Jeffrey Hammond: Okay. And then just — Home Depot is buying kind of the number two player in Pool. And I’m just wondering if you think that drives any change in behavior or kind of tougher customer to kind of deal with any thought there?
John Stauch: I think this year, short-term, no. Clearly, the deal is going to take a while to complete. I mean I think all we can do right now is take Home Depot and SRS Heritage on their words and what they’re saying right now is they expect to run that independently and continue to service the pro channel. And for now, that’s the way we would see it unfolding and therefore not a short-term impact that we anticipate.
Operator: Thank you. The next question is from Nathan Jones with Stifel. Please go ahead. Mr. Jones your line is open.
Nathan Jones: Sorry. I take off mute. Good morning, everyone.
John Stauch: Good morning.
Nathan Jones: Question on Water Solutions. You talked about some verticals there that are expected to improve as year-over-year challenges moderate. Is there an expectation that demand is actually improving sequentially here? Is that just a comment that you run into some easier comparisons as the year goes by and those comparisons just get easier in the second half of the year?
John Stauch: From an overall end market perspective, I would say it’s more the latter, Nathan, in terms of, we can’t with interest rates the way they are and people not buying new homes get too much ahead of ourselves on the residential side. So pleased to see that the decline year-on-year is improving for the last four or five quarters. But again it’s not as robust as we would like it to be.
Nathan Jones: Okay. And are you seeing any parts of those channels? I know we’ve talked a lot about the Pool inventory channel. Any parts of the channel at Water Solutions that might still be reducing their own inventory? I mean you guys have talked about reducing your inventory further. So potentially is there any destocking still continuing in any channel, whether it’s Water Solutions or, I guess, across the portfolio?
John Stauch: Not that we’re aware of, Nathan. I mean right now, we would say that sell-throughs matching sell-in generally across the industry.
Operator: Thank you. The next question is from Deane Dray with RBC Capital Markets. Please go ahead.
Deane Dray: Thank you. Good morning.
John Stauch: Good morning.
Bob Fishman: Good morning.
Deane Dray: Can we circle back on the opening comments, you talked about that you’re halfway through value-based pricing. Would love to hear some of the early read on the traction and whether any disruptions? And then I guess it’s a related question, the same thing on 80/20. Just any success stories there? And any kind of product shakeouts, product lines that might be deemphasized? Any color there would be helpful. Thanks.
John Stauch: Yes. So we’re doing a good job utilizing the pricing playbooks that we have and I’m really proud of the businesses utilizing those tools to affect outcomes strategically in their business. And again, this is just more strategic pricing and more thoughtful value-based pricing. That being said, I said this in Investor Day, and I have now gone through a full session of training. I kick myself for not having done 80/20 sooner. Because what we’re learning from 80/20 is the complexity in the portfolio is all being treated equally. And what we need to do is think of our A parts or our top parts to our top customers getting differential treatment and that’s where we can be more innovative. That’s where we can spend our energies for sourcing and pricing effectively.
And then we get like most companies, you get all the complexity that you introduced over time, either the secondary parts of those top customers or secondary parts to what you call the lower-end customers, that drive the complexity in the organization and drive too many resources where there’s very little impact that you can have. I mean, Deane, I’ll give you this. I mean, think about any regulatory change and thinking about how you treat that equally, it should really just be focused on your top parts to your top customers to your top regions, right? So we’re going to get a lot of value from that. And I think it comes from the complexity reduction, but I think it’s really more of a growth tool because it’s going to allow us to double down and really focus our innovative efforts to the top products that we have into the top end markets that we have with our best customers.
Deane Dray: That’s real helpful. I think we talked about it at the Analyst Day, it’s less about cutting lines and it’s more about optimizing growth. Is that right?
John Stauch: That is correct.
Deane Dray: All right. Good. And then just I’ve asked about this before because I just kind of the voice of the customer on the Pool side is, all this interest in automation, the extent to which you can automate testing and any sort of updates on the Pool chemicals and so forth, operation in the equipment? Just where does automation stand in terms of the take rate of your customers?
John Stauch: I mean it’s still about where it used to be, Deane. And I think — we think this year will be a higher level of penetration as people have time to think. And our dealers have time to get caught up and learn and then be more productive in how they help the end customers get what they need. I think we have to make it simpler and we have to take the complexity out of that portfolio as well. And then I think we also have to think about how do we bring the right value proposition for the overall pad and I think those two things will help us really change and accelerate that penetration rate.
Operator: Thank you. The next question comes from Brett Linzey with Mizuho. Please go ahead.
Brett Linzey: Hey, good morning everybody.
John Stauch: Good morning.
Brett Linzey: Hey, I want to come back to Pool. So just some of the preordering activity received, has most of that shipped out in the fourth and first or do you have some feather into the second quarter, just try to think about any revenue visibility there?
John Stauch: It’s strongly in the second, to be honest. I mean, it balances out between Q4 and Q1, but most of this is about servicing the Pool channel in the season, which will be Q2 and then adjusting within season, which would be Q3 for us.
Brett Linzey: Okay. And then just back to capital allocation, certainly, deals are episodic, but I guess at what point if deals aren’t coming into view, do you lean a little bit heavier into repo? Is that an H2 event or do you think you assess M&A for the course of ’24 and we should think of incremental repurchase as more of a ’25 event?
John Stauch: Well, we’re going to have strong cash flow in Q2, we expect, as we normally seasonally do. And then as Bob mentioned, I think our first step is we just got to reinstate buyback kind of to offset dilution and get that back as part of the capital allocation strategy. And then we’re always looking at potential bolt-on M&A and pleased that we’re at least seeing some things now and if we can transact them or get them over the finish line, that’s yet to be determined. And we got valuations, we’ve got performance that has to be looked at. But ultimately, I think we’re excited that we’re at least looking at things again.
Operator: Thank you. The next question comes from Andrew Buscaglia with BNP Paribas. Please go ahead.
Andrew Buscaglia: Hi. Good morning, guys.
John Stauch: Good morning.
Bob Fishman: Good morning.
Andrew Buscaglia: I just wanted to check on the Flow side, you had mentioned resi weaker than expected of down about 12%. Can you just remind us what’s behind that kind of what’s driving that? And then any concerns that your markets are different, but that leads into other areas?
John Stauch: Two particular markets. It’s water supply, water disposal. North America, which specifically is in ground well pumps and what you’d say is pivot spray irrigation. That’s it. I think it was just clear to us within the quarter that it’s not worth running any promos or specials or thinking about dealer stock outs that we really just have to understand that the market is going to be softer and work within that softer market to drive the transformation levers that we need.
Andrew Buscaglia: Yeah. And then on the topic of areas of weakness in resi outside of Flow, Pool sounds strong, but I guess.
John Stauch: Yeah, Pool has got the — yeah, Pool has got the year-over-year inventory tailwinds, which are helpful, again, still mid-single-digits down and from a market perspective. And then residential water treatment saw severely — severe jobs in their outlook last year. And so they’re really more sequentially flat as they’re moving throughout the year here, which if you said that’s a sign of positive, they’re not down substantially. But they’re not seeing signs of improvement either as some of those higher-end systems require financing to move them.
Operator: Thank you. The next question is from Saree Boroditsky with Jefferies. Please go ahead.
Saree Boroditsky: Thanks for taking my questions. So you made the comment that was positive on remodels and aftermarket in Pool. Could you just update us on how you’re thinking about new Pool construction for the year?
John Stauch: Right now, we’re thinking about exactly the same as in our original guide. And it’s down versus historical standards. But I think overall, from an industry perspective, we’re working within that context and no update at this time.
Saree Boroditsky: And then guidance implies you realized about 50% of your earnings second half, but I guess I would have expected to be slightly higher given the Pool recovery and transformational benefits. So what’s kind of the offset to that, that’s driving second half earnings to be similar to the first half?
John Stauch: Yes. Again, we’re pleased at the — on our last earnings call, we talked about EPS being down slightly in the first half, and now we’re at the point where it’s roughly 50-50. So again, the strength of the first half is reading out. And we feel strongly that the momentum will continue in the second half that’s in line with traditionally how the business is operated roughly 50-50.
Operator: Thank you. The next question is from Andrew Krill with Deutsche Bank. Please go ahead.
Andrew Krill: Hey, thanks. Good morning everyone. Just wanted a quick follow-up on that EPS kind of seasonality question. I think it makes sense on the 50-50 split. Just wondering for 3Q versus 4Q, I think historically, those are somewhat similar. Should we be expecting that or is there any reason maybe it’s a little more 4Q heavy as more of the transformation benefits flow through?
John Stauch: I think I would just say the normal cadence of our business would be generally the same or if not more skewed a little bit more to Q3 versus Q4. Most of our dealer trade businesses, which is 75% of what we do, don’t see a very strong close to the year. Most people don’t want them inside their homes or during the holidays. And then we don’t have that normal industrial cycle where there’s a push to ship everything by the end of the year. The things that will skew that is depending on what the Pool season is for the subsequent year and then that sometimes leads to stronger earlier shipments in Q4, and we have no idea what that’s going to look like at this stage.
Andrew Krill: Okay. Great. Very helpful. And then a quick follow-up just on backlog, I know you’re more of a book-and-ship business, but just a lot of costs — of that kind of a more normalized cycle patterns, et cetera. Just is it reasonable to expect like the small backlog the segments have now you think are lower kind of exiting this year and that should be the more normal run rate into 2025? Thanks.
John Stauch: We would agree with that, that the majority is the shorter cycle and that backlog would be lower at the end of this year as the more normal operating conditions continue.
Operator: Thank you. The next question comes from Scott Graham with Seaport Research. Please go ahead.
Scott Graham: Hey, good morning. Thanks for taking the questions. I have two of them. The first one is on strategic pricing, maybe a little bit more finer to the point, with the pricing guide that you’ve given — that you gave on the call here earlier, suggests a little bit of a bleed off in pricing for the rest of the year, notwithstanding if you increase prices, of course, what is strategic pricing due to the pricing number? In other words, let’s say that bleeds off to 2% for the balance of the year. Does that sustain 2% into next year, the pricing initiatives?
John Stauch: Yes. Strategic pricing would do two things. First of all, it helps you have confidence that the price you set is the right value that you should expect, meaning you looked at the features and you priced accordingly. The second thing it allows you to do is hold firmer on your rebate structures. So that’s usually where the net pricing benefit comes on. So there’s list pricing, which is usually higher. And then what did you net or what did you realize I don’t know if we have next year’s dialed in yet, but we usually drive it to be, as Bob said, price offsetting cost. And when we take a look at material inflation and costs, we’re going to try to drive enough pricing actions to at least be neutral along those two elements.
Scott Graham: Okay. Thank you. My follow-up is around margin guide. I know 22%. It’s just — the first quarter was really strong margin quarter and you had no — really no benefit from volume, you had a little bit of benefit from mix, but it wasn’t necessarily in Pool, right? So the rest of the year, you have building strategic savings, the transformation, you have a building mix in Pool, which is could be material with volumes. I’m just sort of wondering if 22% — just seems like you should be able to get there fairly easily. Are you thinking higher than that potentially?
Bob Fishman: I would start by saying the midpoint of our guide does suggest that we’re slightly higher than the 22%. And overall, for the reasons you mentioned, there’s potential upside on that ROS expansion. So I like the idea that price is going to offset inflation, transformation then drive that ROS expansion. And then mix can play in it plus or minus. We got — we saw some favorable mix in Q1, but having a slightly lower Ice business, that’s a profitable business as an example. So price offsetting inflation, factoring in mix and then transformation potentially reading out better could drive an improved ROS expansion story.
Operator: Thank you. The next question comes from Joe Giordano with Cowen. Please go ahead.
