Pentair plc (PNR) Earnings Call Transcript & Summary

Good day, and welcome to the Pentair Third Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Jeff Thompson, Vice President of Investor Relations. Mr. Thompson, the floor is yours, sir.

Thank you, operator, and welcome to Pentair's Third Quarter 2026 Earnings Conference Call. On the call with me are John Stauch, our President and Chief Executive Officer; Bob Fishman, our outgoing Interim Chief Financial Officer; and Bob Hau, our incoming Chief Financial Officer effective November 1. On today's call, we will provide details on our third 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 provide a reconciliation of differences between GAAP and non-GAAP financial measures that we will reference. Any statements made during our presentation today about Pentair's anticipated financial results are forward-looking statements subject to future risks and uncertainties, such as the risks outlined in today's earnings release and Pentair's filings with the Securities and Exchange Commission. Actual results could differ materially from anticipated results. Following our prepared remarks, we will open the call up for questions. Please limit your questions to 2 and reenter the queue to allow everyone an opportunity to participate. I will now turn the call over to John.

Thank you, Jeff, and good morning, everyone. We appreciate you joining us today. First, let's begin with an executive summary on Slide 4. We delivered a solid third quarter with sales inside of our guidance range and adjusted operating income and adjusted EPS exceeding our expectations. Each of our 3 segments contributed to the quarter. Flow and Water Solutions continued to deliver sales and segment income growth, along with meaningful margin expansion. In Pool, we completed the previously communicated channel inventory destock, an important milestone that positions the business on a healthier foundation as we enter 2027. We also completed the acquisition of Taco Group Holdings on October 1. Taco adds a high-growth platform to Pentair and expands our presence in attractive commercial infrastructure and multifamily residential end markets. Finally, Bob Hau has been announced as Pentair's Chief Financial Officer. Bob brings significant public company finance leadership experience, and we are excited to welcome him to Pentair. I also want to thank Bob Fishman for coming back to serve as the interim CFO this past quarter. His steady leadership provided an important continuity during the CFO transition, and we greatly appreciate his continued support and commitment to Pentair. Bob Hau how has been working closely with Bob Fishman over the past 6 weeks to ensure a smooth transition and will officially assume the CFO role effective November 1. Overall, our third quarter results demonstrate the underlying strength of our portfolio and the continued execution of our strategy. Please turn to the Q3 overview on Slide 5. Turning to our third quarter results. Sales were $976 million, adjusted operating income was $242 million and adjusted EPS was $1.18, above our guidance range to approximately $1.05 to $1.08. The year-over-year comparisons primarily reflect the previously communicated Pool channel inventory destock. This was a temporary impact and aligns channel inventory with current demand. Beyond that dynamic, we saw strong execution across the portfolio. Flow and Water Solutions both delivered sales and segment income growth as well as return on sales expansion. Pool exceeded our expectations for both top line and income. Adjusted operating income in the quarter included approximately $8 million in tariff refunds, significantly below the $35 million received in Q2. These refunds benefited the quarter, but they do not change our view of the underlying operating performance or the progress we are making across the businesses. Cash generation also remains strong. We generated $153 million of free cash flow in the third quarter and $620 million through the first 9 months of the year. Our Q3 performance was ahead of our expectations and gives us increased confidence in our execution as we close out the year. We are reaffirming the midpoint of our previous full year guidance of $4.70. Please turn to Slide 6 for an update on the Taco acquisition. We completed the acquisition on October 1, and we are excited to welcome the Taco team to Pentair. Taco is a high-growth platform with a strong brand, differentiated technology, attractive customer relationships and meaningful opportunities for continued growth and margin improvement. The business is performing ahead of our previous expectations and is entering 2027 with significant momentum. Taco's estimated 2026 sales are approximately $560 million, representing growth of roughly 23% from 2025. For 2027, we currently expect sales of greater than $620 million or growth of more than 10%. EBITDA is estimated approximately $90 million in 2026 and greater than $105 million in 2027, which would represent mid-teens growth. Beyond the near-term financial contribution, we see compelling opportunities to accelerate Taco's growth. Its commercial and residential capabilities, established channels and expertise in water circulation and hydronic flow control are highly complementary to Pentair. The combination expands our customer reach and creates opportunities to bring broader, more complete solutions to the market. Importantly, Taco fits squarely within our disciplined approach to capital allocation. We expect the acquisition to be accretive to adjusted EPS in 2027 and to accelerate Pentair's sales and EBITDA growth, and we expect to delever rapidly due to our strong operating cash flow generation. Now let's turn to the strategic rationale and benefits of the Taco acquisition on Slide 7. As we introduced last quarter, Taco strengthens Pentair strategically in several important ways. First, it creates a broader water management platform by extending our capabilities into water circulation and hydronic flow control, Taco adds another leading brand to our Water Solutions portfolio and complements our existing residential and commercial pump businesses. Second, Taco provides Pentair with additional growth engine. It increases our exposure to attractive end markets, including HVAC, data centers and related infrastructure development. Taco's portfolio is well aligned with these secular trends and with Pentair's broader focus on smart sustainable water solutions. Third, the acquisition significantly strengthens our presence in commercial and institutional applications. Taco has established positions in data centers, schools, hospitals, universities, commercial buildings and other mission-critical water and HVAC systems. Fourth, Taco expands our access to specification-driven aftermarket revenue. Its large installed base of pumps, valves and controls generates ongoing replacement, maintenance and upgrade demand, creating an attractive source of recurring revenue. Finally, the combination creates meaningful cross-selling opportunities Pentair and Taco of complementary products and channels, giving us the opportunity to broaden customer access, deepen channel relationships and bring combined solutions to customers. For all of these reasons, we believe Taco is an excellent strategic fit and is aligned with both our long-term strategy and our disciplined financial return criteria. Let me now provide an update on Pool on Slide 8. We First, we're pleased to announce Josh Cowley as Executive Vice President and Chief Executive Officer of Pentair Pool, reporting to Demon Wiggins. Josh brings 25 years of leadership experience, deep industry expertise and a proven track record of driving growth, strengthening the organizations and improving business performance. We believe his experience and leadership will be a great fit as we continue to build on the strong foundation of our pool business, and position it for long-term growth. Shifting to the business performance. With the channel inventory destock complete, our focus is firmly on execution and returning the business to higher growth. We have a clear strategy built around 4 pillars with one overarching goal, putting dealers at the center and delivering elite customer experience. The first pillar is to outsell. We are strengthening coverage and local execution to outgrow the industry, improve customer acquisition and retention and reinforce Pentair Pool as the industry's most trusted partner. We've added resources to our inside sales team as well as started to build out our regional structure, including enhanced regional reporting and targeted marketing programs designed to enable higher levels of dealer engagement. The second pillar is the [ down ] support. We intend to differentiate Pentair through an elevated customer experience by providing education support across the entire customer journey. In Q3, we added capacity in critical areas to reduce call hold times and provide expertise to pool professionals. The third pillar is to deliver quality. We are working to make quality an even stronger competitive differentiator by enhancing our end-to-end quality management system and consistently delivering the performance our customers expect for Pentair. And when we don't meet that level of expectation, we will make it right. During the quarter, we made investments in the quality organization, including capital expenditures within our testing processes. The fourth pillar is product excellence. We are focused on competing effectively across our core product categories, delivering differentiated value and creating a more visible pipeline of customer-led innovation. We've added resources to seek input from pool dealers to simplify their work and deliver a better experience for our pool owners. These 4 pillars are designed to work together, better coverage, stronger support, consistent quality and differentiated products should deepen our customer relationships and strengthened Pentair Pool's competitive position. While it's still too early to provide formal guidance for 2027, I want to provide some context around the pool business because we believe the underlying dynamics are important to understand. We estimate full year sell-through in 2026 will be approximately $1.45 billion, up 2% to 3% versus 2025. At the same time, channel inventory has been reduced significantly, particularly following the inventory actions in the second and third quarters. This distinction is important. The decline in our 2026 reported pool sales was driven primarily by the channel inventory reset, not by a corresponding decline in sell-through. With the inventory adjustment now behind us, we entered 2027 from a healthier starting point. And importantly, our growth expectations for next year do not anticipate market recovery. We expect sell-through next year to remain about flat to this year at about $1.45 billion with more modest price increases offsetting anticipated continued soft market conditions. This would mean approximately $180 million of year-over-year sales growth by about 14% versus our forecasted sales number for 2026. As 2027 Pentair sales mirror sell-through sales, reflecting steady channel inventory. We also expect to maintain our strong profitability with Pool delivering approximately 30% return on sales for full year 2027, while continuing to invest in innovation, our brand and our industry-leading position. We are going to continue to compete for growth. And with the strength of our brands, the efforts we are investing in, Josh's leadership and new product innovations that we expect to be able to return to volume growth in 2027 and beyond. We'll provide a more definitive 2027 outlook during our Q4 earnings and 2027 guidance call early next year. With that, I'll turn the call over to Bob Fishman to discuss our third quarter financial performance in greater detail. Bob?

Thank you, John, and good morning, everyone. Let's start on Slide 9. As John mentioned, we reported sales of $976 million, adjusted operating income of $242 million, ROS of 24.8% and adjusted EPS of $1.18, above the high end of our Q3 guide of approximately $1.05 to $1.08. Core sales were down 5% year-over-year as an 18% decrease in Pool more than offset 1% growth across both Flow and Water Solutions. Moving to adjusted operating income. The expected Pool volume decline drove headwind year-over-year. Price offset inflation and we delivered productivity savings of $15 million. We received $8 million in tariff refunds in the quarter, which were previously anticipated to be received in Q4. Please turn to Slide 10. Flow sales were up 4% year-over-year to $262 million. Sales were modestly below expectations due to delayed spending in food and beverage. We are very pleased with the performance across the remainder of the portfolio, which delivered double-digit sales growth, including strong performance from the Hydra-Stop acquisition. Segment income grew 15%, and return on sales increased 250 basis points to 26%, driven by strong productivity performance and the acquisition of Hydra-Stop in Q3 last year. Please turn to Slide 11. In Q3, Water Solutions sales increased 1% to $422 million. Core Water Solutions sales grew 1% as commercial sales increased 4%, offsetting an anticipated reduction in residential due to end market headwinds. We are excited about the performance and trajectory in commercial where the focus on large strategic accounts and convenience stores offers runway for continued growth. Segment income grew 16% to $121 million and return on sales increased 370 basis points to 29%, driven by disciplined pricing and productivity. Tariff refunds totaling $6 million provided the largest benefit across the 3 segments. Please turn to Slide 12. In Q3, Pool sales declined 18% to $291 million, which was better than expected. The previously communicated channel inventory reduction has now been completed which we believe positions us for significant growth for our Pool business in 2027. Segment income was $72 million, down 38%. Return on sales decreased to approximately 25%, which reflects the negative impact of volume leverage, inflation and investments in the growth initiatives described by John to deliver best-in-class customer experience. Please turn to Slide 13. Our balance sheet remains strong and continues to provide optionality to deliver shareholder value. Our net debt leverage ratio was 1.4x at the end of Q3. As communicated earlier this year, we increased our dividend by 8% and achieved our 50th consecutive year of dividend increases, making Pentair a dividend king while maintaining our dividend aristocrat status. Our significant annual free cash flow generation has enabled us to strategically deploy capital via debt paydown, dividends, share repurchases and strategic acquisitions. I would also like to welcome Bob Hau to Pentair. I have been working closely with Bob since his arrival, and I'm excited about the leadership that he brings to the company.

Thank you, Bob, and a special thank you to you and the team for assisting with the transition over the past 6 weeks. I'm excited to be joining Pentair. I will now discuss our outlook on Slide 14. For the full year, we've increased our confidence and reaffirmed the midpoint of our previous full year guide. We expect adjusted EPS to be approximately $4.70 and also for the full year, we expect total Pentair sales in fiscal 2026 to be down approximately 3%. We expect Flow sales to be up approximately mid-single digits. Water Solutions sales are expected to be up approximately high single digits, including the impact of Taco, with core sales approximately flat, and Pool sales are expected to decrease approximately 18% to 19% for the full year. We expect total Pentair adjusted operating income to decrease approximately 6%. We expect price to offset inflation and productivity of approximately $55 million, net of volume deleverage and pool growth investments. While we have received $43 million of tariff refunds year-to-date, we do not expect further refunds in the fourth quarter. As a reminder, we completed the Taco acquisition on October 1. We financed this acquisition with $1.4 billion of debt of term loans at approximately 5.25% interest rate. Our pro forma net leverage calculation is approximately 2.5x at the beginning of Q4. For the fourth quarter, we expect sales to be up approximately 7% to 9%, inclusive of the Taco acquisition. Core sales are estimated to be down 2% to 3%. We expect flow sales to be up approximately low single digits, which reflects the continued headwinds from the food and beverage business. We anticipate Water Solutions sales to be up approximately 40% with core growth of low single digits. Pool sales are expected to be down approximately 12% to 15% due to a difficult top line comparison versus the prior year. We expect fourth quarter adjusted operating income to be up approximately 1%. We are also introducing adjusted EPS guidance for the fourth quarter of approximately $1.15. The full year guidance reaffirms the midpoint communicated on our Q2 2026 earnings call and reflects confidence in the actions underway to close this year strong and carry momentum for the expected robust growth in 2027. We plan to remain disciplined with our capital and have additional flexibility to strategically allocate additional capital to areas with the highest shareholder returns. Following the Taco acquisition, we will prioritize deleveraging our balance sheet supporting our dividend and investing in our key growth initiatives. We will also continue to opportunistically repurchase shares in line with our commitment to returning capital to shareholders. 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. Thank you.

[Operator Instructions] The first question we have will come from Bryan Blair of Oppenheimer.

It sounds like the -- your baseline or preliminary outlook for Pool's growth next year. It is largely unchanged, just working off of a slightly higher base. Within that, just to level set, what are you assuming for full market share? Is that stabilizing at that current level? Or is there any recapture of the -- I believe you had framed it as 2 or 3 points of share loss that took last?

Bryan, really, what we're trying to do is say, if we were to remain flat to the current year's sell-through, it would be $1.45 billion. Clearly, that's the starting point. We would expect to do better. We don't yet have the market dialed in for 2027 and we're going to compete for growth. We're going to compete to recover any lost share and continue to grow share. We don't know what that looks like yet. We're just trying to get people's head around the 1.45 and how that moves over and creates that mid-teens growth rate and then give you a starting point to what the ROS should do to model 2027 performance. Little better insight into share value, markets, everything else when we come forward with our full year earnings guidance in early February.

That's perfectly fair. I appreciate it. Your team sounds quite bullish on Taco's operating momentum. If we think about the 2027 outlook that you provided at least the preliminary one, how should we think about growth rates on the commercial and industrial side of the business relative to residential? And then as we look forward, how meaningful should cross-selling be in terms of sustaining take-out growth and also accelerating growth for legacy center?

Yes. I think first of all, we're teeing up double-digit growth for Taco next year off of the strong greater than 20% performance this year. A lot of that's come in to the commercial and industrial side, but they are growing mid-single digits on the residential side as well. I think that's a starting point again for next year. We have a significant funnel of opportunities, and we're working through that funnel to see how we build our confidence rate for how good Taco could be next year. As far as the synergies, we've identified significant opportunities through their rep channel and how they go to market and opportunities to use the complementary portfolio to satisfy key demand. Don't have it yet quantified. We will, again, as we head into next year, give you a better number. First is to do no harm to Taco and make sure we take advantage of their business model and their tailwind. And then we start to add some of the Pentair growth to it. And I think, again, it's a really, really exciting.

Next, we have Brett Linzey of Mizuho.

Yes, quick question on mix. I'm curious on the sales line within pool. Were there any mix dynamics or trade downs that you saw through the quarter? And then I guess, how do we think about mix going forward in the face of the consumer backdrop and then also the potential reentry into some of the lower tier end as you maybe go back into that marketplace and try to win back some share?

Yes. So first of all, I mean, I think we're encouraged by mid-single-digit sell-through in the quarter in Pool, not the high single digits we're used to, but we're back in mid-single digits. So we're pleased by that. As a reminder, we still had a lot of inventory burn in the quarter. That's reflected in what we'd say is the lower margin. And we're also investing significantly for sales, marketing and targeted marketing actions. I don't think there's a mix issue, Brett. I think we feel good about our product lineup, and it's about making sure that our customers and either if you're a service or a new pool builder, understand the value of our products, and you're competing effectively with our products for those opportunities. And I feel good about the progress in Q3, but we're a long way from declaring victory yet.

Yes. No, that's helpful. And then maybe just a follow-up on price and costs. Just thinking about the inflationary uptick we've seen, obviously, some movement on tariffs. But thinking about price cost near term, what your hedging position looks like over the next couple of quarters and at least the front part of '27? Any preliminary expectation on how to model price cost?

Yes, we're going to take IEEPA recoveries and move them off to the side and make them clear for you, ourselves and our customers. And then we have a strong belief that we will offset inflation next year cost with pricing as we've done historically. We won't be able to do that and recover IEEPA twice, right? So we'll make sure that, that clarity is there. But we've had some products running up in inflation, and then we've had some positive movement in some other ways, as you would expect, across the global supply chain. But overall, our initial indications are we should be able to recover on the cost side price for 2027. I appreciate the detail.

Next we have Nathan Jones of Stifel.

This is Adam Farley on for Nathan. Staying on the pool business, how do you think about pricing within the pool business, just given all the dynamics, do you think you'll have to [ eat ] some of the additional costs to compete per share?

No, I don't. I think we believe that we will compete and recover any Listen, when we talk about share, we would acknowledge that we have the most amount of existing pool pads over -- in the country or inside the United States just because of our strong positioning from decades and when we talk about potential share loss, it's a onesie and twosie product on an existing pad that we feel has migrated at times to a more competitive offering or a dealer who has switched alliances. We think by going out and making sure that our products are understood and that they are like-for-like replacements to products we had and reminding consumers that the great experience they've had under the Pentair brand that we can continue to compete effectively for that. It is really about we were focused on new pool builds and we weren't as focused on where those existing pads were. And a big part of this regional structure and the investment we're making state by state with our dealers is to align our opportunities to where the long-term growth resides. And right now that is in the aftermarket in service, and that's why we're going to be more competitive in that area. It's not a pricing play. It's a targeted marketing approach. It's making sure that the customers our customers are well trained. It's making sure that we're providing the services that differentiate them and that's part of the investment that we're making. It's not a pure net price play.

Just -- it's Bob Hau. I'd point you to the conversation that John had in his prepared remarks, we've talked about in the past, the 4 pillars for the get well plan for pool around out selling out supporting -- delivering on quality and project excellence. It's supporting our dealers, putting them at the center of everything we do and competing based upon our offering and our service, it's not necessarily a price play.

And for overall '27, in line with our communication to the dealer channel, we went out with 3% to 4% price increases generally, which is more moderate versus last year. But we think that, that's a good position to cover the inflation, as we mentioned, and position us for the ability to support our dealers in a successful way.

Understood. That's really helpful color. If we change gears and look at the Flow business, maybe could you just talk about some of the near and medium-term path to growth within this segment? Maybe specifically on the volume side and maybe some of the different market dynamics going on between residential and other markets within Flow?

Yes. Certainly, in Q3, we saw some headwinds from the food and beverage piece of the business. So think selling into the beer market as an example, we saw that as delayed spending. Overall, I'd say on the other pieces of the portfolio, we were very pleased to drive double-digit growth in the third quarter. So slightly below our expectations for Q3, but mainly driven by food and beverage delayed spending.

And next we have Robert Davies of Wolfe Research.

I have 2. One was just on the confidence and clarity you have around where you are on that destock. I know you sort of said that with -- so -- just kind of -- if you could flesh out a little bit more where that sort of comfort level comes from. And then the second one was just around the sort of targeting of the sort of mid- and small-sized pool builders. I'd just be curious how the initial conversations with those customers have gone? How receptive were they when you sort of went back and tried to sort of tap into them again? Any color would be great.

Sure. We'll tag team this one. Go ahead, Bob, take the first part on the inventory.

Yes. Our confidence around the destock comes from the information that we have -- we've seen roughly $280 million of destock over Q2 and Q3. So I think, call it, roughly $190 million of destock and $90 million in Q3. That puts us at an inventory position in the channel at the end of the third quarter, that's roughly $110 million lower than it was last year. And then we -- when we look ahead to ending inventory at the end of the fourth quarter, we anticipate that we will be down versus the prior year, roughly $180 million in the channel inventory. And so that information, that type of sell-through that we're seeing puts us in a position for strong growth in 2027 when we use a flat [ 14.50 ] sell-through number. This also includes the mid-single-digit sell-through that John talked about in the third quarter, and again, roughly mid-single-digit sell-through in the fourth quarter. So it's really that ending inventory position at the end of the year that gives us confidence that sell-in will equal sell-through in 2027.

As far as the conversation with customers, we've make sure that we've got a national accounts focus, primarily focused on the 2 largest distributors and making sure they're getting the service levels that they need. And then we've had a dedicated sales and account team on the all other and specifically making sure that all of the nonaffiliated distributor accounts are called on personally and that we're reminding them that we want them back and we want them part of the Pentair family and we're working with them one-on-one on ways to bring them back to our coverage and support. And so it's going to be some of them are smarting on our desire to ask them to go to distribution and their choice not to. They might be a little bit longer coming back, but we're pretty pleased with some of the progress on opening up the buying opportunities across those independents and starting to make some progress on recovering the losses associated with those accounts.