, Deane, and why do we feel good about these investments and show you a little bit of the progress along the way.

I'm going to give you some insights on how I think the transformation office that we're leading and how that transformation can create value and help fund this organic growth.

And then I'm probably going to share with you that we've got a strong balance sheet, as previously highlighted here, and give some indications of how do we use that balance sheet to create incremental value as well. So that's probably what we're going to talk about. And of course, no Investor Day would be fulsome without Dr.

Phil sharing you with some sneak previews that were we're going to bring the technology at Pentair and why we're excited about the longer-term technology investments..

Looking forward to it. Thank you..

Thank you..

Your next question is from Bryan Blair with Oppenheimer..

Hi, guys.Great start to the year..

Hi, Bry..

Hey, Bry..

I was hoping that you could parse out the core decline in commercial water treatment in the quarter and give us a sense of how the monthly sales cadence progressed through Q1..

Yes. I mean -- I don't know, Bob, if you have that exact. I mean we're still down single digits in Q1 in the commercial water treatment. I think we're expecting to be inching hopefully, I mean, we got an easier compare in Q2, candidly.

I mean just to remind you that the Q1 impact last year was muted as far as COVID, and then this is our first year-over-year comparison. And Q2 is where commercial filtration took a deep, steep decline.

So you're going to see a pretty nice growth rate for them in Q2, but it's nowhere near where the 2019 levels were, but getting better off at the Q1 run rate..

Okay. And just a level set on pro forma scale for commercial water treatment.

As demand continues to normalize and get back to prepandemic, core volume then layering in KBI, is that two 75 plus at that point?.

Regarding when you say two 75, you're talking about the actual commercial water treatment piece?.

Yes, commercial water treatment revenue at that point..

Yes. I mean that's -- I'd say that's directionally correct, yes..

Okay. Excellent. Thank you..

Thank you..

Your next question comes from Julian Mitchell with Barclays..

Hi, good morning. Maybe I just wanted to circle back to the investment spend. You've mentioned it a bunch of times. And you gave some good color about some of the areas those funds are being dispersed toward. But perhaps maybe just help me understand the scale of that investment spend in the second half.

Or is it just a sort of toggling function to sort of solve for that incremental margin that you're looking for? That's what I wanted to sort of better understand.

And whether that deferral of investment spend, is that pushing much into next year as well? Or do you think the catch-up this year gets you to the right level medium term?.

Yes. So let me tell you where we're spending it and strategically why. So in pool, it's really around how do we be a destination site through our pool brands on the pad to bring you into Pentair, help you understand what's available and then connect you to our channel. So there's no desire to work around our channel.

We want to go directly through our dealers and our distributors to continue to service you, but we want you to come and learn what's available to you to help pull demand.

And that's where the investment has been going in pool as well as making sure that we've got a consumer services mindset around both services that you might need as well as making sure there's someone to answer the phone or chat with you upon your particular challenges and then connecting you with the dealer to solve that for you.

And we've been steadily seeing more consumer inquiries into our service network than we've traditionally seen the dealer network. So we've had to augment that and build that up.

In water treatment, it's about accelerating our residential services offering, building our brand and again, being more effortless to do business with, which you should read into as digitally transacting. And that's where those investments have been.

And then on the IFT side, as we mentioned before, we believe we've got a nice biogas upgrading capability and sustainable gas. And we want to shift the investments to North America, which traditionally been on the European side. And we think that we've got a nice run rate ahead of us to grow that sustainable gas offering over the next several years.

So that's where the investments are focused. And then obviously, one of those categories, we just filled in with the acquisition of Ken's, which was a buy investment platform instead of trying to do it on our own.

And as far as the actual dollars, Bob?.

Yes. Just to help you quantify that, on our last call, we talked about that spend being roughly 1% of revenue. We spent a little bit of that in the first quarter. But as John mentioned, it does ramp as we head toward the back of the year. So think about a little bit more in Q2, but the majority of that spend, in Q3 and Q4..

I see.

And then at that point, you're at the right level sort of medium term? Or does it go up again next year?.

No. I think at that level, we would expect to see that more flatten from a year-over-year standpoint because then, we've jump-started these programs, got the right people in. And then we're in more of a percentage of sales basis..

Thank you. And then just one quick follow-up. If I look at sort of across the multi-industry group, Colfax and another company announcing a sort of separation into two pieces fairly recently. Just wondered your latest thoughts on the portfolio, overlaps between the two divisions.

Or is it more of the view that the synergies are there now that you're sort of three years as a stand-alone company? And when you sort of look around, that public peers like Hayward and so forth, there isn't kind of obvious value creation from any kind of separation anyway..

I understand the question. We get asked that all the time, but here's the way I look at it. We move -- we help you move, enjoy and improve your water. And the move side is the $1 billion on the IFT side that directly correlates with that phrase.

And very important -- I mean, it's hard to produce any water application without moving the water through some type of pumping application. And we like our portfolio there. We have an opportunity to improve it, focus it and really expand the margins, which I'm comfortable that Jerome and team is working on.

And then we've got a really nice set of industrial assets, and there is some cross-utilization.

The membranes that we talk about on the industrial side are the membranes that are servicing this pool filter that I mentioned and also, hopefully, will be the foundation for our salt-free softener that we'll introduce in water treatment in the next several years. So I think there's cross -- a lot more cross synergies.

I think with the IFT side, it's about focusing it, returning its ROS to historical levels and making sure that we're disciplined with where we grow and how we grow..

That's good to hear. Thank you..

Thank you..

Your next question is from Scott Graham with Rosenblatt Securities..

Hey. Good morning, John, Bob, Jim. Nice quarter..

Thanks, Scott..

Thank you..

I wanted to maybe square for my mind what you're saying, maybe more specifically on price cost. I apologize for beating this up. But raw materials prices increased throughout the first quarter. So what we see in the first quarter for inflation of 240 basis points, I'm just thinking that, that number probably goes up from here.

And you're saying, to Steve's question, pricing, plus 2.5% to 3% for the year, with the emphasis on the second half.

And are you saying that price can offset raw materials inflation? Or are you saying that you need maybe a little bit of help from productivity?.

We need price and productivity both to offset inflation for the full year. That's what we said. And in Q2, as you imagine, when you're catching up in the channels, we are -- most of your orders there are at pre new price levels, and that's what we're still fulfilling, and the material supply has risen pretty rapidly here from a cost perspective.

Everything sold in Q3 and beyond carries a new price -- selling price with it. And therefore, we see more of a positive contribution in Q3 and Q4 than we see the headwind in Q2..

Yes. Understood that. Thank you. So also the productivity jumped in the quarter.

And I'm wondering, is that the G&A initiatives? Is there something more than that? And can you sustain that level?.

It's really a combination of a number of things. I mean our OpEx spending from Q1 of the prior year had not come down. And so we're benefiting from the efficiencies that we drove in the last half of last year and into this year. We're also driving a lot more volume, and the team is doing a really good job to create leverage.

But also a number of the issues from last year around expedites and inefficiencies as we ramped production lines were much better at driving that extra production. So it's really across the board that's driving that productivity benefit in Q1..

Got it. Last question from me. With the large competitor's IPO, how do you think that changes things in the market? Obviously, they now have more resources, and they can get more resources on top of that.

What are you thinking about Hayward going forward as a competitor?.

I mean I think they're -- have always been a formidable competitor. And I think to your point, they may be a more formidable competitor. I think the way I look at it, Scott, is it works its way through the way we think about our transformation.

And we have to treat our pool business as if it was this independent business that's got to compete every single day with the agility and the flexibility against a set of competitors. We can't slow it down.

So we're really working with our pool leadership team, and Mario is doing this in Consumer Solutions to make sure they have what they need to continue to stay in front. And so we welcome the challenge. I think it's going to make us better. And you want strong competition because that generally makes you a better company.

And I ultimately think this will certainly put a kick in our butt, and we'll start moving forward at a faster rate..

Appreciate your responses, thanks..

Thank you..

Your next question is from Nathan Jones with Stifel.

Yes, good morning. This is Adam Farley on for..

Hey, Adam..

Going back to the capacity and labor management within pool.

Is this -- is there any permanent capacity additions? Or is it mainly just running additional shifts? And does the pool business require any additional investment to increase capacity?.

It's a combination again of things. We've added second shifts. We've also increased the number of production lines, for example, in heaters, investments that we made last year, so to satisfy demand. Certainly, for the current year, we're in good shape to -- going forward, as we look out a couple of years, there would be some investment required..

Okay. And then shifting over to I&FT.

Within the industrial business, I think you called out some strength in short cycle, but could you provide some color on what specific end markets are seeing some improvement?.

Yes. I mean I think simply put, our industrial, more capital-intensive businesses, that need that capital investment to spur the demand. So it's really more in the industrial side we're seeing a pop. And then we're seeing some movement in the infrastructure side on our -- in the commercial and industrial side of our flow business.

Those will be the two areas that we're encouraged by the trends..

Alright. Thanks for taking my questions..

Thank you..

Thank you. There are no additional questions at this time. I would like to turn it back over to John for closing remarks..

Thank you, Stephanie, and thank you for joining us today. We believe Pentair is in the right space for the future. We believe we have great well-positioned businesses. We are accelerating investments in focused, higher-growth, strategic priorities. This includes our leading pool business and our growing water treatment business.

Transformation is important to us, and we believe that our focus on our transformation efforts will drive higher levels of accountability and performance. Transformation should help us better allocate our resources as well as drive longer-term margin expansion.

Our balance sheet remains quite strong, and we believe this provides an additional lever of value creation. Thank you for your continued interest, and we look forward to sharing more of our story at our Investor Day on June 10. Stephanie, you can conclude the call..

[Operator Closing Remarks].