濱特爾 (PNR) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2020 Pentair Earnings Conference Call. (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, Mr. Jim Lucas, Senior Vice President, Treasurer and Investor Relations. Thank you. Please go ahead.

Thanks, Mariama, and welcome to Pentair's Third Quarter 2020 Earnings Conference Call. We're glad you could join us today.

With me today is John Stauch, our President and Chief Executive Officer; and Bob Fishman, our Chief Financial Officer. On today's call, we will provide details on our third quarter 2020 performance as well as our full year 2020 outlook, as outlined in this morning's press release.

Before we begin, let me remind you that any statements made about the company's anticipated financial results are forward-looking statements, subject to future risks and uncertainties, such as the risks outlined in Pentair's most recent 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 like to request that you please limit your questions to 1 and a follow-up in order to ensure that everyone has an opportunity to ask their questions.

I will now turn the call over to John.

Thank you, Jim, and good morning, everyone.

Please turn to Slide #4 titled Executive Summary. First and foremost, we hope that everyone is and remains healthy and safe. I'd like to start by expressing my sincere gratitude to all of our frontline employees for their continued commitment to our customers and shareholders. Our performance could not have happened without these teams and their dedication to the Pentair Win Right values and our customers.

While the world we live in continues to face much uncertainty, we were pleased to deliver strong third quarter results with double-digit gains in sales and EPS, while also delivering robust free cash flow. We'll discuss the details of the quarter shortly, but we believe our mix of residential-focused businesses has helped differentiate our results in these uncertain times.

Despite the ongoing challenges and uncertainties that persist, we have continued to invest in our top growth priorities and digital transformation. We have successfully soft launched both the Pentair Home and Pentair Dealer apps, and we expect 2021 to be a great year for a number of new connected products across many of our businesses.

While our businesses are seasonally stronger during the second and third quarters, we're expecting a strong finish to 2020. I'm proud of all of our business' commitment to strong execution in a continued challenging 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 5 labeled Q3 2020 Pentair Performance. During the third quarter, we delivered sales growth of 12% and core sales growth of 10%. On a core basis, Consumer Solutions was up 23%, while Industrial & Flow Technologies declined 4%. I will discuss the details for each segment on the subsequent slides.

Segment income grew 14%, while adjusted EPS increased 21%. Our tax rate of 13% was a true-up as we now expect our annual tax rate to be 15%.

Price was minimal in the quarter as the elevated volumes we experienced in the quarter, primarily in pool, resulted in a higher-than-usual level of rebates with our channel partners. Likewise, our productivity was offset by additional expenses incurred, such as increased hiring to help keep up with demand and higher overall incentive compensation on a year-over-year basis.

Please turn to Slide 6 labeled Q3 2020 Consumer Solutions Performance. As a reminder, nearly 80% of Consumer Solutions serves residential markets. Many of our products have been in higher demand this year, given consumers staying at home. For the quarter, sales grew 25%. Segment income increased 39% and return on sales expanded 250 basis points to 24.2%.

Pool was clearly a strong performer this quarter with a 46% increase in sales. This follows a flat performance in the second quarter, which is worth discussing for a moment. In a normal year, the pool season starts in March or April. In 2019, we saw a late start to the season due to cool, wet weather in several key markets. This year, we saw a pause in business the first part of April as the industry tried to understand the impact of lockdowns in the U.S. By May, orders started to return.

As June drew near, the industry was experiencing unprecedented demand as consumer sheltering at home were investing in their existing pools, upgrading their pools or seeking a new pool to be built. In fact, dealers across the country began to experience a backlog of activity that resulted in many quotes for new pools being delayed as dealers were struggling to keep up with demand.

As those events transpired, we experienced some delays in our supply chain and our own manufacturing plants in April as we adapted to a new normal that included social distancing within the plant. This had a negative impact on productivity and affected our usual ability to deliver quickly, which resulted in a higher-than-usual disparity between our sell-in rates and the industry sell through rates.

As the third quarter began, we had our manufacturing ramped up and our supply chains in line, and we work diligently to meet strong industry-wide demand. While the pool season officially ends in September, orders have remained healthy, albeit not at third quarter levels.

Not only did pool see consistent linearity throughout the third quarter from a sales standpoint, but we saw strong demand across all product categories. Some products, such as heaters, have experienced above-average demand as consumers are looking to open their pools earlier and close them later, given we are all still at home for the foreseeable future.

Despite the higher-than-usual demand and a delayed start to the season, we've continued to invest appropriately in the business and have made good progress in furthering our automation offerings as well as expanding our overall product portfolio.

There has been focus around an upcoming DOE regulation that will see further adoption of variable speed pumps. We've been working closely with our channel partners on educating them on the upcoming regulation. We continue to optimize our variable to speed pumps to exceed DOE requirements, in addition to introducing new select models of single speed pumps for categories that will still be able to use single speed pumps in limited applications.

While the pool season has been far from normal for the second year in a row, we still believe in the long-term growth prospects for this attractive space. Further, we believe that the first half of next year should benefit from still solid demand, in addition to an easier comparison. We will continue to build on our position as a leader in the pool industry, and we expect 2021 to be a strong year for new product introductions for Pentair.

Water treatment, which was formerly called Water Solutions, is more appropriately named given the breadth of our offering and the markets we serve within Consumer Solutions. Water treatment, as a reminder, is comprised of components and systems for the residential and commercial markets.

While water treatment overall was up 2%, it has 2 very different stories to tell. To level set, water treatment revenue is derived from roughly 60% residential and 40% commercial markets. Within the residential facing businesses, we experienced near double-digit growth as consumers became more comfortable allowing dealers back into their homes to test their water and install new systems. We have seen an increase in demand for our brand as consumers continue to focus on the water quality in their homes.

On the commercial side, sales were down in the mid-teens, which is a dramatic improvement from the declines experienced in the second quarter. While restaurants are experiencing a slow recovery and traffic levels remain depressed, our portfolio and focus on the quick service restaurant market provided some relief to the depressed overall market. We have had some success with new offerings like total water management, which is a new seamless end-to-end service, where we specify and install high-quality solutions and provide ongoing service to ensure consistent, great quality water.

While in the early days of offering this new service, we are seeing strong interest from new and existing customers. We expect the food service sector to remain challenged for the near term, but we are encouraged, and we are not declining at the same rate as the industry and are identifying the new areas of growth despite the challenging environment currently.

Please turn to Slide 7 labeled Q3 2020 and Industrial and Flow Technologies Performance. Industrial & Flow Technologies, or IFT, saw sales decline 3% as residential and irrigation flow grew in the quarter, while the other 2 businesses continued to be negatively impacted by a global freeze in capital spending. Segment income decreased 24%, and return on sales declined 360 basis points to 13%. Productivity was challenged in the quarter, principally as a function of a mix with lower margin backlog, in addition to lower revenue spread across a higher fixed cost base.

Residential and irrigation flow grew 6% in the quarter following a 12% decline last quarter. While distributors are still not stocking across the board, demand for some of the higher moving items continued throughout the quarter. The business experienced gains across all channels, particularly in the pro channel and at retail. Within agriculture, our OEM sales were flat, while aftermarket returned to growth.

Commercial and infrastructure flow improved on a sequential basis as we continue to shift our lower-margin infrastructure backlog. This mix negatively impacted the overall segment margin performance, particularly the drag on productivity. Orders in both commercial and infrastructure were down in the quarter, but the quote funnel and infrastructure remains active.

Industrial filtration continued to be negatively impacted by a global capital spending freeze, but the business saw the rate of decline improved sequentially. In the larger food and beverage and sustainable gas businesses, we have experienced softness in both components and longer cycle projects. The other niches within industrial filtration have also experienced softness. Given this business overall is more exposed to capital spending, we would expect the order activity to resume in early 2021 as customers revisit their capital budgets.

Please turn to Slide 8, labeled balance sheet and cash flow. While our sales and income performance were encouraging in this quarter, we were exceptionally pleased with our cash flow performance. For the first 9 months of the year, we have generated over $450 million of free cash flow. The third quarter benefited from strong pool sales spread evenly throughout the quarter and our ability to collect on those receivables. We talked last quarter about the seasonality of our cash flow, with the second quarter historically being the strongest period. With a later start to the pool season and the shift of business to the third quarter, this contributed to higher-than-usual cash flow in the quarter.

We entered the quarter with a net debt adjusted EBITDA ratio of 1.3x, which is at the lower range of where we have talked about our target levels longer term. Between our $900 million revolver and no meaningful cash outlays outside of the dividend, we have more than adequate capacity to fund our growth initiatives, both organic and inorganic. We plan to remain disciplined with our capital, and we feel good about the strength of our balance sheet, and expect to deliver free cash flow for the year greater than our net income.

Please turn to Slide 9, labeled full year 2020 Pentair outlook. Following our strong third quarter performance, we have updated our full year sales outlook of approximately $2.95 billion, and our adjusted EPS range is now approximately $2.35 to $2.40. Below the line, we expect corporate expense to be $60 million to $65 million net interest other of approximately $28 million, a full year tax rate of 15% and average shares to be around $167 million. We expect free cash flow to be greater than 100% of net income.

I'd now like to turn the call back to John to provide an update on some of our key strategies.

Thank you, Bob.

Please turn to Slide 10 labeled Our Longer-term Aspirations. Our first 2 years are focused on developing our new stand-alone strategy, aligning our organization to our strategy, improving our new product pipeline and growth capabilities and developing the right operating rhythm.

Growing the top line organically, consistently and predictably is our main area of focus. This starts with growing the entire portfolio at least greater than GDP and delivering income from our core businesses. We realize that not all businesses will contribute evenly, but we believe that our Consumer Solutions businesses are well positioned to drive above-average growth and are important to building out additional legs of the business and creating our future. In addition, we continue to focus on improving our commercialization process, investing in our digital transformation to deliver more effortless customer experiences and building our brand, we are focused on accelerating fewer, larger growth actions, including expanding our content and pool and building out our residential water treatment offerings.

Within IFT, we are exploring a few promising growth areas around sustainable gas and smart solutions with our Food & Beverage business unit. In addition to growing organically, we believe that there are attractive areas to add tuck-in and bolt-on acquisitions. We expect this will primarily be within our residential commercial water treatment business and includes both products and services. The addition of Pelican and Rainsoft to our portfolio have allowed us to both accelerate our learning and improve our growth performance. We are currently focused on building a robust opportunity funnel, given many of the businesses we are looking at are smaller and privately owned. We are also focused on driving productivity and cash flow while optimizing our ROIC.

PIMS, the Pentair Integrated Management System, is an extensive toolkit that we must continue to deploy effectively. This includes not just our existing businesses and employees, but also future acquisitions and hires. We must ensure that PIMS is truly ingrained in our DNA. We do not have a capital-intensive business, and we believe this asset-light business model will help us further optimize our longer-term investments. We also believe there are further opportunities in our G&A spend that can become sources of self-funding for our growth investments. Our aspiration to become a top quartile performer in our space is well within our control, and we believe we are well positioned across our portfolio.

Please turn to Slide 11 labeled Living Our Win Right Values Through ESG. One of the foundations of our culture is our long-standing commitment to our Win Right values. These values help guide our organization as we work to achieve our highest potential. We are dedicated to holding ourselves accountable to the highest ethical standards as we drive to deliver on our commitments.

Our purpose and our mission, help to empower employees to make a difference within and beyond the workplace. As you've experienced in our recent 2019 corporate responsibility report, sustainability is not an initiative when it's core to how we operate, the products we create and the customers we serve. Our goal is to demonstrate leadership as a responsible corporate citizen in every country and community where we conduct business and wherever our products are put into use.

As we highlighted last quarter, over 60% of our solutions support water efficiency and roughly 75% of our solutions support energy efficiency. Our sustainable gas offerings are supporting CO2 reductions and reuse across the industry.

At Pentair, we are committed to building and advancing unity, equity and inclusion in our company and in our communities. We have amplified our focus on diversity and leadership roles and bench strength. We are committed to safety and a healthy workplace. We are focused on philanthropy, and we walk the talk as our efforts span 6 continents and reach more than 9.5 million people in 2019.

We have strong governance practices. We have a diverse Board of Directors, which includes 3 female directors. The majority of our Board is independent, and our Board is led by an independent nonexecutive Chairman. We also have an anonymous employee help line to report compliance or other concerns with dedicated compliance and audit functions. We also have a code of conduct in place for our employees and our suppliers to help align around responsible, sustainable business practices.

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

(Operator Instructions) Your first question comes from Andrew Kaplowitz with Citi.

This is Eitan Buchbinder on for Andy. So with 46% growth in pool, could you give us more of a breakdown of what you're seeing? Did you see an uptick from the normal 20% of original equipment business? And can you discuss any progress in capturing further share on the pool pad?

No. We were very pleased, as we mentioned in the prepared remarks. Coming into the quarter, demand was high, but making sure that we were able to fill that demand was extremely important, and we were able to ramp up manufacturing production significantly. So again, pleased with the execution and very pleased with all of the work of our frontline workers. The 46% was really, as I mentioned, across the board, across all product categories, demand remains strong going into the fourth quarter, and we're optimistic heading into 2021 as well.

So I would say that I think a good way to look at that would be to spread it over Q2 and Q3 because, as we mentioned, in Bob's remarks and talked open on the last earnings call, we were catching up, and we still are catching up to what the demand is in the industry. As far as expansion on the pad, I mean, Bob mentioned, heaters is a category that has substantially grown this year. That would be another product that we've probably added as far as the content on the pool. And we're very pleased with our automation pull-through over the last couple of quarters as well and we think we're getting an uptick in our automation sales as more homeowners enjoy the ability to manage their pool more remotely or utilize it as a control device through their iPhone. So pleased with those 2 upticks. And as I mentioned, we ended the quarter even catching up as well.

And just as a follow-up. So margin in IFT pulled back sequentially despite higher volumes. You read in the second quarter. Can you talk about some of the factors that impacted margin and what you see as the outlook for marginal while rightsizing the segment going forward?

From an overall margin perspective, and I also mentioned this somewhat in the prepared remarks, is that we did have a catch-up of items like compensation-related expenses in the quarter. Rebates were higher than typical as the pool revenue grew significantly, again, ramping up production, expediting inventory to make sure we kept up with the demand. Those were some of the headwinds that we saw in the quarter. I would say that Q4, from a drop-through perspective, does return to more normalized levels.

Your next question comes from Steve Tusa with JPMorgan.

Your next question comes from Brian Lee with Goldman Sachs.

Maybe as a follow-up to the prior one a little bit, if you guys could. Can you quantify a bit on some of the trends here and into Q4? I know you got a point of price in Q2, but nothing in Q3, and then productivity did swing from being kind of a good guy to a slight bad guy as well in the quarter. Can you kind of talk about trends on those metrics in the context of Q4 expectations? And then, I guess, separately, any early read on those 2 heading into '21?

Yes. I would say that from a pricing and productivity perspective, a lot of the benefits in those 2 areas were somewhat masked, pricing by the rebates and then productivity by some of the compensation-related costs and some of the expedited and ramp-up costs relating to pool. So below that, it was very much in line with kind of what we saw in Q2. And as I mentioned, price and productivity do return to more normalized levels in the fourth quarter.

Okay. Fair enough. So maybe not to put words in your mouth, but a point -- a positive point on each if we're thinking about putting that into quantified terms for Q4 and heading into '21?

That would make sense at this point.

Okay. Fair enough. And then just a second question on the guidance here would imply low single-digit revenue decline implied in 4Q year-on-year. Can you give us a sense of how that breaks down between Consumer Solutions and IFT? And then also, I know you guys just put up a very big 3Q, so was there some pull forward activity? We're just trying to get a sense for the sequentials here into 4Q.

Okay. Yes, I view last year's Q4 as having been a solid quarter. This year's Q4, pool will continue to grow significantly. Demand is good. We satisfy the natural demand here in the fourth quarter. So pool continues to do well. The residential businesses continue to grow. So outside of pool in the residential piece within IFT. We continue to face headwinds on volume within commercial and industrial. And so that is what's bringing the overall growth rate down. We're hard at work in terms of addressing productivity challenges within the IFT business. And so, as I mentioned, again, in my prepared remarks, we expect the demand to continue for pool in the early part of the year, and we expect that IFT productivity will improve as well.

Your next question comes from Steve Tusa with JPMorgan.

Sorry for missing the bell. We're a little bit late this morning, I guess. Just getting out of bed here. So just as we -- I'm not going to ask you to make a call on the weather or COVID next year, but when you guys kind of look out to what's coming your way, in particular, on kind of the regulatory driver, when we turn the corner to next year, is this just like a really hard comp? Or is there something that kind of bridges you into future years and can kind of keep this growth rate at a reasonable level, obviously, for pool? Not saying that 20% is sustainable, but maybe just curious as to how you kind of gauge next year.

Okay. This is Bob. Let me take a shot at it, and then I'll let John add to it. He's probably better at predicting the weather than I am. But we mentioned that Q1, Q2, Steve, faces easier comparisons. Obviously, within the pool business, demand is strong in the fourth quarter, and we expect it will remain strong in the -- as we go into 2021. So feeling good about that. As we face the tougher comparison in the back half next year, primarily in Q3, we should have a number of things going our way. We will have a number of new product introductions. We'll have the DOE regulation. We'll have an IFT business that's facing softer compares and hopefully an improved capital spending outlook. So -- but those are the things that could help us in the back half, but, in terms of the first half of the year, again, much of it is pool and residential-driven.

I think, Steve, without guessing the weather and COVID, we're expecting pool to have a very strong year next year as well based upon the dealer activity and the pools and the pent-up capacity. I don't know what it looks like by quarter yet. I think Bob has given you a pretty good look that Q1 and Q2 will probably be easier compares in Q3, obviously, with this type of growth, maybe slightly more challenged. And -- but at the same time, we'll probably have the same desires of the dealers in the channel to ensure the rebate is matched. And I think we're expecting a good year. And what we're doing now is how do we get the IFT margins rolling? How do we get the year-over-year contributions of IFT to produce a lot of value next year? That's how we're thinking about 2021, Steve, and we're excited about the way we expect to end.

And then just on the earnings bridge. Productivity was a little weak this quarter. Is there anything in kind of price and productivity in the fourth quarter that would influence the result there? Or is it really just kind of a function of the volumes?

It really is volume-related. As was mentioned, our guide suggests that down low single digits in the fourth quarter a strong pool, offset by continued challenge in commercial and industrial. But price and productivity will return to more normalized levels because they aren't facing the Q3 headwinds that we saw around rebates and catch-up compensation.

What I don't quite understand about the fourth quarter is that IFT wasn't that bad this quarter. I mean, is there something that makes it worse next quarter year-over-year?

No, I think we're starting to see the -- we had the backlogs in -- we carried in from Q2 into Q3, Steve, that we were able to shift through the backlog that we have. And now we're trying to build the backlog, but most of the orders that we've taken in, in Q3 are really shippable next year. So we're not seeing our customers step up and want most of their products to an IFT in Q4. And I think they're looking out at the horizon and trying to work more of their deliveries in the next year. So we'll weather the storm in Q4 with IFT, but I do think we're starting to build the order rates and coming off the bottom as we look at IFT going forward.

Right. So a shift from kind of a weak 2Q into 3Q and then, I guess, a step back down. It still seems like with the economy where it is, to go from a positive 10% to negative 5% or negative 4%, even as seems like a real kind of step back, and it doesn't seem like the trends in the business support that step back.

Yes, I hear you, Steve. I also just -- I know we're unusual compared to the -- most of the industrial companies, but Q4 is not a highly strong quarter.

Yes, that's what mitigates that.

A little bit is the pool early buy and the shipments of pool into the channel. Other than that, we tend to have a slightly weaker industrial end.

Yes. Makes sense. All right.

Steve, I know you've always been focused on cash. I did want to mention that I always felt that linearity of operations drive great cash flow. And I just want to make a note that, that came through this quarter.

Your next question comes from Brett Linzey with Vertical.

Congrats on the quarter. I appreciate the color on the top line for next year, but just wanted to focus on the cost side. You talked about some catch-up here on incentive comp in the quarter. How does that roll into next year? And then as you think about the temporary costs that come back, some of the restructuring savings you're going to have that do roll over. What's sort of the netting effect of those next year? And what's that informed for incremental margins for the total company?

At this time, we continue to be hard at work driving those productivity improvements. I mean, the fact that booking compensation this year means there won't be a headwind next year, which, to me, is a good thing. I had talked earlier about opportunities within G&A. We had a benchmarking study done, and it's apparent that our G&A structure is really sized more for a much larger company that kind of post spin. And so we have, call it, a 3- to 4-year runway here to not only improve how we spend our G&A dollars, but to get back closer to benchmark. That study suggested that our spend today is roughly 150 to 200 basis points higher than our peers. And so we've got an opportunity within G&A. We've got an opportunity within complexity reduction, within the IFT business, primarily in SKU reduction. There's also opportunities within supply chain and procurement to become more efficient. So plenty of things that we're working on now that should drive margin expansion next year.

Okay. Great. And just as a follow-up on the IFT margins, you mentioned the negative mix in backlog. Was that a 1-quarter year-over-year event? Or should we expect some drag there for another couple of quarters before it starts to normalize?

We're seeing a little bit of mix challenges within the commercial and infrastructure space. We're hopeful that, that then normalizes going into 2021.

Your next question comes from Joe Giordano with Cowen.

I just wanted to kind of follow up a little bit on the regulatory push into next year. And how do you think of the positive benefits on the price that you're going to get versus like maybe the volume benefits that you'll get ahead of that from pull-through of single speed? And how do you -- how should we think of all of this in totality? And maybe are you entering '21 with a higher level of kind of visible backlog into the first half?

Well 2 different answers. I mean, certainly, we were heading into next year still catching up with the demand that we feel the dealer is trying to satisfy from the consumer. So we feel like we're going to be catching up for several quarters on the demand pull-through in pool. As it relates to DOE, I'm always cautious on these transitions as to how the industry reacts and smooths these transitions over time. So I don't think there's a huge windfall necessarily in any one particular quarter, I think, plays out thoughtfully over time as people work around state-by-state and building out the inventory and still putting in the older product.

The margin -- actually, the operating margin or the drop-through margin on the variable speed is slightly lower, but the variable speed pump in itself is almost 1.8x more expensive than the single speed. So overall, from a content and a simplification of our business model and giving people, quite frankly, a better pump, we think those things work their way out over 2021 and '22, but I think it will be a smoother transition over those periods.

Fair enough. And on IFT, like as you look through your total company and new product introduction being more very focused on some of the resi applications and your capital deployment likely targeting there, like what's the business evaluation process looking like on IFT? Like how core are all these businesses? How are you thinking about them? Has that changed at all over the last 2 years?

Listen, I certainly understand that the margins in IFT at this point in time are not where we want them. They're definitely not where leadership wants them, but I do want to complement the team. This is a truly global business. This is a hugely complex business. It's an engineering mortgage business. And if COVID has been hard from a manufacturing standpoint across one part of the portfolio, it's certainly been really hard to the IFT team. And I couldn't be more proud of how they stepped up. And they're answering the bell as far as getting their customers the products.

There's a lot of inefficiencies in the way that you ship product or you deliver product in an engineered-to-order business when you've got challenges, as we're experiencing with stay-at-home orders and COVID. So again, I just want to say that I think some of this is going to work its way out over time naturally as we get better and working through the new rules.

The second piece is, we're seeing the activity around the focus in the portfolio. We believe we have a really investable industrial business where we provide technology, especially smart technology, the membrane technology to a lot of sophisticated customers around the world that we're getting a lot of momentum on IoT related to those products. We're also participating in CO2 recovery and CO2 use that's getting a lot of push from regulatories, and it's an environmentally friendly product. So really excited about some of those growth aspects.

We got a good R&I business. It's not going to be a rapid grower, but it's got high margins and contributes nicely to the cash and the P&L., and we've got some project challenges in C&I. But we got a new leader there, and we're focused on what we need to do to right the ship there and make sure that we're going more after the aftermarket products and less of the projects.

So I think we're going to see recovery in '21 in a meaningful way and margin in IFT. And I think over the longer haul, this is going to be a good contributor to Pentair's portfolio.

And if I could just sneak one last one in for Bob. You've been there about 6 months now. Obviously, an interesting time to be starting a job anywhere. Just curious as to -- as you look about what you thought going in, in terms of how to budget and how to do this process, like what's gone most according to plan? What's been a little bit different? And what kind of changes are you kind of adapting to?

Yes. Thank you for asking that. It's been a great decision from my perspective to join Pentair. I could not be more pleased with the people that I work with on a day-to-day basis and the opportunity for the company. So for me that I've joined the company that has a great foundation, but there are opportunities for improvement. The things that I'm probably more focused on is around helping to drive consistent organic growth.

We've implemented a number of processes around driving growth on a category level. We're developing better analytics. So think of analytics of products and customers as opposed to necessarily just P&Ls. We have opportunities to drive efficiencies and margin expansion, and I'm excited about both Consumer Solutions and IFT. So from my perspective, a really great future here at Pentair, and look forward to the start of 2021.

Your next question comes from Rob Wertheimer with Melius Research.

So you've touched on this in a number of different ways, but just to sort of get a broader overview. You mentioned just trying to catch up with the strong demand that's been going on with pool. Can you just sort of talk across the segments on backlog/channel inventory versus normal? Are they mostly fully caught up or whether the channel has a bit bunch in some games? Just sort of characterize that across segments.

I would say that the catching up is generally a theme that applies across the portfolio. I think, right now, we believe that inventory levels are correctly rightsized with the exception of what we think is still a channel that needs more inventory for pool. But I think most of our distributors and dealers are being prudent, even in areas like commercial filtration, where there hasn't been any pre-stocking ahead of the expectation of restaurants opening or hospitality opening. So I think, right now, we're seeing a really nice situation where the demand is equal to the shipments that we're experiencing.

Okay. That's perfect. If I may just ask a little bit more of a structural question. You mentioned, in consumer, water treatment, how dealers are able to get in the homes again and sort of put stuff in. I know you're working on education and just making people aware of all the good solutions that there are for the home. Can you just touch a little bit on what the structural growth drivers are there, whether it's signing up dealers? Or how are you getting that education out? And how are you really sort of taking advantage of a reasonably large opportunity?

There has been tremendous search demand. So people on the Internet searching for water filtration and water treatment needs. And Pentair isn't a brand yet that you recognize if you do that, and we are going to be. And the consumer pull and the demand that we think people want is the right solution for their particular need. Water's not consistent, both from an input across the world, and it's certainly not consistent from the way that you desire your water. And Pentair has all the technology capability to take whatever input water you have and deliver the quality and the taste of the water that you want. And that's where we think the biggest opportunity for Pentair is.

And we think we have to build out the channel and the consumer pull and the demand. And we have a lot of new products we're launching next year to do that to make you aware. And the second piece would be to make sure that we're aligned with our service channel to be able to meet the demand and then give you the technology you need. So we've been at this for a couple of years. We've learned a lot from the Pelican and the Aquion acquisitions, and we're poised to really make a lot of progress in 2021 and 2022 around the residential water treatment side. So we're excited, excited about the progress, excited about the learnings and excited about the future.

Your next question comes from Deane Dray with RBC Capital.

It would be interesting hearing some more about this total water management initiative you have in commercial water treatment. Just by the sound of it, it would seem to be similar to what you're doing at one of the major coffee chains globally. So could you just size for us what the applications would be, what the opportunity is, what kind of investment.

Yes. Deane, I mean, that's really in reference to there are franchises and/or restaurants mainly that don't -- necessarily the higher wealth or the company-owned stores in which franchisees are buying a lot of equipment. And we're really giving them an expertise in allowing them to lease their solutions from us, right, and really building connectivity between us and that end customer and renting them or leasing them the solution instead of them buying the solution. That's what total water management is about, Deane.

Great. And is there an investment -- upfront investment that you need to be making? And can you give...

Yes. Yes, we're obviously putting that unit into the field. And instead of collecting the revenue from that unit at once, we're collecting that revenue over time as a way to promote our solutions. So I mean, it's in its infancy right now, several million dollars of revenue, Deane, and we just want to make sure it's a solution that we have out there for our customers if they choose to rent that model. And we're doing them in IoT enabled, so we know what they're being used and how they're being used. And we have the ability to work with that partner to make sure they're optimizing their water experience. So we're excited about that.

Good to hear. And then on capital allocation, just given the strength in the balance sheet, given the cash flow and the line of sight on your cash flow, where do buybacks fit in priority? The stock's sitting right by our calculations at the low end of its relative PE range for the last 3 years. So it really does look attractive if you want to make that case. So just update us on buyback plans.

From a buyback perspective, we start most years with the goal of buying back roughly $150 million of shares. This year, we have done $115 million in the first quarter, and then we suspended our buyback period -- our buybacks as we assessed free cash flow and liquidity. Obviously, as free cash flow has been robust the last 2 quarters, we -- you'll see in the queue later today that we've removed the suspension around buybacks and certainly have that opportunity as we close out the year and move into next year.

Your next question comes from Jeff Hammond with KeyBanc.

Just want to go back to pool and kind of the momentum in the fourth quarter. I mean, I think if I hear you, you're seeing strong underlying demand, and you expect that next year and inventories are still low. So just any read on further catch-up on inventories in the fourth quarter and what your distributors are saying about that early buy?

I'll start on that one. Again, I view Q4 as being satisfying natural demand. So really not dipping into early buys, which is a good situation as we get into 2021. So Q4 is all about delivering on the orders that we have. That then sets ourselves up for a good start to 2021 as we deliver on early buys and more of the standard orders that will come.

And is it fair to say like underlying demand is -- if you kind of put 2Q and 3Q together is like high single digit is kind of the order run rate into 4Q?

I think it'd be higher than that, Jeff. I, for sure, believe it's double digit as far as the underlying demand and absolutely double digit.

And are you doing something different with early buy incentives to disincent early buy? Or...

No.

Okay. Okay. And then just quick on IFT. In your presentation, you talked about growing the entire portfolio above GDP, which would obviously include IFT. But in the earlier question, the focus kind of continued to be more on the margin and margin improvement. So just talk about what changes that kind of drive the growth profile for that segment going forward.

Yes, I think it's focused. I mean, there are some of these businesses that just doing the basics is going to generate 2% to 3% of growth, and that's okay. I think some of them have margin opportunity, and let's just do the 2% to 3% consistently and predictably every single quarter and let's do it well. There's other businesses, as I mentioned, sustainable gas and our IoT offerings in F&B that have an opportunity to be high single digits over a cycle. And that's where we want to focus.

And so it's really discipline, Jeff. When you have projects in front of you, you could chase whatever projects you want. And by the time you realize the lower margins, you're challenged. And some of that still exists in this portfolio, and we're working through that. And that's what we don't want to do anymore.

So we want each business to play its role in Pentair. And by choosing what that is and making sure they're focused on it, I think they can be a big contributor to Pentair's outcomes.

Your next question comes from Scott Graham with Rosenblatt Securities.

Very nice quarter, guys. So I wanted to understand a little bit about -- I guess, maybe I'm just going to not going to put a finer point on this for the fourth quarter. The low end of the EPS guidance suggests a quarter very similar to the second quarter, yet your highest margin business' demand is up double digit. You're saying productivity is going to be better or tax rate goes a little bit the other way perhaps. Maybe there's some cost to push things out the door because of COVID and bottlenecks, but is there something that I'm missing here? Do you -- I mean, truthfully, is there like a huge factor in the fourth quarter?

No, Scott. I mean, it is simply this. The hardest thing for companies today is to produce a low end of the guidance range that incorporates what you think a hiccup related to COVID could be to you. That is it. We're guessing at that end of the range to do how a second wave or third wave, however you want to describe, that COVID might impact Pentair. We know nothing today that would suggest it, but, when you put a range out there, we want to have a range that we can address throughout the quarter. And that's simply what it is, Scott.

Understood. So a further question about your capital allocation, but maybe more from the M&A side. You talked about water treatment being an area of potential targeting. Could 2021 NAV -- your -- the residential businesses are doing better. You have a better -- you have a better understanding of what consumers are buying off of your kind of very long and elaborate study of consumer buying habits and desires. Could '21 be a pretty big year for M&A with you guys in water treatment?

I hope so. I mean, we're continually looking at options, Scott. I definitely look at M&A as an accelerator to what we can do organically. Water treatment's definitely a focus area. I think we're -- that's where the funnel's more robust, and I certainly hope it's an accelerator.

Got it. Last question. The productivity number, obviously, being a bit of a net number was depressed by the things that you guys talked about. What was the gross productivity for the quarter?

It was more in line with what you would have seen in Q2. So -- and then, again, I had mentioned that, that will return in the fourth quarter. So productivity continues to be a consistent enhancer of the margins. It's just unfortunate that, in Q3, we caught up on compensation and, on the pricing side, had higher rebates. But behind the scenes or underneath that, our gross number's very much in line with what we saw in the second quarter.

Right, which I also know, I think, includes some of your productivity, your cost-out actions that you talked about 2 quarters or 1.5 quarters ago. And, I guess, I'm wondering, have we enacted any of those? Did we need to enact any of, call it, $80-plus million that you had identified as the potential to lower cost this year?

Yes. We -- our goal was to take out costs in line with the volume drop, and we've done a reasonably good job there. A lot of hard work has gone on within manufacturing and supply chain. We continue to spend less on what we call purchase spend, discretionary spend. We've renegotiated. We took a hard look at our policies across the board from travel and entertainment, all the way to how we train people, recruit, relocation. And so those are finding their way through as well and, on a full year basis, will help 2021.

Your next question comes from Nathan Jones with Stifel.

Great cash flow quarter, there, John.. A follow-up here on pool. You guys got off to a slow start to the selling season in 2Q '19 around some of the bad weather in the southern states and the big states, where our pool installations happen. And last year, you were pretty cautious telling us that there was labor constraints. It was difficult to catch up with some of those things as the year went by. This year, in 2Q, 3Q of '20, you're probably closer to 20% overall growth. Can you kind of square those comments from last year to this year, where you might expect them to be able to catch up because of labor constraints in the later part of 2019, yet the industry has been able to support such fantastic growth this year over the last 6 months? I'm sure there was some inventory restocking. I know you said, POOLCORP and others were selling out of their own inventory in 2Q. I'm sure you were catching up with some inventory refilling for them in 3Q, but just if you could square those comments?

Yes, I can, Nathan. Let me just give you some -- the way I think about it. I think given the weather we know happened this year, because it was a good weather year. So let's say nothing abnormal happened against us, we would've expected a double-digit full year, primarily because of the challenges we had last year and where we thought overall inventory was, I mean, overall, double digit. I think, let's say, we're close to mid-teens. I don't think we're seeing more than the 5-point tailwind, in my opinion from what would be the COVID order rates because I do think there's a constraint in the industry anyway. I think what we're hearing and feeling is that demand's going to extend. And that extension will be managed through the capacity that you're mentioning. So that's why we're sitting here today relatively confident we're going to have a good year next year.

It does seem like there's still plenty of demand left going into next year to continue to see growth in the pool business in 2021. I know it's a long way out to look at 2022, but do you think we are pulling some demand forward there and potentially maybe your below average growth for a year or 2 after we get past COVID, if that ever happens?

Nathan, I would not guess. I haven't figured out 2021 yet. So to adjust that for 2022, because I get COVID. I got elections. There's all kinds of things that have to unfold first. But I think what you're seeing is people -- I think people are realizing vacations might not be on the horizon, and they're choosing destinations for second homes that they can retreat to. And I think that has been a unique pool across the entire industry, and most of those states are where a pool is in the backyard.

I think that's a fair valuation. I just want to follow up on Jeff's question about the growth, all your business greater than GDP. There's a number of business, primarily the industrial businesses that over the last number of years have not been able to do that. Do you have different strategies that you're going to deploy there now to get those businesses up to growing GDP? And what are the plans for those businesses if there -- if you're unable to get those up to growing at GDP levels?

Yes. I think just to put it in perspective, we have product categories that sit below our businesses. There's some 23 of them. And when we talk about that, we're talking about averaging. And if something's not able to grow, we would look at how it's doing across its cycle, and that it's still doing well relative to the cycle that it's in. We want to make sure, predictably and consistently that we can deliver that core every single year and that it starts with a positive contribution to our shareowners.

The second piece is now let's talk about the strategic growth of it on top of it, and we're trying to get both. And that's not something we've done consistently over time. And I want to be consistent with both of those. You need a stable core growing and then a few incremental things you can put on top of it. And then if you could put M&A on top of that, now you're really lighting it up, and that's our goal.

And just one clarification. I think I heard you say you believe that the inventory levels in -- per pool in the channel are balanced at the moment?

No, I think we're still catching up.

We're balanced across the portfolio.

Catching up in pool, yes.

Your next question comes from Andrew Obin with Bank of America.

This is Emily Shu on for Andrew Obin. Were there any supply chain adjustments made in the quarter to deal with the outsized pool demand and the catch-up? If you could just give some color on the overall state of your supply chains, that would be very helpful.

I'll take that. We've talked about emerging from COVID stronger. I would say that's an example. We've added second suppliers where it made sense, closer to the markets we serve. But generally speaking, Q3 was a quarter of ramping up manufacturing productions, adding a second shift, adding more people. So I do think we've addressed the supply chain challenges, but also given us more optionality around manufacturing production.

Okay. Great. And then my last question is just with the federal election coming up and potential change in administration, have you guys assessed if there could be any impact to the business from a potential green new deal?

Well we're -- and, obviously, we're learning how to balance risks or opportunities all the time between tariffs and COVID and now election. I think we are a sustainable solutions provider. So we would expect to benefit from any movement in green initiatives or societal changes that affect the environment in a positive way.

Your next question comes from Saree Boroditsky with Jefferies.

So with the expectations that pool demand remains strong next year, how are you thinking about the opportunity to push through pricing since it was really not a contributor to sales in the quarter, given rebates?

Yes. I think -- listen, we -- as Bob mentioned, we're deep in the planning cycle right now. And one of the key inputs to any pricing decision is, what are you seeing with inflation? And what's going on with suppliers' material? And we'll make those assessments, and, based upon those assessments, we'll make sure that we're pricing effectively. So this is the time we do that. And if we need to make adjustments, we make adjustments.

Great. And then just following up on the 150 to 200 basis points in G&A opportunity, can you touch on how you're thinking about the timing on this and how we should think about of any benefit into next year?

We think of it as a 3-year runway.

More or less linear.

So not back-end loaded. So improvements. And again, as the improvement in margins will come in 2 forms, it will be some cost out, but also avoiding costs as revenue ramps. So I think it's good that we've got a 3-year path here, and we're hard at work at operationalizing that improvement.

Our next question comes from Julian Mitchell with Barclays.

This is Trish on for Julian. Maybe just one more follow-up on seasonality. I know you mentioned perhaps there's some contingency in the guide. But the implied Q4 guide suggests sales decline kind of high single digit sequentially and then versus normal seasonality of mid-single-digit increases. And so you mentioned IFT is kind of normal seasonality. It's typically down into the fourth quarter versus the third. Should we expect consumer to follow normal seasonality as well? I know you said it will satisfy kind of natural demand. So I think that's typically up quarter-over-quarter into the fourth quarter.

Yes. So simply stated, I think our normal seasonality is Q2 is our strongest quarter, followed by Q3, Q4 and then Q1. And pool is the strongest in Q2 and Q3 because of how it ramps for the season, and that it usually has what's called an early buy, which is a level loading of the distribution base so that we can maintain our employment levels and satisfy the industry demand. Other than that, we tend to see a tail off with the Christmas season, meaning that we've only produced probably the mid-December and shipping products in mid-December.

So the natural tendency is for Q4 to be a little soft across our particular lines. As Bob mentioned, we had a good Q4 last year. And so our IFT businesses, they're still experiencing that headwind on a year-over-year basis. And that's simply what the challenge is with Q4.

Got it. And then just maybe one follow-up on free cash flow. Given the strength to date, as we look out, how should we think about working capital movements? And maybe free cash flow into 2021, do you think it's possible to grow free cash flow next year? Can you give a project to build some supply in pool?

For free cash flow, again, our starting point is 100% of net income, and that will continue to be our goal. I mean, to me, it speaks to the quality of the earnings that we have here at Pentair. One thing, as John alluded to, was there's nothing like linearity to improve free cash flow, either from a quarterly perspective or from an in-quarter perspective. So with the strength that we're seeing in pool, our factories are busy from the start of the quarter to the end of the quarter. That revenue that comes in early in the quarter allows us to collect that by the end of the quarter. So I would say, linearity will continue to be in our favor. We'll continue to drive free cash flow at or higher than net income, and also remain disciplined around things like CapEx.

The are no further questions at this time. I will now turn the call back over to John Stauch for closing remarks.

Thank you for joining us today. We continue to believe that Pentair has a strong foundation and portfolio of businesses to build upon. We have a strong purpose, mission and vision focused on delivering smart, sustainable solutions that empower our customers make the most of life's most essential resources.

We believe that we are in attractive spaces that are expanding. We are a leader in the pool industry, and our water treatment business is helping us become an even more integral player in both residential and commercial water treatment. We believe we have the right enterprise strategy, businesses, talent and culture. Through our Win Right values to our Pentair integrated management system, we are enabling all of our employees to continuously improve. Finally, we continue to prioritize, providing superior customer experiences and delivering more predictable and consistent results.

Thank you for your continued interest. Mariama, you can conclude the call. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.