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Good morning, everyone, and welcome to the Pentair Second Quarter 2025 Earnings Conference Call. [Operator Instructions]. Please also note, today's event is being recorded. At this time, I would like to turn the floor over to Shelly Hubbard, Vice President of Investor Relations. Ma'am, you may begin.
Thank you, operator, and welcome to Pentair's Second Quarter 2025 Earnings Conference Call. On the call with me are 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. On the Pentair Investor Relations website, you can find our earnings release and slide deck, which is intended to supplement our prepared remarks during today's call and provide a reconciliation of differences between GAAP and non-GAAP financial measures that we will reference.
The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP. They are included as additional clarifying items to aid investors in further understanding the company's performance in addition to the impact these items and events have on the financial results. Before we begin, let me remind you that during our presentation today, we will make forward-looking statements, which are predictions, projections or other statements about future events. 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. Please note that during the presentation today, we will be making references to record financial results. These references reflect the time period post the nVent separation in 2018. Following our prepared remarks, we will open up the call for questions.
Please limit your questions to 2 and reenter the queue if needed to allow everyone an opportunity to participate. I will now turn the call over to John.
Thank you, Shelly, and good morning, everyone. Thank you for joining us today. Before we get to our record Q2 results, I want to take a moment to recognize our entire Pentair team. Your leadership has helped to elevate us to new levels of financial and operational execution in an extremely volatile environment.
Thank you for putting our customers first and continuing to drive shareowner value. Now let's turn to the Q2 executive summary on Slide 8. We delivered a record quarter across all 4 metrics: sales, adjusted operating income, return on sales and adjusted EPS in one of the most continuously challenging dynamic landscapes globally. In Q2, sales increased 2% and Pool grew 9%. Adjusted operating income increased 9% ROS expanded by 170 basis points to 26.4%, and adjusted EPS rose 14% to $1.39. We also delivered record free cash flow and repurchased $75 million of shares in Q2. Driven by continued confidence in our ability to execute, we have increased our full year '25 guidance.
We now expect sales growth of approximately 1% to 2% and adjusted EPS to be approximately $4.75 to $4.85, up 11% at the midpoint versus full year 2024. In Q2, we made an incremental investment in an exciting new start-up known as HOPE Hydration, whose mission is to deliver free water through its digitally connected water refill hydro stations, which generate revenue from advertising and sponsorships. These hydro stations use Everpure technology from Pentair Water Solutions to bring free, high-quality and chilled drinking water to cities, stadiums, airports and commercial spaces. We are excited to help HOPE accelerate their growth strategy, broaden their impact and help to reduce the consumption of single- use plastic water bottles.
Let's move to the strategic overview on Slide 9. At Pentair, we are continuously evolving to drive consistent long-term shareholder value. We have talked about our transformation initiatives and more recently, 80/20. At the same time, our teams are also focused on driving growth within their businesses and investing in strategic growth initiatives, including high- performing talent, new and breakthrough product innovations, go-to-market strategies and digital transformation. We remain on track to deliver our expected transformation savings this year, and we expect continued margin opportunity beyond 2026 as we accelerate the implementation of 80/20 and the transformation progress continues.
The softer residential end market has enabled us to focus on improving our overall business and best position Pentair to leverage higher demand when residential end markets recover. We believe the catalyst to an improving housing market will be lower interest rates. Lastly, we continue to remain agile in a rapidly changing macroeconomic and geopolitical environment. Let's turn to Slide 10. We shared this slide with you last quarter, which shows the success of our transformation program.
Since the beginning of 2023, we have delivered over $200 million in transformation savings, net of investments, which includes the $44 million we drove in the first half of this year. We have committed to a total of $80 million in 2025, net of investments, and we see additional savings in 2026 to achieve our ROS target of 26% by 2026 year-end. I'm very grateful for what our teams have accomplished, and I am energized with the opportunity to drive further benefits in the next several years. Before I hand the call over to Bob, let's turn to Slide 11. There are several key themes that I wanted to share.
We delivered a record quarter in Q2. We increased our full year 2025 guidance due to increased confidence in our strategy. We continue to build a foundation of optimal operational efficiency that can be leveraged when volume returns to normal. We have a balanced water portfolio and a capital-light business model with 75% of our businesses going through 2-step distribution and roughly 75% of our revenue representing replacement sales. And we have strong free cash flow, a solid balance sheet and a balanced capital deployment strategy to accelerate earnings and return on invested capital.
As a focused water company providing solutions to move, improve and enjoy water, we continue to believe that we are well positioned to address opportunities from favorable secular trends by getting water to where it needs to be and away from where it doesn't and by filtering and purifying water for people to drink and enjoy. I will now pass the call over to Bob, who will discuss our performance and financial results in more detail. Bob?
Thank you, John, and good morning, everyone. Let's start on Slide 12. As John mentioned, we delivered a record quarter in sales, adjusted operating income, return on sales and adjusted EPS in Q2 despite lower volume. We also drove record free cash flow. In Q2, we delivered sales of $1.1 billion, up 2%, adjusted operating income of $297 million, up 9% ROS of 26.4%, which expanded 170 basis points, driven primarily by transformation and price and adjusted EPS of $1.39, up 14%.
Core sales were up 1% year-over- year, driven by 7% growth in Pool, which was offset by a 1% decline in Flow and a 3% decline in Water Solutions. Moving to the adjusted operating income walk on the right-hand side, price and transformation drove significant margin expansion in Q2. Inflation was approximately $37 million, which included about $15 million of tariff impact. We also delivered strong transformation savings of $20 million. Please turn to Slide 13. Flow sales were flat year-over-year.
Within Flow, residential sales were down 1% as higher interest rates continue to pressure residential end markets, but the rate of decline has improved considerably over the last 2 years. Commercial sales rose 1%, marking the 12th consecutive quarter of year-over-year sales growth. And industrial sales were flat, but a nice improvement versus the last few quarters. Segment income grew 10% and return on sales expanded 210 basis points to 23.4%.
The strong margin expansion was a result of continued progress on our transformation initiatives as Flow continued to benefit from improvements in its go-to-market strategies and its focus on complexity reduction. Please turn to Slide 14. In Q2, Water Solutions sales declined 4% to $298 million, driven primarily by lower volume, which was partially offset by higher price. Commercial sales were down 3%, largely driven by softer end markets within foodservice. Within residential, sales were down 6% year-over-year, primarily due to a continued sluggish U.S. housing market and portfolio actions to improve the growth and profitability of the business.
During the quarter, we also strategically divested our small commercial services business. The dynamics of the lower-margin service business had changed over the last couple of years, and this allows us to focus even more on our higher-margin filtration and ICE businesses. Segment income declined 4% to $70 million and return on sales was flat at 23.5%. We drove significant transformation savings during the quarter and price offset inflation.
Please turn to Slide 15. In Q2, Pool sales increased 9% to $427 million, driven by price, volume and our Q4 2024 Gulfstream acquisition. Segment income was $153 million, up 14% and return on sales increased 160 basis points to 35.7%, driven by price and transformation. We do expect price versus cost to normalize in Q3 as we incur a full quarter of tariffs. Please turn to Slide 16. We generated record free cash flow of $596 million in Q2, up 14% year-over-year.
Our balance sheet remains strong, and our return on invested capital surpassed 16%. Long term, we continue to target high teens ROIC. Our net debt leverage ratio was 1.2x, down from 1.6x a year ago. Year-to-date, we have repurchased $125 million of shares.
Over the last 2 years, we have generated significant free cash flow, which has enabled us to strategically deploy capital via debt paydown, dividend, share repurchases and strategic acquisitions. We plan to remain disciplined with our capital and have additional flexibility to strategically allocate additional capital to areas with the highest shareholder returns. Let's turn to our outlook on Slide 17. For the full year, we are increasing our adjusted EPS guidance to approximately $4.75 to $4.85, which is up roughly 10% to 12% year-over-year. Also for the full year, we are increasing our sales guidance to up approximately 1% to 2% despite an approximate $40 million headwind relating to the sale of our commercial services business in Q2. We expect Flow sales to be up low single digits, Water Solutions to be down mid-single digits with core sales approximately flat and Pool sales to be up approximately 6% to 7%.
We expect adjusted operating income to increase approximately 7% to 9%. We continue to expect to drive approximately $80 million in transformation savings this year, net of investments. For the third quarter, we expect sales to be approximately flat to up 1%. We expect Flow sales to be up approximately mid-single digits.
We anticipate Water Solutions sales to be down approximately mid- to high single digits, with core sales approximately flat, including commercial water sales to be up approximately low to mid-single digits. Pool sales are expected to be up approximately 3% to 4%. We expect third quarter adjusted operating income to increase approximately 4% to 7%. We're also introducing adjusted EPS guidance for the third quarter of approximately $1.16 to $1.20, up roughly 6% to 10%.
Let's turn to Slide 18. We are executing well in an uncertain environment. We've updated our 2025 tariff impact to be approximately $75 million for the full year, which includes $15 million in Q2 and an estimated $60 million in the second half of 2025. This $75 million, which is included in our guidance compares to our previous estimate in Q1 of $140 million. The reduction in the China tariff rates from 145% to 30% in Q2 was the primary driver of the decrease in our full year tariff impact estimate. We have increased prices and implemented mitigation strategies across our businesses to offset the expected tariff impact.
Our 2025 guidance does not include the possibility of an additional $10 million in tariffs related to copper, the European Union and other countries, which could take effect on August 1. We expect to take mitigating actions as needed to offset these additional tariffs if they occur. We continue to monitor the rapidly changing landscape and remain agile to quickly adjust as necessary. We have a strong balance sheet and free cash flow along with a balanced capital allocation strategy. We plan to continue to deploy capital in areas that drive the highest returns for our shareholders while being mindful of protecting capital during periods of macroeconomic and geopolitical uncertainty.
I would now like to turn the call over to the operator for Q&A, after which John will have a few closing remarks. Operator, please open the line for questions.
[Operator Instructions] Our first question today comes from Andy Kaplowitz from Citigroup.
John, could you talk about what you're seeing in pool in terms of unit volumes and sensitivity to higher prices? I think Q2 at 7% core growth came in at the higher end of expectations. So was that better-than-expected volume or more price? And then you raised pool for the year to up 6% to 7% versus, I think, up 4% to 5% where you were before.
Where is the improvement coming from? Is it less assumed demand degradation? Any color between new pools, renovation break and fix would be helpful.
Yes. I mean I think we're now seeing an environment that we would expect new pool builds that we generally thought were flat to maybe modestly up, now feeling like they'll be modestly down. I think also on the remodel side, we're seeing that environment be deferred. I feel like there's a little bit of slide to the right that's occurring on some of the larger projects.
And we're also seeing customers extend product life by spare parts, spare part kits and seeing a little bit more repairs than we would have normally seen in these types of environments. I think all of that's got to be driven by the incremental prices. I mean, overall, I mean, we're up about 15% in price in the trailing 12 months. The whole industry is.
And I think at some point, that's starting to have an effect as people are waiting for the interest rates to reduce. So overall, I mean, we're getting the price, which is great. We're seeing volume flattish to slightly down, which is in line with our expectations. But we're not seeing the acceleration of it that we would normally have expected as we head into the back half of the year.
So all of that's adjusted in the guide. I think we feel good about our positioning. We feel good about what we're doing from a new product development and a new introduction, but we got to get this market going.
Very helpful. And then, John or Bob, I'm just trying to understand how you're thinking about price versus cost for the year because I think you passed through, I think it was 75% of the pricing on that original $140 million expected tariffs in early April. It's a lot higher than the $75 million of expected total tariff costs you have now. So are you forecasting rebating in the year, baking in some contingency for maybe new tariff costs that could come on August 1?
How are you thinking about price versus cost in your guide?
Yes. Generally, in terms of the tariff, we're thinking about price offsetting the tariffs. If you remember back at the beginning of Q1, we had estimated the tariff impact at roughly $140 million in year, and that was primarily driven by that high China tariff. Now when we size it, it's closer to that $75 million.
So think of roughly a $65 million benefit from those lower tariffs. We also talked at the beginning of Q2 around staggering our pricing. So doing some pricing in April, some in May and some in June. Because of the reduction in the tariffs, we are not going out with roughly $50 million of price that was built into the beginning of Q2 forecast.
So if you think about it, $65 million lower in tariff, $50 million less price for a net $15 million benefit, and we've raised the guidance about that amount.
Our next question is from Steve Tusa from JPMorgan.
Yes. So just a follow-up on that. So I guess, is the price that we see in the numbers today, it seems like that only reflects part of what you guys have put through given kind of like the timing in the quarter, understanding you guys aren't going out with the other -- the rest of the price you thought you'd need to cover the tariffs.
That's correct. I mean we will have a normalized, what I'd say, a more normal price increase, Steve, in our normal pool season that will be slightly higher than an average year, which reflects generally more commodity inflation and general cost of inflation. But the recognition of that, as you recall, that goes out as prelude early buy, and we don't necessarily receive that this year, receive it next year. But there's no other scheduled tariff increases at the moment in our guide.
Right. But I mean...
That would change, Steve, if we get big headwinds, we're going to have to go back and talk to our customers and put those through the channel. But right now, we're not anticipating those.
Right. But does the 2Q price of, I think it's like $47 million, $48 million or something like that, that doesn't reflect the full kind of run rate of what you put through because you put through stuff in May and June. So you should have a bit more of a step-up to come in -- the run rate for 3Q will be more reflective of what you're getting for the second half of the year?
That's correct. You'll see a little bit more price in the back half of the year.
Slightly more in Q4 than Q3, but you'll see that price begin to accelerate in Q3 and Q4, Steve. And you'll also see more inflation because as we said on that one slide, we didn't realize all of the tariffs in Q2. So we had a little bit more headwind in tariffs in Q4.
Yes, of course. And then just lastly, on the fourth quarter, is there anything you're planning for? I mean, how are you thinking about seasonality in the fourth quarter? Is there any -- is there -- is most of the caution on the end markets in pool reflected in the 3Q guide? Or is there something that you would expect to kind of trigger in the 4Q on that front?
I have a little more caution in Q3 with Q4 more anticipating a 2026 pool year and more people positioning themselves into the 2026 look for how they're going to work with their customers on the remodels and the new pool builds. I'm hopeful that we're going to see some interest rate reduction at some point, Steve, and then we're going to need some time lag between those interest rates as they get reduced and when people get excited that they can start investing again.
Our next question comes from Brian Lee from Goldman Sachs.
Maybe just on the pool guidance here, you raised it a couple of hundred bps. Can you -- I might have missed this, but did you delineate how much of that is being driven by price implementation and what you're seeing in price capture and pull forward versus -- is there any improvement in demand underlying the increase in the guidance? Or has anything changed on kind of the volume/demand side of the equation for your guidance for pool this year?
The way we're thinking about the 6% to 7% guide for pool, which is up from 4% to 5% last quarter is roughly a couple of points from the acquisition that we did in Q4 of 2024. Then we've got price of, call it, approximately 5% and then down slightly for the reasons John mentioned with volume. You've got lower new pool demand and remodels as well as a bit softer aftermarket. So that's the pieces that make up the up 6% to 7%.
Okay. Fair enough. That's helpful. And then I know John alluded to this.
I mean, you're optimistic or maybe hopeful that interest rate relief will be coming and that could help kind of set the tape for '26. But if we're sort of in this higher for longer environment, and we see the macro persist here into -- well into 4Q. And what are your early reads into kind of what the pool build cycle is going to look like next year in that environment? And what are sort of the volume trends you would anticipate as some of the pricing tailwinds from this year maybe dissipate? Like what's sort of the normal run rate if this is kind of the macro we're going to be seeing for the next, let's call it, 6 to 12 months persisting?
Yes. I mean, I don't know yet. I think as we build our planning cycle, we'll get more around that as we head into the '26 guide. I think right now, our anticipation is that volume remains a little bit sluggish.
And what we've got to do is grow our content per pad from NPI introductions, sales and marketing campaigns, making sure that our dealers are well informed as to the new products and how to install those new products and really get the industry excited about the benefits of automation. Those still remain the top growth levers for us regardless of the pools are growing or not. These levels of pool builds, we haven't seen these since after the financial crisis of '08, '09 and '10. So it's been -- the whole industry has anticipated that we come up from here. I think it's just a matter of when.
I think if price -- if inflation rates or interest rates don't come down, then I think people are wondering when the build costs and/or the overall build starts to soften. I don't see that happening. So I think what we're talking about is wealthier second home buyers that are building homes in the warm weather states still, and that's the primary 80% of our sales go to those areas. So that's what we're anticipating.
Too early to call '26 though right now.
Our next question comes from Nathan Jones from Stifel.
I wanted to ask a question on a bit more of the longer cycle, more CapEx-driven businesses, which I think probably mostly sit in flow. Maybe you could just talk about the environment there, how tariffs and how, I guess, the macro uncertainty are potentially impacting customer decision-making, deferred capital spending, things that would impact kind of your order book or your quoting rather than what's in demand today?
Yes. We were pretty candid and transparent that we certainly saw in Q4 of last year and Q1 of this year, a little bit of slowing in the order books and the quoting activity. We did see some pickup here in Q2. And in fact, we have booked orders as we head into Q3 and Q4 and feel pretty optimistic about some of those longer-cycle businesses. saw a recurrent investment in the infrastructure flow side. And we also saw some of our industrial businesses inside of that Flow segment also see some pickups as we head into the remainder of the year.
Yes. Really pleased to be able to guide Flow to roughly mid-single-digit growth in Q3 and then up the full year from up slightly to up low single digits. So good momentum for Flow exiting the year for sure.
Obviously we're starting to anniversary some of those difficult residential comps, meaning we've got easier comparisons in residential, and we're starting to get the nonresidential piece of our business as a growth contributor as we exit the year at Flow.
Obviously, those are a little bit longer cycle, takes longer to book, takes longer to turn them into revenue and earnings. So does that improving strength there, improving orders portend a growth year in 2026 for those businesses?
Yes. I mean I think it's encouraging, but we're more in the configured order side, which is -- and more standard order side. So we're recognizing things within a quarter or 2, Nathan. So we're not as long cycle as some companies may be. So these are pretty standard projects and pretty standard deliveries for us.
Our next question comes from Julian Mitchell from Barclays.
I just wanted to understand a little bit better the moving parts on the sort of op profit or EBITDA guide. So the EBITDA guide unchanged at $1.1 billion or so. You pushed up the revenue guide a point or so. So is the sort of the delta there with the smaller gross tariff headwind and the higher sales guide, but the unchanged EBITDA guide, is the main moving parts sort of weaker volumes at Pool and then some small effect on the divestment earnings?
It sounds like that's pretty low margin in that business. But is there anything else kind of in that bridge on the EBITDA guide kind of now versus prior?
Not really. In fact, you've got rounding. As income goes up, EBITDA will go up. So if you think about the raise in our guide of, call it, $0.07, I think about roughly $0.05 is the business, so the income piece. So call that $10 million, and the rest is below the line because of the strength of our free cash flow in Q2, we're getting about $0.02 because of lower interest expense.
That's helpful. And then just to hone in a little bit on the Water Solutions segment. I don't think that's come up much yet. So maybe help us understand, I think first half organic sales were down low single digits.
The year is guided flattish core. So help us understand the confidence in that acceleration in the back half in Water. And maybe any more clarity on that commercial divestment? How much of that old KBI services business is being sold?
And what's the margin on it?
Yes. So let me start with the KBI sale in Q2. So that was the business that we acquired back in 2021. Over time, what we've realized is the dynamics of that business has changed quite a bit -- and so the sale of that business for us was really to focus more on the higher- margin filtration and ICE businesses to exit that lower-margin services business. And as a result, we really avoid significant cash outlays into the future. So that is a margin accretive, smart decision for us as we focus more on our core businesses of ICE and filtration.
That will result in us losing roughly $20 million per quarter in Q3 and Q4 based on the sale of that services business. That's implicit -- that's included in the guide. When you think about how the business is doing first half versus second half, I'll start with the residential piece. As you know, we were going through a lot of portfolio rationalization.
We'll have one more quarter of that in Q3 for residential, and then that business should start to stabilize. On the commercial water side, excluding services, we did have a disappointing Q2. We saw a softer foodservice market than we expected. But in the back half of the year, we do expect growth of low to mid-single digits as that business slowly recovers in terms of the ice and the filtration business.
Our next question comes from Bryan Blair from Oppenheimer.
Hoping you could offer a little more detail on the decision to divest KBI. We knew at the outset that, that was a lower margin asset. Had that -- had the ROS level deteriorated significantly relative to when you purchased the business? Because there seems to be pretty natural synergies between Everpure Man Ice and KBI. So there must have been a trigger there.
Yes. So we had -- we bought a services company. The expectation was at the time, there was a part that went into the water replacement. Think about Ever [indiscernible] pure cartridges and solving those challenges.
And then there was a frozen carbonated beverage rearrangement for a key hamburger customer. What we learned is that we were in a lot of low-density routes in rural environments. And while we had a good penetration of our water changeouts, we weren't able to grow. And ultimately, we had a fixed price contract, and we were absorbing substantial labor inflation and also lost services revenue from driving and routes.
And the opportunity would have been to invest more deeply and expand our presence, which really creates channel conflict with some really good partners that we have that do this already or to hand this over to somebody who's already in the industry for them to get synergies from it. And that's the decision we ultimately made. So I mean, dynamics changed drastically during this period, and we made the best decision going forward that we could. And we're very comfortable that we still have the right customer relationships there, and we've got the right service to serve the channel.
Okay. That makes a lot of sense. I appreciate the detail. And sticking with Water Solutions, you've offered your take on commercial and residential dynamics and outlook. Perhaps do the same with U.S. versus international business.
Yes. I mean I think the amount of rationalization in residential water treatment reflects its global footprint, strong large footprint in Europe and a pretty big one in China as well. So we're making sure we're well positioned longer term and making sure that we're in the higher end of the markets, and we're not in the commodity side, and that's reflected in a lot of the revenue that we're walking away from and really trying to strengthen the core filtration components of the residential business. That dynamic isn't as big in the rest of the businesses because we're more local for local or the dynamics change.
So in the pump business, for instance, the motors are different in Europe than they are in the United States. So you don't have that global one product fits everybody globally that you have in the water filtration side. So this is generally specific to a water treatment business that we want to position better for the long term. And we'll be through that, as Bob said, after Q3, and then we can get back to growth in Q4 and beyond.
I think what happened in Water Solutions, though, is we got caught with that rationalization while we thought we were going to recover at a stronger rate in commercial. And optically, from a revenue standpoint, you're seeing a little more challenged environment than really what we're experiencing internally.
Our next question comes from Linzey from Mizuho.
Congrats on the quarter. I wanted to come back to tariffs. I appreciate all the details. So you're dialing in the $60 million full year, $140 million previously.
Obviously, a lot of moving pieces. It doesn't look like you're flowing through the full tailwind. I guess does the framework contemplate some potential softening developing in the second half and it's more of a hedge? Or are you actually marking to market what's a lower exit run rate?
Yes. Just to go over the math, the full year expected this year is $75 million versus the $140 million. So if you think about that's a $65 million benefit, then we talked about $50 million less price. So the net benefit is around $15 million.
And I would say we've flow in about $10 million of that to the full year guidance. So again, staying cautious. We talked about the fact that August 1, there's a potential $10 million headwind there. Not sure what exactly is going to happen on August 1, but we'll be able to work through our mitigating actions if those tariffs actually do take place.
Great. And then you noted some of the operational efficiencies in the factories. It looks like you're optimizing the footprint moving in that next wave. Has the tariff situation in any way slowed or perhaps accelerated some of that decision-making as you're reconfiguring the supply chains? And any help on the phasing of those initiatives?
I think it's -- if I picked one in the middle, I think it's kind of paused it, right? I think if we could have more permanent clarity on where we should avoid and where we should go to, I think it would help the investment substantially. Clearly, our strategy of being local for local on the factory footprint continues to make sense. And where we have those avenues, we're doing it.
But it takes us a while to move supply chains because of qualification of products. We have to test everything, and we have to make sure our quality levels are still high. So we're working through all that and giving ourselves some options. And then I think we can start to accelerate the long-term footprint strategy that we have once we have better clarity.
Yes. Really pleased with the start to the year around transformation. We've driven roughly $44 million of savings in the first half. We've guided to $80 million for the full year.
This is really following the $67 million of savings 2 years ago, $107 million last year. So really strong momentum, and it still is kind of low to middle innings in terms of the transformation program. We're able to see some really nice balance between the sourcing savings and the efficiencies that we're bringing to our factories.
And I would just add to that, that I want to remind everybody, we're still committing to the 26% and 26% of ROS. If we get volume ahead of the [indiscernible] expectations we have, we're going to get some tremendous leverage across the factories that's going to add to the ability to raise margins and add to those transformation savings because it's the one spice we have not yet realized our full expectations from is through the factories and that leverage on volume.
Our next question comes from Jeff Hammond from KeyBanc Capital Markets.
Just want to go back to pool and be crystal clear here. So it doesn't seem like anything has really changed in your pool volume outlook, maybe news a little better and remodel upgrade a little worse. Is that fair? And then just as you talk to your channel partners, how would they characterize channel inventories?
Yes. So I want to jump on your crystal clear. That would be our new hybrid filter that should be coming out next year. And thanks for that advertisement, Jeff.
But no, I think that -- I think the volume is -- if we had Plan A and Plan B, I think Plan A was for some modest volume upside as we headed through the year. I think we're more to plan B, which is modestly more challenging, but we're talking about 1 or 2 points from our perspective, which is generally in line with expectations. I think channel inventory is where it always has been historically, and we're very good now at being able to monitor sell-through and make sure we're pacing the sell-through. And that's really how we're working through this.
And I think that's just a lot of learnings from the COVID days. And so we feel good about our positioning of inventory, both from distributors and dealers, and we feel good about our ability to have visibility on what sell-through should be. I think weather was a little bit of impact in Q2. It's hard to judge. So we'll see how that comes through the Q3 and Q4 shipments.
And then just on the tariff dynamic, I mean, moving pieces, you mentioned Europe and copper. Do you assume like you're going to kind of let this play out and then you'll just -- anything else you do on price will just go into next year's price increase?
No, I think we'd want to react accordingly when we've got more clarity. And again, that slide that we've been publishing now gives you where the biggest risks would be. I mean, we don't have a settled China tariff yet. I mean we have a verbal, but we'd like to see some clarity on that.
That would obviously be the bigger one. Copper is going to affect the entire industry and every industry. So we'll see what we do there. But generally, we're looking at this as inflation on commodities because as we put the tariffs in place, even U.S. manufacturers tend to go up to the line of where those tariffs are.
So we're going to reflect what happens in August 1. We'll work with our dealers and our channels, and we'll do our best to recover that in year for the impact that we'll see happen, Jeff.
Our next question comes from Deane Dray from RBC Capital Markets.
I just want to circle back on the divestiture of the commercial services. And John, you gave a really crisp answer to Brian's question just on the rationale. I mean, as soon as I heard fixed contract in this environment, you could see why you wanted to exit. So that's clear.
But what wasn't clear was, are you going to lose any of that pull-through on the aftermarket because you no longer have a captive service. But -- so is that factored in, in terms of not selling as many replacements, cartridges, et cetera?
No, I don't believe so, Deane. I think we built really good relationships primarily through the distribution channels and the synergies of Manitowoc and Everpure. And as a reminder, we go out with Everpure as its own brand and Manitowoc with its own brand. And so we've been able to really position our filtration as the filtration of choice.
And if anything, that position has gotten stronger over the last 3 years, 4 years. Competitive pressures have weakened some. I'm not going to mention who those companies are, but there are dynamics where we've been better positioned to solve in a more standard and consistent way our customers' challenges, and we feel better about those relationships today than we did even when we bought KBI. So I think it's the right timing, and we'll continue to work with the partner who bought KBI to make sure that they get the filtration offering, and I think we can continue to expand that channel.
Great. And then are there other divestitures being contemplated in the near term? And then a quick one for Bob. This is your outstanding quarter in free cash flow conversion. I mean it's just -- it's nearly 260% conversion. How did it play out according to your expectations, working capital, maybe there was a little bit less CapEx, but just some observations there, please.
Yes. So let me answer the first one, and then I'll let Bob take the victory lap on cash because we certainly are proud of that number. I would say that when we look at divestitures, we're looking at really product line exits. So when we look at 80/20 or we do our product line exits, we look at it as is there -- is it inside of a shared factory or not?
Is it got its own dedicated infrastructure? What would the ERP transition look like? What would the digital migration look like? And then generally, what's the cost benefit of that?
And so if some asset we have is better off in somebody's hands or it's difficult to run, Deane, we'll consider it. short answer to your question is I have nothing really else pending. And I think we have the ability to run most of our product lines successfully inside of our portfolio. So I wouldn't expect divestitures to be a big part of the future. Bob, do you want to talk about cash flow?
Yes. I would say on cash flow, it certainly helps with having a record quarter for sales and income. That's the starting point for us. And then we've been very focused over the last couple of years on improving DSO and days inventory on hand.
So really proud of the team for the focus on working capital, which has, again, given us a very strong number in what is typically our strongest free cash flow quarter of the year.
Our next question comes from Andrew Krill from Deutsche Bank.
I just wanted to ask on the topic of tariffs again. Just any observations of prebuying, like to the extent you can measure that. It didn't seem obvious, but I wanted to check. And I guess, therefore, if there could be any form of an air pocket in the third quarter. So any color there would be helpful.
Yes. I think we saw definitely in Q1, mitigating strategies that would include bringing in what you could. And we were very transparent on the benefit that we had created regarding that. I think Q2, both in the cash flow of us and probably as an industry is indicative of the fact that a lot of us collected on what we did in Q1 and Q2. And I think the prebuying has slowed because I think the normalization of the tariffs are better today than they were when we were putting those strategies in place.
So I think we've been monitoring that. I don't think we feel that there's a lot of the prebuy that happened in Q2 relative to Q3. What we saw was that happening in Q2 relative to Q1. So buying in Q1 to Q2, that's where we saw it, and that's where we mitigated it. Hope I didn't confuse you, but I don't think that was my point.
Okay. Makes sense. That's very helpful. And then for -- going back to the transformation savings, $44 million in the first half, so about $36 million for the rest of the year. Just should we be assuming that's pretty evenly split between the third and fourth quarter? And then any difference by segments on which could have more or less of a benefit?
I would model as roughly even between Q3 and Q4. And then I look to the 2 segments that have the biggest opportunity from a complexity reduction perspective. So again, Flow and Water Solutions, both hard at work in terms of driving those transformation savings.
Yes. And the only thing I will add to that is I just want to remind everybody, it's net of investments, too. And despite the fact that we're not seeing that rebound yet, we are putting some heavy technology investments in, in the form of R&D innovation and digital and analytics. And you're going to see those investments in Pool and Water Solutions primarily.
But I just want to remind you that transformation is net of incremental sales, marketing and technology investments.
Our next question comes from Nigel Coe from Wolfe Research.
So I just want to double-click on 3Q. I mean you're pointing to some pretty important inflections with -- I think it's flow up mid- single digits and the Commercial Water Solutions up low to mid-singles. Just wondering what gives you confidence in that outlook? Obviously, pretty different outcomes to what we saw in 2Q.
So is there anything in the order book or backlog that's informing that confidence?
I mean the way we look at it is sequentially more than we look at year-over-year. And then obviously, year-over-year as a result of what happened last year versus what's happening this year. So when you look at sequential order and shipment rates, that's what drives the confidence in what our outlook for Q3 is. And the comparables in every business on a year-over-year basis are just different.
And that's why I think it looks stronger than it really is if you look at it from a sequential perspective. Does that make sense? I don't want to.
Yes, it's more comps than anything else. I get that. And then another crack at the pool pricing. So John, I think you're appropriately highlighting the fact there's been a lot of prices has gone into this end market and obviously, underlying conditions remain quite challenging there.
Do you think there's any threat to the pricing here? I mean we tend not to see pricing rollbacks, but do you think that promotional activity could pick up or discounting? And do you think that next year will be a normal year of pricing, normally see 2% or 3% pricing. Do you think next year could look like that?
Or do you think the sheer volume of price kind of prevents that happening?
Yes. I would say that I would start with, I hope. So let's I know hope is not a strategy, but let's say we hope we could get to normal. And I think any time we're going to see growth in the industry and generally growth in the channel, I think those normal dynamics tend to play out.
I think it'd be fair to say that when you take a look at the profit pool being what is realized by the equipment manufacturers, what is realized by distribution and then what is being realized by the end dealer. I think there's been a shift where the dealer is generally benefiting right now. And I say that because they're getting both service labor, service revenue and pricing margin on product. The manufacturer is able to push through to distribution, the tariff increases.
And I would expect that distribution is being caught slightly in the middle as we go forward. That's not a dynamic that's healthy, and that's a dynamic that needs to be considered as we think through how do we get those profit pools more in balance for the longer term. So I think it's something we're monitoring. I don't think there's warning signs yet, but it's something we have to make sure that those dynamics come out to play.
The way we do it is adjusting rebates to dealers on products that we need them to sell versus just general revenue pools and making sure that we're moving the content into the channel that's better for all.
Our next question comes from Joe Giordano from TD Cowen.
Just curious, John, you mentioned like price and pool up 15% in trailing 12 months. Just curious like, is that creating an opportunity for foreign product to come in and enter the market at a lower price point? We've heard some stuff about that. Just curious if you're seeing it at all.
Yes. I don't think we're seeing it yet. I do hear about it, and I do think that, that's something we've got to monitor. I mean, again, probably more on the low end of the market on dummer products.
I mean, I think we believe that we need to get every pool automated. And once you're automated into the manufacturers IoT system and the app, you're going to generally buy the higher-value products along with the pad. I think you could see service providers in this type of environment switching out certain pad components for lower-priced product. It's not good for the industry.
It's not good for safety. It's not good at the overall value contribution, but you could see it happening if we don't see volume and we don't see demand continue. I think it will be noise in the early stages, but I think we got to keep an eye on it.
Yes. Fair enough. And then just on the KBI divestment, correct me if I'm wrong, I thought there was like that -- owning that business was kind of like a part of the thesis to buying Manitowoc Ice, right, like combining all this stuff. And can you kind of talk us through -- I mean, I understand the reasons and how the dynamic has shifted at KBI, but like does it change the outlook at all for how to make Manitowoc Ice successful within Pentair?
Yes. Let me just readdress the strategy. When we bought KBI, we didn't have Manitowoc. And the theory was that we needed to have a service provider to make sure that our high value and very valuable to the industry, Everpure cartridges are not being switched out for lower-cost competitive product.
That's what our theory was, and that's what we did. So it was really more of a defensive strategy. We did believe that we could also grow the penetration and really think about the franchise saying this is our spec that we want and then make sure that the franchisees are on in that spec and putting those units in place. When you fast forward and you bring Manitowoc along, now between Manitowoc and Everpure going through same distribution, we're starting to scale up the availability of both the Manitowoc brand and the Everpure brand, and we become much more relevant in the industry so that we're less dependent on what the individual service provider is doing.
That being said, we would still have it today if all those dynamics I mentioned did not come to fruition. And as you look forward to any business, it's got to be, is the incremental investment worth the work. And we just determined it wasn't at this stage, and we needed to put it in somebody else's hands and continue to work with that new partner to sell our cartridges to.
Our next question comes from Andrew Buscaglia from BNP Paribas.
I just wanted to check on your cash flow has been strong lately and preference towards using that for repo versus M&A. And what are the discussions like on the deal side given the tariff uncertainty now that we got a full quarter underneath us?
Yes. I think we're lucky in the sense that we're generating a lot of cash, and we really paid down the debt, and I'm proud of the team for doing that. And we're still not optimized on cash flow, and we have an opportunity to recover a lot of the pre-COVID views. I think a little bit of buyback, a little bit of dividend on an ongoing basis is the right thing to do, and I don't think that precludes us from doing bolt-on M&A.
We are seeing more bolt-on M&A into the pipelines. I think we got to be -- continue to be disciplined. We got to continue to make sure they're the right strategic deals, and we got to make sure they have the right value returns for shareowners. But I do think the pipeline is starting to open up, and we might see some in the future here.
Okay. Okay. Maybe just one last one on your previous distributor comments. Certainly, at some point, they're going to feel the pinch as well with pricing. So I'm wondering, first off, price realization sounds like came in around where you expected. And then I guess, going forward, how does that dynamic work when we look out to 2026 with distributors' ability to keep taking price?
Well, as part of 80/20, we have done a lot of customer simplification of who we ship to. So we ship primarily to our top distributors now and only to our top distributors. It really is about making sure we're aligning the dealer incentives to move the product through that's beneficial to us and the channel and the end right? So what you see sometimes is you get a mix and they might go buy the spare parts and maybe the spare parts weren't priced appropriately, and they can put a lot of labor on top of it.
So I think it's our responsibility to make sure that we're working with the channel to continue to grow content on the pad and then we go out and try to get our fair share of that content. And that's what we'll continue to do as we head into '26. And as we look at those incentive plans that we put into place for the dealers.
Our next question comes from Saree Boroditsky from Jefferies.
Maybe just another one on pool. I think you mentioned the potential for sluggish volumes in 2026. But maybe just talk about how you're thinking about replacement demand from the bulk of equipment that was put in during the COVID years. And when does that start to show up in volume?
Yes. So real quick. I'm not -- I don't -- I want to make sure I'm clear. I didn't say sluggish.
I'm saying we haven't yet seen significant volume recovery. We were planning on it. I don't know if it's going to be here in the back half of the year. I don't know where it sits for 2026. So I just want to make sure we're there.
And then I just think that overall, there is still a lot of opportunity for new product and for training dealers, for training customers and making sure that we get to every pool being automated and making sure that people understand the value proposition of that. And I think there's a ton of opportunity to still grow within the current environment.
Okay. And then maybe just one on price. You talked about pool demand being impacted by all the price increases. Just how you're thinking about pricing over the next several years. Does pricing slow down at some point? Is it just discounts? Or can you introduce more entry-level equipment just to make pools more affordable to more people? Or is that just not part of the equation?
I think our value proposition is always be working the higher-end pools and have the technological advancements that the industry wants and needs and make sure we're driving value and content. I do think, though, that price normalization, getting back to that 1% to 2% per year, reflecting general inflation is the hope of every industry so that you can work within the context of driving productivity plans and making sure that you're providing that incremental value to the channel. And that's something we're working on. I'm sure every industry is working on it.
There's just a lot of volatility right now. And what we have to do is protect our shareowner base and make sure that we're managing our channels the best possible to always be on the positive side of that, but it's going to be everybody if that inflation comes down and the pricing come down. Okay. I want to thank everybody for joining the call today.
In closing, I just want to reiterate some key themes on Slide 19. We delivered our 13th consecutive quarter of margin expansion. We drove double-digit adjusted earnings growth and Pool grew its top line 9% as a result of solid execution and transformation. We increased our 2025 sales and adjusted EPS outlook despite tariff impacts, and we remain confident in our long-term strategy. We expect a long runway of productivity savings driven by transformation and the benefits of 80/20. And our focused water strategy and strong execution continue to build a solid foundation with optimal operational efficiency to drive long-term growth, profitability and shareholder value.
Lastly, we believe we are well positioned to effectively manage the global macroeconomic and geopolitical environment. Thank you, everyone, and have a great day.
Ladies and gentlemen, that does conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.