Good day and thank you for standing by. Welcome to the second quarter 2021 Pentair earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions].

I would now like to hand the conference over to your speaker today, Jim Lucas. Please go ahead..

Thanks Michelle and welcome to Pentair's second 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. 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 second 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 an opportunity to ask their questions. I will now turn the call over to John..

Thank you Jim and good morning everyone. Please turn to slide number four titled Executive Summary. We were pleased to deliver strong second quarter with sales up over 30%, adjusted EPS growth greater than 40% and free cash flow up over $100 million in the first half of the year.

I would like to thank our Pentair teams for helping deliver these results, even in the face of unprecedented material shortages and inflation. Our orders continued to grow and our backlog ended the quarter at record levels.

We believe our order trajectory gives us increased confidence not only in our ability to growing the second half but it also gives us comfort that the topline momentum we have built the past several quarters will carry over into next year. Our transformation work is on track and we built a strong pipeline of initiatives across the enterprise.

Regarding the current inflationary environment, we have implemented further price increases and we expect the price cost gap to further narrow in the second half. Our cash flow remained robust and our balance sheet is in a very solid position.

We have a strong M&A pipeline tied to our strategic growth initiatives and we plan to remain disciplined with our capital allocation. We are introducing third quarter guidance and raising our full year expectations once again, which Bob will give more detail on later in the call.

Our forecast reflects our expectations that material shortages and inflation are not going away nor will they improve materially. We believe we have better visibility than we have had in the last few quarters and that our proven focus around manufacturing and sourcing gives us the tools to navigate the current environment.

We are encouraged to see our commercial and industrial businesses recovering and our residential businesses remaining seasonally strong and as mentioned earlier, our backlog support continued growth. Please turn to slide five labeled Building a Track Record of Consistent Growth.

At our June 10th Investor Day, we introduced several targets for 2022 to 2025, including mid single digit sales growth, 300 basis points margin expansion and 10%-plus CAGR for adjusted EPS. Our 2025 targets were based on our guidance as of June 10, which we are raising once again following our strong second quarter performance.

Our longer term target provided at Investor Day would now be based off of our revised guidance. We have experienced significant growth since the second half of 2020 and we believe the momentum that we have created will continue into the foreseeable future.

We continue to believe that we have a well-positioned portfolio benefiting from many positive secular trends. Our pool business serves a large installed base. Water treatment helps solve water quality issues for residential and commercial customers.

And industrial and flow technologies serves some attractive niches like biogas in addition to a large installed base the pumps. While our consumer businesses are seasonal, we do not believe them to be cyclical.

Wile our focus is on driving the core to create consistent value creation, we are investing in a few strategic growth initiatives to accelerate the topline. These include getting closer to the consumer in pool, expanding water treatment further into services and biogas and carbon capture within industrial and flow technologies.

As we drive transformation more broadly across the entire enterprise, we expect that this will drive both ROS expansion and help fund growth initiatives. Finally, we believe our balance sheet provides a great degree of flexibility to drive further upside, primarily through M&A tied to our strategic growth initiatives.

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 will provide an update on our overall strategic position.

Bob?.

Thank you John. Please turn to slide six labeled Q2 2021 Pentair Performance. Second quarter sales grew 32% with core sales increasing 28%. Consumer solutions grew core sales nearly 40% and industrial and flow technologies delivered core sales growth of 12% with second consecutive quarter of growth.

Segment income was up 40% and return on sales expanded 110 basis points to 18.6%. Adjusted EPS increased 42% to $0.84. Consistent with our guidance, the second quarter did not see price fully offset inflation as we saw higher inflation and we have continued to implement price increases to help offset.

The second half should see price cost start to even out, but unprecedented amount of material and wage inflation coupled with robust demand has contributed price reading out at a slower pace. Corporate expense was $26 million in the quarter as we recorded higher levels of compensation expense, given the performance our businesses delivered this year.

Our tax rate was 17.4% in the quarter as we now expect the full year tax rate to approximate 16%. This is due primarily to higher levels of North American income as our residential businesses continued to grow at strong double digit levels. Please turn to slide seven labeled Q2 2021 Consumer Solutions Performance.

Consumer solutions sales growth was 44% as both businesses delivered strong double digit growth. Segment income increased 48% and return on sales expanded 80 basis points to 24.9%. Consumer solutions experienced significant inflation during the first half as demand continued to grow. Pool experienced sales growth of 50% in the quarter.

While we have seen significant growth two quarters in a row to start the year, we believe pool dealers are doing their best to keep up with robust demand. The theme of consumers investing in their backyards continued. The pool team have significantly increased capacity even in the face of material shortages and inflation.

Backlog remains at record levels and orders have more than doubled. Even when the record year, we believe the improvement in orders and strong backlog gives us improved visibility that growth will continue looking ahead for next year. The macro trends continued to be favorable and the installed base of pool continues to grow.

Demand for new pools remained strong with many builders reporting backlogs into next year. We believe consumers remain committed to enhancing their at-home quality of life and enjoying the pool is a major part of the experience for many consumers.

In addition to new pool construction, aftermarket growth remains strong as consumers have used their pools more. Water treatment delivered 35% sales growth as residential demand remains robust and commercial showed strong signs of post-pandemic recovery.

Our residential business grew nearly 20% and our commercial business grew sales by over 40%, excluding the contribution from KBI in the quarter. Overall, we believe consumer solutions is well-positioned to deliver continued double digit growth in the second half based on strong order and backlog trends.

We expect price to read out further in the second half and close the gap on the higher inflation experienced in the first half. Please turn to slide eight labeled Q2 2021 Industrial and Flow Technologies Performance.

Industrial and flow technologies increased sales 17% in the quarter and its end-markets further recovered and the business continued to execute its strategy. Segment income increased 30% and return on sales expanded 160 basis points to 15.7%. Residential flow grew at a double digit rate for the third consecutive quarter.

Orders continued to exceed sales and we expect the seasonal business to end the year well-positioned within all of its channels. Commercial flow increase sales 11% and further built backlog. The commercial recovery has gained momentum with orders continuing to improve. We expect growth to continue for the smaller part of the segment.

Industrial filtration delivered 14% sales growth as the short cycle aftermarket showed further signs of improvement, particularly within food and beverage. We experienced double digit increases in both orders and backlog. Industrial and flow technologies remains focused on reducing complexity, selective growth and margin expansion.

Please turn to slide nine labeled Balance Sheet and Cash Flow. Free cash flow continued to be a great story with over $100 million improvement year-over-year. We generated $340 million of free cash in the first half. We have returned $117 million to shareholders through dividends and buybacks in the first half.

We also repaid a $104 million bond that matured during the quarter and paid approximately $80 million to acquire KBI. As we continue to invest our capital wisely, we ended the quarter at just under one times leverage. We are extremely proud and excited to see our return on invested capital exceed 18%.

As we look at our cash flow needs going forward, we plan to remain disciplined in our capital allocation approach. We plan to continue working the M&A pipeline and to buyback at least $150 million of our shares this year. Please turn to slide 10 labeled Q3 and Full Year 2021 Pentair Outlook.

We are initiating third quarter and updating our full year 2021 guidance. For the quarter, we expect sales to grow 16% to 19%, segment income to grow 18% to 23% and adjusted EPS to grow 16% to 21% to a range of $0.81 to 0.85.

Our forecast reflects our expectations that material shortages and inflation are not going away nor will they improve materially. For the full year, we expect sales to grow 21% to 23%, segment income to increase 30% 5o 34% and adjusted EPS to grow 32% to 36% to a range of $3.30 to $3.40.

Embedded in our full year sales guidance is anticipated growth in consumer solutions around 30% with pool expected to be up nearly 40% and water treatment up over 20% as commercial is expected to further recover and KBI is expected to contribute in the second half.

Also incorporated in the revised guidance is anticipated low double digit growth for industrial and flow technologies. Below the operating line, we expect corporate expense to be around $80 million, given the higher levels of compensation expense in 2021, given the record performance expected this year.

We expect corporate expense to go back to more normalized levels next year. We now expect net interest to be in a range of $15 million to $16 million and our tax rate to be around 16%. We anticipate the share count to average between 167 million and 168 million shares for the full year.

Capital expenditures are expected to be around $60 million, while depreciation and amortization is anticipated to be around $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 Michelle for Q&A, after which John will have a few closing remarks.

Michelle, please open the line for questions. Thank you..

[Operator Instructions]. Our first question comes from the line of Mike Halloran with Baird. Your line is open. Please go ahead..

Hi. Good morning everyone. Thanks for taking the questions.

So can you just give some context behind the incremental confidence you are seeing in the pool trajectory from year? Maybe just how far is the backlog stretching out? Maybe a little more details on some of the commentary you getting from the channel? Inventory levels? Any more context would be great..

Well, as said in the prepared remarks, the backlog is at record levels, demand at all time high and remains very strong. We see pool build into next year and beyond. So the metrics around demand are very strong.

Certainly with what we see now, we have confidence that the growth will continue for a variety of reasons, everything from second homes being built to people spending more time on in their backyards and a number of different products coming out. So I believe that that will continue. We are confidence into next year.

Inventories, they are still catching up. So we are working through that to satisfy our distributors and dealers..

And then, just in that question, how far out is your backlog specifically tracking at this point? Or is it just meeting with what's available in the channel?.

Yes. So Mike, this is John. First of all, we look at the pool season is coming to a completion at the end of September. And then we start the next pool season when we get to October. So our first goal is to get the backlogs and the inventories related to this pool season out.

And as Bob mentioned, we feel like we are in a really strong position regarding that. And then we got to work on next year, which we feel is also going to be strong demand. I think another level of confidence is, we have been able to start to attract labor and keep labor in our pool factories which was harder to do three to four months ago.

And we are starting to manage the supply chain, the uniqueness because of that, availability product and being able to demonstrate the agility in the factories to get product out to customers. So those are the differences of how we feel.

As far as higher confidence, Mike, I think we have always been confident this is a good business and that this is a good demand. But we wanted to make sure we were able to make progress on meeting that demand throughout the year..

That makes a lot of sense. And then on the other side of the business. Just maybe some incremental commentary on the recovery cadence you are seeing in IFT? Sustainability, what customers are saying? How it's tracking versus normal seasonality? Any incremental color there will be great..

Yes. I will start with that one. We were very, very pleased again to see the IFT growth return. The residential piece of the business within flow continues to be strong. The recovery in commercial has also helped the flow business. And then within industrial, food and beverage has been a nice growth area for us.

So it continues to grow to be able to guide for the full year low double digit growth for us is exciting after the challenging year last year. And we expect the momentum to continue as well in IFT..

And Mike I would just add that we saw in our commercial filtration businesses in water treatment finally get back to levels that they saw in 2019. Obviously, it wasn't easy compared to 2020 coming up the dip that we had there.

But we are encouraged on those trends and we are encouraged as more restaurants and hotels and hospitality open globally that we will continue to see sequential improvement there..

I appreciate it. Thanks John. Thanks Bob..

Thank you..

Thank you..

Thank you. And our next question comes from the line of Joe Giordano with Cowen. Your line is open. Please go ahead..

Hi guys. Good morning..

Good morning..

Can you kind of just talk us through regionally how like, if you had like a scale, one to 10, how crazy pool has been regionally? Are certain markets just more out of whack from a go forward basis? Like I live in New Jersey. So I know Northeast new pool inflation is probably at levels that have been seen before.

But can you kind of scale how this is in more traditional markets? And maybe it's more balanced than some of these growth rates might appear when you normalize businesses for like the comps?.

Yes. So we had a couple of things going on this year, as you probably know. One, we had the department of engineering changeover from single speed to variable. So we are already expecting that we are going to see strong growth in that particular product line.

And then obviously the acceleration of new pools and remodel pools is really putting a significant demand nationally on that product. And that is the same product generally sold in all of the pool regions.

And then state-by-state, you got these disruptions like Texas that has been disruptive for everybody and the fact that all of that aftermarket demand still needs to be satisfied of what happened with the freezes.

And then the rest of the markets, I would say that they are just accelerated, meaning that the rate of new builds are consistent across those areas. And then the aftermarket demand replacement cycles or the additive, I want more products in my pad, have been traditionally across the Sunbelt states.

So right now, I would say the demand is not easing and we are all trying to catch up with that demand and work through our supply partners to do that..

And if I could just sneak one in and apologies if I missed it in the very beginning.

But any update on like timeline of new product introductions from some of these like in-home point-of-view systems like with Rocean?.

Yes. That's our next year product introduction for us as we work to try to get that technology up to speed and then launch that somewhere around the end of the year, the early part of next year with a soft launch and then expect to ramp that up throughout next year..

Great. Thanks guys..

Thank you..

Thank you. And our next question comes from the line of Brian Lee with Goldman Sachs. Your line is open. Please go ahead..

Hi guys. Good morning. Thanks for taking the questions. Maybe just a follow-up on Joe's question. Just any initial views on the new pool market for 2022? I know it sounds like from listening to other supply chain players, the general expectation is for about 110,000 or so, call it, this year.

But wondering if you think that number grows next year? And then with respect to backlog trends, I know you are at record but kind of what sort of visibility can you quantify to any degree you have with builders currently heading into next season?.

I think builds will continue to grow. I think you it's capacity constrained generally by labor and product availability beyond just pool equipment after we do the landscaping in those backyards. So, we continue to think that 2022 will be a robust year there. And then additive to that number, we always have remodels.

So the pools that needs to also be done in addition to those new pools. And then where we are really pleased is the penetration rate of the products on the pad and more and more awareness of heaters, automation, salt-based chlorinators, those effects of products are where we have really seen the acceleration.

So I think we want to continue to grow from here and we believe that we have right now up enough visibility to feel like 2022 is a growth year..

That's fair enough. And just my follow-up on the price increase. You mentioned the latest price increase.

Can you give us some quantification around what that level was? When that was implemented? Or when that's going into effect? And then what parts of the portfolio here? If I look at your consumer solutions segment for the back half, it seems like you are implying kind of 20%, 25% year-on-year growth number for the he back half year.

How much of that is price? How much of that is volume? I am assuming a lot of that's going through that part of the portfolio here? Thanks guys..

What I will do is just share a little bit of color around price and inflation overall for Pentair. In Q2, price was a two point benefit for us and inflation was quite high, close to five points.

As we move into the back half, think of inflation in that by the five to 5.5 point range, so slightly higher but think of price reading out at closer to four points in the back half. So we improve from Q2 and narrow the gap but it continues to be a challenge.

And the whole material shortages is a challenge for our ops and supply team and we are really appreciative of all of the work that that team has done. In the second quarter, they really did a nice job helping us drive that 32% sales growth. They did have the luxury of more raw materials sitting in that opening inventory.

So as we move into Q3 and Q4, the challenge for the team is really to deal with the lumpiness of the material shortages. So every week is interesting as they plan the production schedule and the team is doing a remarkable job to achieve the numbers that we have guided to..

And then just to follow-up on your price question. We have three general business models. In our dealer-distributor short-cycle businesses, obviously, it's easier to work with the supply chain and then work with the channel partners to raise price in those areas. They usually get through relatively quickly.

Then we have our more OEM related businesses or our larger company programs, which takes time. And then we have got the projects that you quote and you are basically dealing with the cost of inflation until you quote that next set of projects.

So that's the other color I bring across those three business models and it all blends to the numbers that Bob shared with you..

All right. Thanks guys for all the color. I will pass it on..

Thank you. And our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Your line is open. Please go ahead..

Hi. Good morning guys..

Good morning..

So the incrementals in the quarter were certainly better than I thought and I think how you guys started on the June Analyst Day and I think that was a concern. It seems like price is more of a help in the back half.

But what kind of surprised you to the better in the second quarter and how should we think about incrementals in the back-half?.

Well, I think we have got some of the IFT productivity that we were expecting and it read out and we feel like that's generally sustained, which was definitely better. And then obviously, when we get more pool product out the door, it generally drives higher levels of margins for Pentair.

And we were able to get capacity levels up in pool and we benefited from that..

Okay. And then just on, I guess, this view into 2022. Just in the strength here in pool, where do you think some pull-forwards happening or stuff off that maybe isn't repeatable? I know there is good demand trends on new and remodel.

But where have you seen maybe the most pull-forward in terms of consumer attitudes?.

Well, I think every single channel partners we have is spending a disproportionate amount of time trying to work with us to get product to the next job there you are doing, right, on the new build side.

So when you see increase in the new builds simultaneously with the demand for aftermarket, you are trying to balance those two things at the same time. So I think some of the traditional filter and pump are obvious because every pool pad needs those and they have to be repositioned to where the jobs are and how to get the inventory where you need.

And then some of the more nice to haves in the pool that can be deferred and/or added later is really where we think the majority of the backlog is repositioned for next year..

Okay. Thanks John..

Thank you..

Thank you. And our next question comes from the line of Bryan Blair with Oppenheimer. Your line is open. Please go ahead..

Thanks. Good morning guys..

Good morning..

I was hoping you could offer a little more color on KBI integration and how the service network is influencing your commercial water treatment recovery and process going forward?.

So for us, KBI is really an exciting acquisition for us that closed in the second quarter. We now are able to provide services within the commercial space. It's a business that we can learn from and then leverage to help grow in that area.

So really strong start for us in that business and exciting to see the footprint and the opportunity within that area that we really haven't been able to drive into..

That's excellent. And then I think you said 40% total growth for commercial treatment in the quarter. I apologize if I missed it.

But did you cite the organic figure?.

Yes. The growth for the full year in water treatment, we gave -.

It was 35% in the slides. I think Bob, right, for Q2 and then there is just a modest contribution from KBI in the quarter. And then for the year, in the full year outlook that Bob gave, think of roughly $20 million a quarter for KBI..

Okay. I appreciate that. And then John, -.

Yes. the growth that we gave for the second quarter excluded the 40%, excluded the contribution from KBI..

It did, okay. I appreciate the color..

Thank you..

So with that momentum, John, you said over the last couple of quarters that it's unlikely that commercial demand would recover to 2019 levels.

With the pace, the momentum you have in the business now, does the changes anything?.

Right. Actually, as I said, we are at 2019 levels now. So we took a dip last year and now we are recovering to modestly growing versus 2019. We do believe that starts to accelerate from here. But we need the rest the world to continue to open. Primarily hospitality would be the one area that is not yet as robust driven by global travel primarily.

Once that gets going, I think we feel like we are growing off of 2019 levels again..

That's great. Thanks again guys..

Thank you. And our next question comes from the line of Nathan Jones with Stifel. Your line is open. Please go ahead..

Good morning everyone..

Good morning..

I am just going to follow-up on the discussion there on commercial water treatment being back to 2019 levels. I can't imagine that the market is actually back to 2019 levels.

So can you talk about where you think you are gaining share in this market? Or what's driving your ability to get back to 2019 levels when I can't imagine that the market could possibly be back to that level yet?.

Yes. It's the spaces that we have a higher participation rate in, Nathan, like quickserve restaurants and also you got gas station service. And those are beverage hotspots as you can imagine. And we participate in both filtering the ice and also filtering the beverage dispensed. So that is a area that has definitely picked up faster than it was in 2019.

And the rest of the fullservice restaurants and hospitality have been slow to recover it is but still recovering..

Okay.

So your mix is more skewed to stuff that does have a market level back to where it was?.

Yes. We benefit from that, yes, right..

And then a follow-up on that price cost equation as well. Narrowing the gap in the second half, pretty big gap there in the first half.

In the unlikely event that we get kind of stable input prices, would you expect to be net price cost positive in 2022 as you make up these deficiencies from 2021?.

Don't know yet. I mean, we definitely have learned a lot about inflation. I mean the sourcing inflation is usually easier predicting and I think we have done a relatively good job on that one. Where I think we have still been playing catch-up this year is labor inflation and the amount the wage increases that occurred throughout the year, Nathan.

We are making sure that we are using best practices as we quote the next projects and next year's projects ahead of time. And then were making sure that we keep agility in focus as we think about how to price more effectively on the shorter cycle businesses..

Great. Thanks for taking my questions..

Yes..

Thank you. And our next question comes from the line of Ryan Connors with Boenning & Scattergood. Your line is open. Please go ahead..

Great. Thanks for taking my questions. I had a big picture question on sort of the aftermarket opportunity. You alluded earlier to this idea that there are so-called nice to haves on the pool pad that maybe aren't going in right now because of the supply chain constraints.

And so my question is, how should we think about the growth of the installed base over a couple of nice years here on new builds? And what that does to the structural aftermarket opportunity in the next several years, three to five years out? I mean, is that meaningful, that expansion in aftermarket? And do you believe that's a good thing from a mix perspective? Can you just give us your thoughts there?.

Yes. I mean we look at it as, every new pool that goes in is additive to the 5.3 million in-ground pools that exist today. And as people use their pools more and more, the number one thing they look to is the water chemistry of their pools. And then how do they make it more enjoyable and comfortable as an experience.

And those things tend to drive higher degrees of automation and consumer awareness and also then lead you to figure out what else you can do to either self manage or self monitor your pool or control heat and/or the other comfort aspects of your pool. So we look it as, all this is good news to build out the long term demand in the channel..

Okay. And then my other one was, just want to get your reaction, there is a lot of the news about this global minimum tax rate and lot of movement on sort of tax rates. And I know you have got the unique jurisdiction as a corporate.

So any thoughts there on how that could impact Pentair or not from a tax rate standpoint, depending on how that plays out?.

We are in the process of assessing what the impact would be. It's still too early to really give a perspective. But our early view here is that there would be some upward trip in the tax rate but not significantly higher at this point. And then certainly better than a number of our competitors..

Yes. Okay. Fair enough. Thanks for your time..

Thank you. And our next question comes from the line of Andy Kaplowitz with Citigroup. Your line is open. Please go ahead..

Hi. Good morning guys..

Good morning..

John, you mentioned you are excited about how much smart automation in heaters and your really new pool pad products in general are adding to remodel and aftermarket growth.

Can you give us a little more color into how much the new upgrades to the pool pad are maybe more secular? Have you invested enough in your sales and product capability to take advantage of this trend? And what do they tell you about the longer term growth potential in pool? How much do you think they could contribute to longer term growth?.

Great question. I mean we have been stuck and the industry is has been stuck and we have been with it somewhere around just modestly in the double digits of automation. And I think just with the recent trends in more mesh networks and getting Wi-Fi into the backyard in a more dependable basis, it creates more opportunities for more automation.

You really need awareness and you need people to use the pool with care to really drive that behavioral change. And that's what we are most encouraged by. There is also better technology at great price points that we are participating into to manage and monitor water chemistry.

And then to begin to determine what's necessary to balance those water areas. So that's what I am really super excited. We also saw and we shared this openly that as use their pools more, the heater matters.

And that was always the nice to haves on the pad on the older builds and I would say most people remodel now they are putting those heaters in, both the spa and for the pool. So we have seen the trends in lighting earlier. We saw the trends working around some of the variable speed pump penetration.

We are now starting to see that extend to the other capabilities around the pool. So I think it's a few points of overall pad penetration for the industry over the next several years. And that encourages us and excites us..

And John, I might have missed this is in the prepared remarks. But at your Analyst Day, you had mentioned that you are right in the middle of 12 weeks sprint to come up with ideas to form more of the basis of the transformative plan that you laid out through margin improvement.

So maybe you could update us on sort of what sort of ideas have come out of that? Any sort of interesting observations you would make?.

Yes. So my official report out is this Thursday with the executive team and I am looking forward to that set of brainstorming actions. We have engaged a lot of people so that we have got a voice from the broader organization. It's required patience for my part to not jump and know what the answers are. So I am not going to jump out of that.

But I have seen the funnel and I have seen a list of ideas and I would say that it's more sizable than I originally thought. And that was about how do we put the programs around it to action them and to think about sequencing them to derive the value from that.

But really, really encouraged right now on the participation in the organization and the ideas that are starting to surface..

Yes. This is Bob. And I have probably been a little less patient than John. So I would confirm that the pipeline of opportunities is very robot. A lot of complexity reduction initiatives. There is huge opportunity to drive margin expansion and to really help with those Analyst Day numbers.

We said in the prepared remarks that even with a higher guide this year, we are going to go ahead and add on to this year the 300 basis points of margin expansion into the future with where revenue will grow at that mid single digit plus number that that we shared at Analyst Day. So transformation will be a big part of to us achieving those results.

And embedded in all of this is ease of doing business with Pentair, so a much, much better situation for our distributors and dealers as well..

I appreciate it guys..

Thank you. And our next question comes from the line of Josh Pokrzywinski with Morgan Stanley. Your line is open. Please go ahead..

Hi Good morning guys..

Hi Josh..

John, just on some of the inventory commentary out there in distribution or kind of your channel. And sense for what that's like kind of on a normalized basis? Maybe absolute levels versus 2019? I think days on hand were probably pretty well, just given how strong the growth pace is.

But if we were to sort of dial that back a little bit or normalize that, would inventory sort of be in the right ZIP Code or would they still be low on an absolute basis?.

Josh, without getting to specific, we are lower than we should be and our customers and channel partners are asking us every single day to pick up the pace and get then more equipment, right. That's the way I would say it.

it's exhausting to the plan teams to keep up the demand and the sell-throughs you can articulate from other people's releases and you see that we are trying to do what we can to catch up with it..

Got it. That's helpful. And then just touching on the last question that I think got asked on some of the other quantified discretionary stuff. You mentioned heaters. How much were those up relative to rest of the pool business? I would imagine a lot of that is more kind of first fit than necessarily replacement of an existing theater.

Is that fair?.

Yes. I mentioned it because we saw that really go into the back half of last year in a broader way, if you recall.

And so now when we think about anniversarying the back half, we are still growing on top of those levels which gives us encouragement that these aren't necessarily one-and-done but we are seeing a long term penetration of the product lines..

Got it. I appreciate it all..

Thank you..

Thank you. And our next question comes from the line of Scott Graham with Rosenblatt. Your line is open. Please go ahead..

Good morning John, Bob and Jim. I have questions, a couple of questions about price cost.

And I was wondering, Bob, would you be willing to split out the labor piece of the inflation that we saw in the quarter?.

Roughly speaking, two-thirds material, one-third labor..

And maybe help us maybe understand a little bit on the labor side. So are you talking about increases to the compensation pool for your current employees to retain them because your business unit heads are saying, hey, we are going to lose people.

So you kind of got to get more aggressive there? Are these new employee adds? Could you give a little color on that, if you don't mind?.

Yes. I think it's both. I mean when you look at having to add to your labor base, you are confronted with what are the real market dynamics to add. And then you have to go back and you have to make sure that your existing loyal employees are paid at least that, if not more. So it creates a dual impact.

One, trying to get the new people and then making sure that your current employee base are well taken care of..

Thank you for that.

On the productivity, particularly IFT, is that the beginning of some of the reduction in complexity, the $10 million, is there a piece of that in there?.

Yes. There is a big piece of that in there. And I think we are really encouraged with their efforts around that. And we think that that is, that's why Bob also mentioned transformation. I think we learn from certain categories of dullness. We have seen how it reads out in better efficiencies on sourcing and also less complexity for customers.

So we are really encouraged by that trend and we expect to bring that across the enterprise in a faster way..

Okay. Thank you. Last question is a question you might not be able to answer, but I am just going to shoot anyway. The prices of assets are pretty inflated, speaking of. And we have IFT, which is a business that needs to some fixing to improve the margins there.

But it looks like, particularly as of Thursday you are going to have a very clear path to do that. As in acquisitions announced in this space, I would say, in this space in sort of a multi-area just the last couple of days where it affects them about 17 times EBITDA which is your multiple.

And I am just assuming that the pool multiple is higher than the IFT multiple embedded within your valuation.

Is there any thinking around IFT spinning that off at some point down the line, particularly with asset prices where they are now?.

Yes. Scott, I mean the way I look at it is, I think we have a really good IFT business that continues to demonstrate progress towards its goals. I mean I am really encouraged by the way its growing. Double digit core growth this quarter and starting to build out the order pipeline.

And I am also encouraged about its focus, its complexity reduction and its commitment to the margin expansion. Now I am going to get through the transformation work. And I believe that this business has significant margin expansion in front of us. So I believe the course of action is, that's can create value for Pentair, a large part of our portfolio.

And then it is a big important part of our portfolio..

Got it. Thank you both..

Thank you. And our next question comes from the line Rob Wertheimer with Melius Research. Your line is open. Please go ahead..

Thank you. Good morning everybody. So you have talked on this a couple of times before. But water treatment, we are looking at a really cyclical rebound but a bit less as you have impact from product changes and the solution in residential and commercial.

Is that correct? Or is some of the work you are doing underlying will allow this to some of that growth more structural than the nice rebound that we had? And then just maybe just kind of reiterate the timeline of the impact you are seeing from what you are doing there? Thank you..

Yes. So just within water treatment to remind you, roughly $100 billion pro forma business. We have residential and we have commercial. And the residential has been fairly strong. Little lumpy through COVID with the ability to get in people's houses or not as far as what we are trying to do there.

But now it's at a point where I think we have got steady-state growth. If you recall, when commercial happened, there was generally a closure of most restaurants and hospitality and offices where people drink water. And that was a huge step back to our business last Q2.

That has slowly been recovering as people return to more of the normal of the way it used to be pre-COVID but we are not yet back globally to where we expect it to be.

I think our addition of KBI gives us the ability to have services components on top of products with strategically what we think our customers want and we are very encouraged about the early signs there.

So I think we are starting to return and I think we are now in, what I would say, every part of that portfolio growing versus being more residentially led, as it was in last several quarters..

Thanks..

Thank you. And our next question comes from the line of Julian Mitchell with Barclays. Your line is open. Please go ahead..

Hi. Good morning. This is Trish, on for Julian. So just on free cash flow, it's been very strong year-to-date. Under normal seasonality, I think second half free cash flow represents 50% or 60% of the full year free cash.

Should we expect this normal seasonality to occur this year? And maybe if you could just walk us through the moving pieces there for the balance of the year?.

Yes. Balance of the year free cash flow remains strong. What's really helping us is, we get off to fast start at the beginning of each quarter that the linearity is very strong. So I expect another strong free cash flow year following last year. And we will continue to drive it over 100% of net income..

Great. And then maybe one more. On IFT, I know you guys have talked about the significant margin expansion opportunities there.

But how should we think about inorganic opportunities there? Can you just remind us what end-market or products you might look to increase your exposure to within that segment?.

Yes. So we hinted at Analyst Day. We really right now like the carbon capture and also the sustainable gas parts of that portfolio. And we feel like that we have got a fairly good position there and we would love to continue to scale and also be able to provide the regional partners the solutions they need. We are at the heart of everything we do.

We are a membrane focused company. So we like to look into filtration and have opportunities to expand our filtration capabilities as well. And as a reminder, even though we use some of these technologies in the consumer solutions, they initiate those applications in IFT and we cross-pollinate those across both segments.

So those are the two areas that I would say are definitely areas of a focus in the IP portfolio..

Okay. Thanks guys..

Thank you..

Thank you. And our next question comes from the line of Deane Dray with RBC Capital management. Your line is open. Please go ahead..

Hi. This is Dean Tyler, on for Deane..

Well, hi Tyler, on for Deane..

Sorry if I missed this, but could you discuss some of the supply chain issues that you guys are seeing? Obviously, you mentioned product availability in some of the prepared remarks.

But are you seeing other supply chain issues like port congestions or anything there?.

Yes, yes and yes. I mean everything that you are hearing, we are experiencing in some type of inconsistent way, right.

So we would say that even though we have had availability of most of the supply we need, it's very inconsistent in its predictability of when and how it's coming, which is forced tremendous agility in our factories to rearrange in a lean way where we put the labor efforts.

And sometimes we are producing 75% of the product and then coming back and fishing 25% later, to give you an example. That's why we are very complementary of you teams, as Bob said, because it's required all kinds of different skills to be able to move forward.

Main challenges to us are chips, would be drives, would be motors, those would be the areas that are in high demand for the products that we serve..

Great. Thank you for that.

And could you guys provide just any updates on some of your new IoT products that have launched recently or planning on launching?.

Yes. So we are excited by that. And I think, first of all, really excited about the momentum we are building in IFT on lot of their IoT enabled services ability. We have launched products on the consumer solutions side that allow you to connect to our Pentair Home app. And we continue to add product capability to give you a better consumer experience.

So I would say, most of those been soft launched in 2021 and we will expect accelerate in 2022 and beyond.

And then I have to take a plug because I know Deane would be very interested in this, Tyler, is we feel like we are really making some of progress on some smarter filtration technology for pool as well and we are excited as we mentioned at the Analyst Day about the progress on that technology and making pools clearer and more visible and utilizing less chemicals to achieve the same outcomes..

Great. Thank you very much..

Thank you..

Thank you. And I am showing no further questions and I would like to turn the conference back over to John Stauch for any further remarks..

Thank you Michelle and thank you for joining us today. 2021 is experiencing a phenomenal year of growth and we believe the future continue to bright for Pentair. We believe we have strong business platforms that are industry leaders in their designated spaces.

We are in spaces that are growing faster than the overall global markets and are propelled by attractive secular trends. And we have carved out exciting strategic growth priorities in which we have already begun to demonstrate performance.

Further, our transformation journey is designed to unlock value that allow us to grow faster than the industries that we participate in and help us to expand margins rapidly by 2025.

And finally, our balance sheet is strong and we believe we will continue to get stronger, supporting incremental value creation above and beyond what are base businesses can do on their own with tuck-in M&A. Michelle, you can conclude the call..

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day..