Prepared remarks
Welcome to the Pentair Second Quarter 2026 Earnings Conference Call. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Jeffrey Thompson, Vice President, Investor Relations. Please go ahead.
Thank you, operator, and welcome to Pentair's second quarter 2026 earnings conference call. On the call with me are John L. Stauch, our President and Chief Executive Officer, and Bob Fishman, our interim 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 and 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 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 unless noted otherwise. Following our prepared remarks, we will open the call up for questions. Please limit your questions to two and re-enter the queue to allow everyone an opportunity to participate. I will now turn the call over to John.
Thank you, Jeffrey. Good morning, everyone. We appreciate you joining us today. As you saw this morning, in addition to our quarterly results, we announced that we have agreed to acquire Taco Group Holdings, a market leader in hydronic and water-based solutions. This exciting transaction aligns with our strategic priorities and allows us to accelerate our growth trajectory. First, let's begin with an executive summary on slide 4. The second quarter was slightly better than the July 14 preannouncement and reflects efforts to realign pool channel inventory ahead of the 2027 pool season. Pool remains a fantastic business, and we believe it is well positioned for a return to robust growth in 2027. Importantly, Water Solutions and Flow remain on track to deliver full-year expectations and we expect to see improved revenue growth from these businesses in the second half of 2026. Lastly, the addition of Taco creates another platform in water solutions that aligns with Investor Day themes and accelerates our growth profile. Please turn to the Q2 overview slide on slide 5. As we shared in the preannouncement on July 14, Q2 was a challenging quarter driven by the underperformance of our pool segment and specifically the acknowledgment that we would not realize the pool dealer growth that we had originally planned. While we are disappointed with the impact this had on our overall business, I want to emphasize two important points. First, our underperformance was concentrated in pool. The Flow and Water Solutions businesses delivered record return on sales, even when excluding the benefit of tariff refunds, further reinforcing the resilience of our balanced portfolio. Second, we believe the pool challenges are temporary. We remain confident in the attractive nature of the segment and our position as a market leader. As we will discuss in the following slide, we have a clear plan to address the near-term issues we are facing and return the business to robust growth as we have historically realized. Second-quarter adjusted operating income included approximately $35 million of tariff refunds across our three reporting segments. During the quarter, we repurchased $150 million of shares in the open market as we continue to put our capital to work to drive long-term shareholder returns. For the full year 2026, we are reaffirming our adjusted EPS guidance range of $4.60 to $4.80, communicated through our preannouncement on July 14. Please turn to our pool overview and growth action plan on slide 6. The year-over-year decline in pool sales was largely driven by a more pronounced inventory alignment with major channel partners than previously expected. Once learning the full magnitude of the inventory reduction during the quarter, we acted with urgency to address the issue, and we are confident that the inventory levels will be optimized by the end of Q3, setting us up nicely for the 2027 pool season. A smaller portion of the sales decline was related to moderating sell-through due to ongoing end-market pressure across discretionary residential end markets in North America. In addition, we estimate modest movement in share on some older pool pads where we are not capturing our fair share of replacement equipment installed 10 to 15 years ago. Our action plan includes initiatives to resolve this issue and increase aftermarket share moving forward. As these dynamics became clear throughout the course of the quarter, we initiated a comprehensive review of our pool business to determine how best to adapt to our current environment and ensure we are positioned for success heading into next year's pool season. This review showed us a few key points. First, we remain an industry leader with a premier brand, strong customer base, and a large installed base with leading positions in energy-efficient and smart-connected pool technologies. We believe the challenges we are facing are temporary and do not reflect a structural change in the pool market or our long-term opportunity. Finally, we need to deepen dealer engagement and accelerate customer-driven innovation to deliver the value-added differentiated solutions that have become synonymous with the Pentair brand. We have a clear action plan to invest in our highest-performing growth initiatives and position the pool business for a return to more normalized performance in 2027. These actions include aligning the pool sales organization and marketing strategies by region and realigning incentives with industry growth priorities to ensure we have the right products and service levels in our most important geographic markets; implementing a dealer-centric and segmented sales process to drive enhanced engagement with channel partners and increase aftermarket growth; and increasing investment in customer-driven innovation to expand core pool product categories with more differentiated value-added solutions. We are focused on the work underway and the opportunities ahead. Pool remains an attractive market with compelling profitable growth opportunities. We are confident the actions we are taking will strengthen the business and position it to deliver on those opportunities, and we expect to build momentum throughout the rest of 2026 and beyond. Now let's turn to the strategic rationale and benefits of the Taco acquisition on slide 7. We believe Taco is a natural fit for our business. It advances our growth strategy and meets our disciplined M&A criteria. Taco broadens Pentair's innovative suite of water solutions, accelerating growth and strengthening our ability to serve more customers across commercial, infrastructure, and residential applications. The combination also brings together Pentair's innovation engine and Taco's strong engineering and product development capabilities. Together, we believe there are meaningful opportunities to develop new solutions that address customers' evolving water needs, including efficiency, reliability, and sustainability. Importantly, this transaction significantly strengthens our positions in attractive high-growth commercial end markets, including HVAC, data centers, and related infrastructure build-outs. Demand for solutions in these markets is supported by key secular trends, including infrastructure investment, digital infrastructure and the AI revolution, energy efficiency, and sustainable water management. Our increased exposure in these areas will allow us to create an attractive diversified growth engine and enhance our resilience. During our Investor Day earlier this year, we identified the residential utility room and building a broader, more scaled offering for the North American plumber as a key growth priority. Taco expands the breadth and scale of our plumbing offering and positions us to increase share in this high-growth category. Taco will also expand our channel network, creating compelling cross-selling opportunities. Taco is a strong manufacturer-representative model with established relationships with OEMs, distributors, contractors, engineers, and end users. Taco's large installed base will allow us to leverage these channel opportunities to expand our aftermarket business. In fact, approximately 85% of its revenue is associated with replacement products, maintenance, and system upgrades. That durable demand will create more customer touchpoints and deepen those relationships, supporting growing recurring revenue streams and enhancing our resilience. This is not just an opportunity to bring an outstanding business into Pentair; it is an opportunity to bring an outstanding growth-focused team. We look forward to welcoming the Taco team to Pentair and we are confident that our shared values and commitment to excellence will allow us to seamlessly integrate our organizations as we work to capture the compelling opportunities ahead. With that, I would like to welcome back Bob Fishman, who is rejoining Pentair as interim CFO while we search for his successor. Bob previously served as the Pentair CFO for six very successful years, and we could not be happier to have him back on the team. Bob will walk through our financial results in more detail. Bob?
Thank you, John, and good morning, everyone. I am excited to be back at Pentair supporting the CFO transition and working with such a great team. Let's start on slide 8. In Q2, we reported sales of $933 million, adjusted operating income of $237 million, return on sales of 25.4%, and adjusted EPS of $1.14. These results are slightly better than what we communicated in our preannouncement on July 14. Core sales were down 17% year-over-year, driven primarily by the $170 million pool channel inventory destocking. Moving to adjusted operating income, lower pool volume was the primary year-over-year headwind. The volume decline and inflation were partially offset by price realization, $14 million of productivity savings, and approximately $35 million of tariff refunds. Despite the recent challenges in pool, we continue to invest in growth initiatives that support our long-term strategy. Please turn to Slide 9. Flow sales were up 5% year-over-year to $264 million, driven by the Hydra-Stop acquisition. Order wins in the quarter across commercial building, data center, and desalination markets highlight the breadth of the portfolio and provide confidence in our long-term growth trajectory. Segment income grew 27% and return on sales increased 470 basis points to 26.5%. Even when excluding the benefit of tariff refunds, Flow delivered record return on sales driven by productivity, the acquisition of Hydra-Stop, and price. Please turn to Slide 10. In Q2, Water Solutions sales decreased 5% to $422 million driven primarily by the sale of our commercial service business in Q2 2025. Core segment sales declined 3%. Commercial sales were down 6% inclusive of a negative 8% impact from the Q2 2025 business exit. Residential sales were down 4% year-over-year as we lapped one final quarter of lower-margin portfolio exits in our residential filtration business. The pro channel continued to grow during the quarter, reflecting gains supported by our 80/20 focus on top customers and strength in our combined product offering as we bring our residential pump and filtration portfolio together. Importantly, this growth came from repeatable, higher-quality demand. Segment income grew 17% to $126 million and return on sales increased 560 basis points to 30%, driven by disciplined pricing and productivity. Water Solutions segment income included $18 million of tariff refunds, the largest benefit among the three segments, but similar to Flow delivered record return on sales even when excluding this benefit. Please turn to slide 11. In Q2, pool sales declined 42% to $247 million and segment income was $58 million, down 62%. Return on sales was 23.4%, down from 35.7% in Q2 2025. The reduction in sales and income was mainly driven by the $170 million channel inventory destocking in the quarter. Price offset inflation excluding the one-time tariff refund benefit. We expect that the actions that John described earlier will drive significant growth in pool in 2027. Please turn to Slide 12. Our balance sheet remains strong. Our net debt leverage ratio was 1.4x as of the end of the second quarter. In Q2, we repurchased $150 million of shares reflecting our strong confidence in the long-term strategy. 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 proudly maintaining our dividend aristocrat status. Our significant annual free cash flow generation has enabled us to strategically deploy capital via debt pay down, dividends, share repurchases, and strategic acquisitions. We plan to remain disciplined with our capital deployment while also having the flexibility to strategically allocate excess cash toward areas with the highest shareholder returns. Let's turn to our outlook on Slide 13. Our current guidance excludes the Taco acquisition, which is expected to close in the fourth quarter. For the full year, we are reaffirming our adjusted EPS guidance provided on July 14 of approximately $4.60 to $4.80. Also, for the full year, we expect total Pentair sales in fiscal 2026 to be down approximately 4% to 7%, consistent with the July 14 preannouncement, with a midpoint of approximately $3.95 billion. Flow and Water Solutions are unchanged from the previous guidance given during our Q1 earnings call. We expect Flow sales to be up approximately mid-single digits to high-single digits. Water Solutions sales are expected to be approximately flat with core sales up approximately low-single digits. And pool sales are expected to decrease 18% to 22% in fiscal 2026, consistent with the July 14 preannouncement. We believe the right-sizing of channel inventory this year positions the company for robust pool growth in 2027. Within our down 4% to 7% sales guidance for total Pentair, we expect full-year price to be up approximately 3% with FX, acquisitions, and divestitures providing a net benefit of approximately 50 basis points and the remaining change reflecting lower volume. We expect total Pentair adjusted operating income to decrease approximately 5% to 9%. We expect price to offset inflation and approximately $55 million of productivity savings net of investments. We are executing well on our productivity initiatives, but the savings now include the inefficiencies associated with the lower pool volume. Tariff refunds reflect a range of outcomes from $35 million to $50 million as described in our preannouncement on July 14. For the third quarter, we expect sales to be down approximately 4% to 6% with a midpoint of approximately $970 million. We expect Flow sales to be up approximately high-single digits which includes our Hydra-Stop acquisition of approximately $10 million of sales in the quarter at approximately 30% ROS. We anticipate Water Solutions sales to be up approximately low-single digits. As a reminder, we divested the commercial services business in Q2 of last year, and as a result, we do not face this sales headwind in Q3 for comparative purposes. Pool sales are expected to be down approximately 23% to 25% as we continue to rightsize channel inventories for the 2027 pool season. We expect third quarter adjusted operating income to decrease approximately 14% to 16%. We are also introducing adjusted EPS guidance for the third quarter of approximately $1.05 to $1.08. We anticipate that the actions underway will support significant sales, operating income, and EPS growth in 2027. I would like to now take the opportunity to provide additional detail on the exciting announcement of the Taco acquisition. Please turn to Slide 15 titled Transaction Overview. Under the terms of the agreement, Pentair will acquire Taco for $1.4 billion subject to customary adjustments. The purchase price represents approximately 10.5x expected 2026 adjusted EBITDA when accounting for estimated tax benefits and run-rate cost synergies. The transaction is expected to be $0.10 to $0.15 accretive to adjusted EPS in fiscal 2027. Taco is a fast-growing business with a large addressable market and will significantly strengthen our Water Solutions segment. The acquisition establishes a new growth engine, enhancing exposure to energy efficiency, comfort cooling, HVAC, and data center infrastructure build-out. While the real opportunity is top-line growth, we expect to generate approximately $30 million in run-rate cost synergies over the next few years through Pentair's purchasing power and economies of scale. We will preserve the brand, expertise, and customer relationships that have made Taco so successful over the last 100 years. We plan to fund the transaction with a combination of cash on hand and committed bridge financing which we intend to refinance through a permanent debt issuance. At closing, which we anticipate in the fourth quarter, we expect net leverage of approximately 2.4x. Supported by Pentair's strong cash flow generation, we expect to reduce net leverage to below 1.5x within two years following the close. Next, turn to Slide 16 highlighting that Taco is a market-leading hydronics and water solutions provider. Taking a step back, this is a business and team we have long admired and have crossed paths with regularly. For over 100 years, Taco has built a premier brand and is a trusted market-leading provider of circulator pumps, valves, other pumps, tanks, heat exchangers, fabricated solutions, and advanced controls. It has done so by maintaining a culture built on innovation with a relentless focus on customer service. Taco is primarily a North American business with an especially strong presence in the Eastern United States, which we see particularly compelling growth opportunities in the multifamily residential market. It brings a large installed base of roughly 40 million units across commercial, industrial, and residential markets. What makes this base even more compelling is that Taco products are specified by engineers which fuels their aftermarket business as customers require like-for-like replacement solutions. The company has a strong growth profile along with attractive profitability. Finally, turn to Slide 17, as we highlight the increased scale and enhanced water solutions platform. As we have touched on, this transaction advances our strategic priorities and accelerates growth, strengthening our positions in key high-growth end markets that are supported by secular water and sustainability trends. The addition of Taco will increase the scale and relevance of our Water Solutions segment. Just as important, it will enhance the resiliency of Water Solutions as we expand Taco's installed base and accelerate the growth of our aftermarket business. The transaction will give us a new growth profile. Taco's commercial business is its fastest growing, driven primarily by its HVAC and data center exposure. Data centers represent approximately 15% of Taco's commercial and industrial revenue, with a significant pipeline of opportunities expected to support accelerating growth. On the residential side, Taco's business is heavily weighted toward multifamily, which is a faster growing and more compelling area of the market than single family. The transaction will scale our business, enhance our growth profile, and allow us to unlock significant profitability and value creation as we bring our businesses together. We are excited to welcome Taco to the Pentair family. 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.
Questions and answers
Thank you. We will now begin the Q&A session. In the interest of time, we ask that you please limit yourself to one question and one follow-up. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press *2. Our first question comes from Bryan Blair with Oppenheimer. Please go ahead.
Thank you. Good morning, everyone.
Hi, Bryan.
Bob, nice to have you back for a little bit.
Thank you.
Alright. It is a level-set a bit on pool destocking. How regionalized is the reset? Are there certain geographies driving most of the realignment? And similarly, is the destocking concentrated in any product categories?
No. It is broad inventory, and it is broad on the product side. There is no particular subset that is being addressed in this one in the destocking.
Okay. Understood. And with regard to Taco's financial impact, you outlined some key near-term metrics and expectations. We know margin dilution at the outset and then synergy capture helping to close that gap over time. I guess two related questions. One, what is the timeline to achieve the $30 million in synergies? And then longer term, is there any reason why the gap would not be fully closed to current fleet average margin? Or is there something structural on the Taco side that may cap profitability below that range?
I'll start and I will have Bob add some color. First of all, we want to honor the fact that this is a growth platform. This is a hundred-year, rich-in-history brand that has done a lot of great things to evolve its product line, and right now, it is growing at a substantial rate. I do think there are some things in the Pentair business system that we think can add to the margin profile, mainly around sourcing and helping them drive operational leverage. At the end of the day, we want to learn and really open our eyes to understanding where the continued opportunities are, and we see probably more growth synergies in the long haul than we are focused on the operating synergies. We are going to run it as a standalone unit, honoring its go-to-market capabilities and strategies, and we will have a shorter, light touch on the integration. We see that integration period being somewhere around three years to fully get those synergies.
Out of the business. Yeah. I would agree with that. Over the next two to three years, we will be able to drive those cost synergies. Those are primarily related to the purchasing power of Pentair and economies of scale. Some of those will accrue to us next year, but we definitely feel good about the $30 million of cost synergies from a run-rate perspective.
Got it. Appreciate the detail.
And the next question comes from Andrew Krill with Deutsche Bank. Please go ahead.
Hi, thanks. Good morning, everyone.
Hi, Andrew.
Digging a little deeper on pool and the 2027 growth prospects, could you build a finer point maybe on some expectations there? I think Bob said significant, robust. Does this mean it could be double-digits, or will this be close to the mid-single digits Investor Day target? Thank you.
Yes. It is important for us first to have dealt with the issue as quickly as possible in Q2 and then, as we think through the balance of the year, to make sure that the channel inventory is right-sized for success in 2027. I would say that the math that I do, if you put together the guidance that we gave on pool, it is going to be roughly a $1.25 billion-type number for the year for pool. The way that we start to build up the 2027 number is by looking at the inventory destocking. So if you say conservatively inventory destocking around $200 million for the year, you can put yourself in a position where you're looking at a $1.45 billion-type number next year for pool. Now a lot of things have to happen between now and then in terms of us assessing the 2027 pool season, but when you are growing $1.45 billion off a $1.25 billion base, that is where we get the significant robust growth.
Great. That is very helpful. And related to that, just margins for pool next year. Any help there just given how big of a reset the deleveraging this year is, do you think you can be back solidly into the 30s next year? Or are there going to be new headwinds from growth, etc.? Any help there would be great. Thank you.
Yeah. I am targeting definitely keeping a three in front as the first digit and starting with a zero as the second digit for now. I think we are going to use this opportunity to reestablish a growth mindset in pool and ensure that we are investing appropriately in the growth opportunities. We have been afforded a small reset on that margin side, and I want to start with a growth orientation on driving a higher level of growth and getting the drop-throughs. Structurally, nothing has really changed and we would get the leverage on the way back up from all of the growth. It is about making sure that we take our higher growth profile in pool and invest in it. These are small investments: putting the dealer first, rallying around the seven regional sales leaders that we have today, and making sure their voice is heard. It is also about making our product roadmap reflect our dealer councils and inputs. Those are not huge investments, but a little bit here and there that I want to make sure the organization has at its discretion and that the channel knows we are supporting them.
Thank you.
And the next question comes from Brett Linzey with Mizuho. Please go ahead.
Hey. Good morning, just wanted to follow back up with pool. Appreciate some of the destocking details and the bridge to 2027. Are there any other signals or KPIs that are giving you a little bit more confidence that things do, in fact, come back and the inventory levels are right-sized? Are you seeing any pull-forward on orders already? And then why does the $200 million come back? Is there some structural kind of reset on inventory levels in the system?
I'll have Bob chime in here. Keep in mind the $1.25 billion that Bob is sharing with you is our ship-in number, consistent with all the previously reported numbers that we have had in prior years. The inventory is really a doubling up of any inventory that was in the channel and it comes out at a 2x factor to how it went in because the first $100 million will be serviced through existing inventory and then you have the right-sizing inventory to get you back to where you need. We expect all of that to be cleared out by Q3, and then we head into next year with moderating prices where our price increase is not going to be as large as it was last year, which generated some of this prebuy into the channel. It is going to be a slight add as we build that inventory out of season. We have clearer lines of sight on the sell-through which is our sales to dealers. The numbers Bob is giving you, if you look at dealer sell-through today, you can actually take the ship-in plus the change in inventory and that is what we are selling to the dealer channel. With no growth next year, we get those types of growth rates that Bob was alluding to. Now we have higher expectations than that with the growth actions we are taking and we would like to be back to that mid-single-digit sell-through growth that we set in the long-range plan. We will build that credibility and trajectory over the next several quarters.
I would agree with that. Obviously, it's early to be giving a 2027 view, but because of the challenges we saw in Q2, that $1.45 billion-type number does approximate sell-through that we have seen over the last couple of years. Conservatively, you are saying another flattish sell-through year. When you think about maybe a little bit of price plus volume coming back, and pool equipment breaking, you would like to think that there will be some volume growth next year. Again, we are not going to get ahead of ourselves. The number I gave, the $1.45 billion, feels like a reasonable starting point to plan for the year.
Alright. Thanks. And then just one on Flow and Water Solutions that delivered the strong ROS in the quarter. As you strip out tariffs and look at the underlying results between the productivity actions and maybe some mix benefit from the product exits, what is the jumping-off point from here? Is there any one-time noise or is it a sustainable run-rate that we build off into next year?
Both Flow and Water Solutions are performing well from a profitability perspective. They have a nice funnel of product improvement programs, and we believe ROS will continue to expand. There are a number of complexity reduction plays as well as revisiting Wave 1 and Wave 2 of our sourcing program. We are optimistic that those businesses can continue to drive ROS improvement and, more importantly, drive top-line growth. We are going to see some nice back-half growth in both Water Solutions and Flow, even with a challenging international environment. We are optimistic both from a top-line and ROS expansion for both segments.
Appreciate all the detail. Thanks.
And the next question comes from Andrew Buscaglia with BNP Paribas. Please go ahead. Andrew, your line may be muted. And the next question comes from Mike Halloran with Baird. Please go ahead.
Hey, good morning everyone.
Morning. Morning, Mike.
So to take some questions. First, just on the pool side, how quickly do you think some of these efforts can drive results? The commercial efforts and innovation— I know some of these you put in place earlier this year. How quickly can those drive results? And John, is there an implication to pricing in your commentary about maybe being a little less price aggressive in the marketplace as you look to stabilize the business?
When I talk about moderating pricing, I'll give you a range. I think it is somewhere in the 3% to 5% range next year; we have not established those price increases yet. We think we cover some freight and have some unique inflation on some core product lines. Those increases should cover those costs. It is a reference that last year we had 7%–8% price forecasted and it drove a prebuy across the entire channel because customers got ahead of those price increases. The prices I am talking about are more moderate and will not generate the same prebuy environment as last year. On investment and how long it will take, I think credibility with the dealers that we have their back and that we are supporting them consistently will be important. We have started that already. We need to build that quarter by quarter. It is about using our technical service reps and field service support to back dealers and ensure product is up and running and supported. It is also about understanding that different regions have different competitive dynamics and making sure we compete effectively in those channels. The primary area where we lost share is pads we installed 10 to 15 years ago; our technology has evolved rapidly, so we need product that can address a like-for-like replacement on those pads. In terms of timing, we can make progress in the back half of the year, but you should expect a 6- to 18-month timeframe to get back to where we feel we should be and to start winning share again rather than just defending share.
Appreciate that. And then just a balance sheet question here. 2.4x is what the leverage is expected at close. Is the plan to let growth and EBITDA normalization and pool inherently lower that leverage level over the next couple of years? Are you willing to deploy capital for buybacks beyond that or other things, or is there a targeted debt paydown plan concurrent?
We would run a similar play to what we ran with Manitowoc Ice, which was successful from a balanced capital allocation story while leaning into debt paydown so we delevered quickly. Our expectation is that we would utilize some amount of Pentair's free cash flow for debt paydown. That would be the main driver to get us from the approximately 2.4x down to 1.5x two years later. But that still allows room to continue making dividend payments and increases, do share buybacks at least from a dilution perspective, and have optionality with other free cash flow that we have.
We will prioritize debt paydown to drive that leverage ratio down, and that is on the strength of the Pentair and Taco free cash flow.
Thanks, gentlemen. Appreciate it.
And the next question comes from Nathan Jones with Stifel. Please go ahead.
Good morning, everyone.
Good morning.
I guess I will start with another on the pool inventory buildup. You have talked about the price increases coming into this year as responsible for the prebuy. It does not seem like a lot of other suppliers are saying the destocking at the same level that Pentair is. Can you provide a little more color on how this inventory build got into the channel? Also, you gave guidance at the end of April. Did you have any indication that there was a big inventory destocking coming then? Is there some review of business processes that needs to be made so you have better intelligence on what is actually going on with your dealers and in the market?
I appreciate the question. I cannot speak to our competitors. We had a double-digit growth on the sell-through side as we headed into this year. That included seven to eight points of price and about two to three points of volume. We did our channel checks and talked to our dealers; people were encouraged and optimistic entering the year. A lot happened in the first quarter: geopolitical conflict, gasoline spikes, and interest rates that did not decline. We did sell-through checks in Q1 and did mid-single-digit growth. What happened in Q2 is we saw some pull-ahead from the channel from Q2 into Q1 and noticed there were a fair amount of rebates to dealers and encouragement for them to buy product. We learned we were not going to hit those sell-through rates, which is where we started to soften guidance in April. We came out with a lower pool forecast at that time and had some inventory correction in our Q3 numbers. It became apparent we would be in an excess inventory situation in Q2 and we worked with the channel to actively rightsize inventory so we could get it behind us by the end of Q3 and begin to get back to a sell-out mentality next year. We will make sure inventory coming in equals inventory going out. This was a case where a small percentage miss on the way up results in a larger impact on the way down when you have a large business. Usually, you will live with a little excess inventory, but this one got to the point where we were uncomfortable that it would affect our long-term growth rates. Going forward, we have the ability to measure sell-through and sell-in across all regions and will keep an eye on what is going into the channel and what is going out. Seasonality must be considered, but it is straightforward to monitor.
Thanks. On Taco, you are talking in the slide deck about mid-teens 2026 revenue growth. Can you put that in a bit of context with where it has been historically and expectations going forward? I assume revenue from data centers is a big driver of that growth. If you could parse that out, maybe what the growth rate is excluding data center exposure. Thanks.
Our plumbing business exposure never included the HVAC channel historically, and Taco is strong in the HVAC channel, which is a good place to service plumbers. Taco is the number one or number two brand in the climate and hydronic HVAC space and plays well in regions with multunit housing where we have not historically played. Their growth rate has been mid- to high-single digits historically and when you start adding data centers onto that, you get a ramp in incremental growth related to those data centers. I'll let Bob add detail.
They are taking advantage of some fast-growing markets. We are excited to add roughly $10 billion of addressable market to Pentair. Historically, Taco has been a high-single-digit grower and is seeing nice growth this year as they expand into data centers, including expanding their product offerings. The commercial side of their business overall is doing well and is in the sweet spot for efficiency and sustainability plays. The residential business is doing well with a focus on multifamily units. They are building a nice funnel, and we are excited not only about Taco's growth but also about combining what Pentair has to offer. Taco sells primarily through manufacturing reps while we sell through distribution; there is a nice cross-sell opportunity. We will run Taco as a standalone business unit within Water Solutions.
Thanks for taking my questions.
And the next question comes from Deane Dray with RBC Capital Markets. Please go ahead.
Thank you. Good morning, everyone.
Morning, Deane.
Hi, Deane.
Hey, Bob. Welcome back. I do believe you lead the league now in the most comebacks and retirements. Is that true?
I don't know if I would lead, but I do like coming back. This is such a great company, and I'm excited to be back.
Pentair's fortunate to have you ready to step back in. So we appreciate that. On the Taco deal, we know this brand; it is a top brand with a great aftermarket. Full disclosure: our HVAC in my home has all Taco mixing valves. This feels a lot like the Manitowoc deal where you bought a top brand with good aftermarket and planned to run it as its own platform. Is that right? And can you expand on where there are adjacencies to build out this platform further, maybe in fluid handling? Thanks.
Thank you, Deane, and congratulations on your news as well. We plan to run Taco and learn from the Manitowoc approach. It is a proud brand with a long heritage; Taco is a fourth-generation business and we'll run it as a standalone entity and use Manitowoc as a playbook. Our biggest meaningful synergy is in mechanical-side data center opportunities. We are entering data center markets with a large HVAC offering and this connects to larger chilling and cooling aspects with our water solutions. Introducing products to each other's customers and sharing leads are important synergies. For the plumbing channel, expanding the line card and giving plumbers access to both companies' products is a meaningful opportunity.
Great. And a follow-up on the pool side. One question we get is, has there been any fallout from 80/20 disruptions on the customer side when you switch someone from direct sales to distribution? There can be relationship disruption. Does that apply to your situation?
The answer is yes. It is not the 80/20 tool itself; it is how you implement 80/20. We made some assumptions on smaller distributors, buying groups, and small dealers that are independent and do not necessarily buy from the two largest distributors. Those actions created disruptions and contributed to lost share in the aftermarket. We are actively pursuing getting that back and reestablishing those relationships. These are long-term relationships and we made decisions that need to be revised. I will acknowledge we did not implement the tool with the right assumptions and industry knowledge.
Great. I appreciate the candor and your support over the years. Best of luck.
Thank you.
Best of luck to you, Deane.
And the next question comes from Nigel Coe with Wolfe Research. Please go ahead.
Great. Thank you. Bob, great to have you back. Maybe Deane can actually start to rival you for all the comebacks here. Bob, good to see you back. We have covered a lot of ground, John. It sounds like you have lost most ground with the smaller distributors and small contractors. With the larger players, do you feel like you are in good shape, or is there more work to do there? And this new growth mindset in pool, is there anything on a product side or in terms of customer targeting—thinking about some of the larger pool builders—where you need to reestablish a presence?
We segment the market. We feel like our positioning with premium, large builders is where it needs to be; we continue to serve those dealers. We have not historically played in larger pool builders that serve the mid-tier market—those mass-produced homes with single-body pools. That segment is growing faster right now than premium pool builds and is more price conscious; we have to explore whether we want to participate. We do not currently serve the top 20 builders in that space and are evaluating the economics and aftermarket/service tail. Where we need to get better is product that replaces existing products in a simple, service-friendly way for those service technicians who replace units. We have product availability today but may need to increase awareness and focus on areas to recapture share. Long-term our innovation has to be more iterative, easy to use, easy to install, and easy to sell. We have moved toward more breakthrough thinking which is a bigger leap for the channel; we plan to shift our product roadmap to deliver more frequent, incremental improvements rather than radical redesigns.
John, that is great color and good luck with that transition. Just a quick clarification on the margin question: you indicated something close to the 30% is where you see the business maybe trending longer term. Do you think that is a good number for 2027, or could there be a two-handle on margins next year due to the transition period?
There is no need to put a two in front of it. Before this reset, we were tickling the mid-thirties. I think we can be in the low-30% range systematically for pool. This is still a Rule of 40 business: you can get to 30% plus 10% growth, or be at 33% with 7% growth. I view it as a business where emphasizing top-line growth will deliver income growth and value, so targeting a low-30% margin is reasonable as we reestablish growth.
That is great. Thanks, John.
And the next question comes from Andy Kaplowitz with Citigroup. Please go ahead.
Hey. Good morning, everyone. Bob, welcome back.
Hi, Andy.
John, how difficult do you think it is to pivot from this sort of 80/20 mindset in pool to a more innovation-based focus? You mentioned replacing products—maybe some examples where you will lean in to drive growth. Is it more on the automation side or specific products where you lost share? How do you think about that?
We have historically been a customer-led, sales-led organization. During supply chain disruptions, we had to solve more centrally and stopped listening at the localized dealer level. This pivot is not hard to achieve but it is not immediate. We must recommit to supporting dealers and empowering salespeople to say yes to what dealers need. We also must support salespeople and make consistent investments. We are making progress within the quarter and will continue through year-end to ensure consistency into 2027 and beyond.
Helpful. And then on Flow in general—mid- to high-single-digit growth through the year. Hydra-Stop is doing well. Core sales were down 1%. Talk about the different businesses and whether anything is slowing you down there—CapEx doing reasonably well, any headwinds?
Nothing specific is slowing us down; more macro factors in certain regions, like Europe, have been headwinds. We expect those to come back as economic conditions improve. Overall, Flow is performing well and we are optimistic about driving high-single-digit growth in the back half of the year. We remain focused on ROS expansion and top-line growth.
Appreciate all the color.
And the next question comes from Brian Lee with Goldman Sachs. Please go ahead.
Hey, guys. This is Tyler Bisson on for Brian. Thanks for taking our questions. Wanted to dig into the Flow segment. Sales were up 5% and you called out key order wins in commercial buildings, data centers, and desalination. Can you provide more details on these order wins? Have you seen any market share gains here? Is the business performing a little better than expected?
The wins reflect investments in productivity improvements where we reinvest some savings back into growth initiatives. The work we are doing around data centers reflects investments in the channel and product improvements. Those wins are expected to drive revenue growth in future quarters. We like the breadth of the portfolio within Flow, which gives us confidence we can drive better growth; Flow used to be a low-single-digit grower and we now believe we can do better than that.
Thanks. And back to pool: can you provide more detail on the plans to regain aftermarket share? What are the low-hanging fruit near term and medium-term impacts?
Low-hanging fruit in the short term is ensuring the industry understands our like-for-like replacements. For example, ensuring people know that the WhisperFlo is a like-for-like replacement that can give the customer what they need. We had been promoting IntelliFlo3, which includes full automation and app-based control for customers who want that offering. But we must also ensure there are simpler alternatives that are our products for customers who do not want the advanced options. We also need to make dealers aware of existing product availability and focus on regions that can recapture share. Thank you for joining us today. In closing, I would like to reinforce some key takeaways on slide 18. We have taken actions to address near-term pool dynamics while maintaining long-term growth priorities and we anticipate robust growth in 2027. Flow and Water Solutions remain on track and continue to perform in line with our expectations. Our acquisition of Taco expands our suite of innovative water solutions, strengthening our position in high-growth end markets and expanding our channel network and aftermarket exposure. This transaction will create an attractive and diversified growth platform. We are confident that our focused water strategy and disciplined execution will further strengthen the business, enhance operational efficiency, and position us to deliver long-term growth, profitability and value creation for customers and shareholders. Thank you, everyone. Have a great day.
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