濱特爾 (PNR) 2025 Q4 法說會逐字稿

Welcome to the Pentair Fourth Quarter 2025 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Shelly Hubbard, Vice President, Investor Relations. Please go ahead.

Thank you, operator, and welcome to Pentair's Fourth Quarter 2025 Earnings Conference Call. On the call with me are John Stauch, our President and Chief Executive Officer; Bob Fishman, our outgoing Chief Financial Officer; and Nick Brazos, our incoming Chief Financial Officer.

On today's call, we will provide details on our fourth quarter and full year 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 invent separation in 2018 unless otherwise noted. Following our prepared remarks, we will open the call up for questions. Please limit your questions to two and reenter the queue 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. As we celebrate our 60th anniversary year and approached dividend King status, Pentair stands at the forefront of solving the world's most pressing water challenges. Our focus on customer obsession, innovation, operational excellence and sustainability positions us for strong growth in 2026 and beyond. To capitalize on our opportunities, I'm pleased to introduce Nick Brazos, our incoming CFO.

Nick brings a deep track record of operational rigor and financial acumen, and I'm confident he will help us extend our legacy of disciplined execution.

I also want to thank Bob for his six years and 24 quarters of outstanding service. Bob's leadership has been instrumental in positioning us for our next phase of growth.

He leaves behind a very strong financial organization that partners with our businesses to drive excellence in their respective industries. I would like to acknowledge that Demon Wiggins and Adrian Chiu have accepted new, expanded and important roles, and I want to extend my sincere appreciation to Steve Pilla and Phil Rolchigo for their significant contributions over the roughly 20 years that each have served the Pentair shareholders.

At Pentair, we believe that culture and talent are our ultimate competitive advantage, and we are committed to developing leaders who can drive sustained outperformance for creating future value.

We are entering an exciting new chapter for our company, one defined by accelerated growth through customer obsession, innovation and operational excellence. As announced this morning, we have strategically combined our flow Residential business with our residential business within Water Solutions beginning in quarter one of 2026.

This move allows us to combine two businesses that both serve plumbers in the North American Residential segment under the same leadership. It opens up channel growth opportunities, creates operational scale and efficiency.

Together, they make up about 25% of total Pentair factories and allows for regional sales and G&A synergies and creates organic and inorganic growth opportunities to build the business for the future. Demon, who has led a remarkable transformation and flow, we'll now will receive both the Flow and Water Solutions segments driving cross-segment collaboration and best practice sharing.

Adrian will lead our efforts in strategy, digital, AI and innovation for Pentair, helping to ensure that we stay at the forefront of technological change and partner with the businesses to build growth strategies to drive enduring success.

As we position our company for continued growth in the future, we believe this new leadership structure provides more agility to drive long-term shareholder value. We believe our balance sheet is solid. Our free cash flow is strong and our opportunities are plentiful.

Now let's turn to the Q4 executive summary on Slide 4.

In the fourth quarter, we delivered 5% sales growth and the 15th consecutive quarter of margin expansion. This was made possible by the relentless application of our Pentair business system tools, and a culture of continuous improvement. Adjusted operating profit increased 9%, ROS expanded by 90 basis points to 24.7% and adjusted EPS rose 9% to [$18].

Turning to the full year. Let's move to the full year 2025 executive summary on Slide 5. In 2025, we achieved record annual sales adjusted operating income, ROS and adjusted EPS. These results reflect our focus on execution, disciplined capital deployment and the resilience of our balanced water portfolio.

And 80s, 20s is gaining traction, allowing us to deepen relationships with our largest customers, our 80s, while streamlining our portfolio for the higher efficiency and growth by reducing our efforts on the 20s.

We generated record free cash flow of $748 million and returned $225 million to shareholders through share repurchases, demonstrating our ongoing commitment to disciplined, balanced capital allocation.

Our innovation engine remains robust with notable launches, including the Eccentric Impeller and Flow, PFAS Everpure Filtration and Water Solutions, the award-winning Manitowoc Ice Neo, which leverages integrated filtration and next-generation refrigerants, which are compliant with new EPA standards and in Televide Lights and Intellicorp and pool.

Our focus on launching differentiated high-value products that solve critical customer needs and drive sustainable growth is highlighted by both the PFAS Everpure filtration and Neo under-counter ice machine, winning the Kitchen Innovation Awards at the 2025 National Restaurant Association Show. Our 2026 outlook reflects confidence in our business model and the resilience of our end markets. We plan to continue to invest in digital and AI-driven solutions, strengthen our portfolio and return capital to shareholders all while advancing our leadership in sustainable water technologies.

Looking ahead, we are introducing our full year 2026 adjusted EPS guidance range of $5.25 to $5.40, an 8% increase at the midpoint. We expect approximately 3% to 4% sales growth and approximately 5% to 8% adjusted operating income growth, driven by continued operational excellence and innovation.

We remain vigilant in responding to macro volatility and the broader operating environment and continue to take proactive steps to mitigate risks, helping to ensure that we deliver on our commitments regardless of the external environment.

Let's turn to Slide 6, titled Aligning Organization in 2026 for Accelerated Success. As I previously mentioned, we have moved our residential flow business into Water Solutions and combined it with our residential Water Solutions business to help accelerate efforts to improve customer experiences, enhance operational efficiencies and deliver more comprehensive solutions to our channel partners.

Our Flow segment will now consist of our commercial and industrial flow businesses, and our Water Solutions segment will consist of our non-pool residential businesses as well as our Everpure filtration and Manitowoc Ice businesses.

You will see these changes reflected in our Q1 2026 results. We've also provided the revised segment information for historical sales, reportable segment income and return on sales in the Supplemental Information section of our earnings presentation.

Let's move to the key takeaways on Slide 7. With a strong foundation, a clear strategy and an energized leadership team, we believe Pentair is poised to deliver sustainable growth and value creation. 2025 was another record year for Pentair. We delivered strong margin expansion, sales and earnings growth and robust free cash flow. We have a clear strategy, a proven operating model and an outstanding team.

Our balance sheet is solid, and we plan to continue to drive a balanced capital allocation strategy. We remain confident in our ability to drive sustained outperformance creating value for our customers, employees and shareholders alike. Thank you for your continued investment in our company, and I'm looking forward to seeing many of you at our upcoming Investor Day on March 4.

I will now pass the call over to Bob and Nick, who will discuss our financial results and 2026 guidance in more detail. Bob?

Thank you, John, and good morning, everyone. As John highlighted, Pentair is entering an exciting new chapter, one defined by innovation, sustainability and operational excellence. Our financial results for Q4 and full year 2025 reflect the tangible impact of our transformation journey and disciplined execution, and most importantly, our commitment to creating value for all stakeholders.

Before I review our performance, I'd like to echo John's welcome to Nick and I have worked closely together over the last three years, and I'm excited to pass the baton over to him. I'm confident he will excel as the incoming CFO.

We are well aligned in how we think about capital allocation and driving shareholder value. Our Q4 and full year results are a testament to our commitment to building a more resilient, innovative Pentair.

The sale of our commercial services business in Q2 and the acquisition of Hydro-Stop in Q3 are deliberate steps in our strategy to focus on higher-growth, higher-margin businesses, which we believe positions us to lead in the water industry.

We remain focused on our transformation initiatives and 80s, 20s approach, which have enabled us to streamline operations, invest in differentiated products and deliver consistent margin expansion. These actions are not just about the short term, there about building the foundation for sustainable long-term success.

Let's start on Slide 8 titled Q4 2025 Pentair Performance. I will also be discussing our full year performance on Slide 9. In Q4, we delivered a strong fourth quarter. We have remained focused on our transformation initiatives in 80s, 20s and proven that we can successfully navigate through a variety of macroeconomic and geopolitical landscape. In Q4, we delivered sales growth of 5%, strong margin expansion and adjusted EPS growth.

Sales were driven by a 9% increase in flow with core flow sales growth of 4% and an 11% increase in pool sales with core pool sales up 9%, slightly offset by Water Solutions. The sale of our commercial services business in Q2 2025 was a strategic move to sharpen our portfolio focus.

Fourth quarter adjusted operating income increased 9% to $252 million, with return on sales expanding 90 basis points year-over-year to 24.7%. This improvement was driven primarily by price and transformation. Adjusted EPS of $1.18 was up 9% versus the prior year. For the full year, sales were up 2% to $4.18 billion driven by growth in pool and flow slightly offset by Water Solutions. Adjusted operating income grew 10% and return on sales expanded 170 basis points to a record 25.2%.

Adjusted EPS increased to a record $4.92, up 14% versus the prior year.

Please turn to Slide 10 labeled Q4 2025 flow performance. In addition to the fourth quarter performance for flow, I'll also be referencing the full year performance on Slide 11. In Q4, flow sales were up 9% to $394 million.

Commercial and industrial sales both increased 12% year-over-year, while residential sales rose 4%. Reportable segment income was up 22% and return on sales increased 240 basis points to 22.8%, driven by price, the acquisition of Hydro-Stop and transformation.

For the year, Flow sales increased 3% to $1.55 billion, driven by commercial and industrial. Full year reportable segment income grew 14% and return on sales increased 230 basis points to 23.3%, a record margin for flow driven primarily by transformation.

Please turn to Slide 12 labeled Q4 2025 Water Solutions performance. In addition to the fourth quarter performance for Water Solutions, I'll also be referencing the full year performance on Slide 13. In Q4, Water Solutions sales decreased 10% to $232 million. Commercial sales were down 15%, which includes an 11% impact from the sale of our commercial services business in Q2.

Reportable segment income declined 12% to $55 million and return on sales decreased 60 basis points to 23.5% due to FX and a decline in volume.

For the year, Water Solutions sales decreased 6%. Reportable segment income was flat and return on sales increased 130 basis points to 23.9%, a new full year record as transformation drove significant productivity.

Please turn to Slide 14, labeled Q4 2025 Pool Performance. In addition to the fourth quarter performance for pool, I will also be referencing the full year performance on Slide 15. In Q4, pool sales grew 11% to $393 million driven primarily by price. Reportable segment income increased 11% and return on sales decreased 20 basis points to 33.6%. We continue to invest in growth initiatives in Q4, which slightly offset strong productivity.

In the fourth quarter, we also experienced higher-than-expected inflation, primarily from certain metals. If this inflation persists, we will review pricing and other mitigation efforts to offset this impact. For the year, pool sales grew 9%, driven by price, volume and the acquisition of Gulfstream in December 2024.

Reportable segment income increased 11% and return on sales increased 60 basis points to 33.8%, a new annual record, driven by sales growth and transformation. While inflation and tariffs present ongoing challenges to total Pentair, our proactive pricing strategies and operational discipline have enabled us to sustain margin expansion.

We are closely monitoring global supply chain dynamics and remain ready to adjust quickly to protect profitability and invest in future growth. Our risk management approach remains agile and disciplined, allowing us to navigate volatility and seize new opportunities.

Our record free cash flow not only strengthens returns for our shareholders, but also empowers us to invest in our people, our communities, and the technologies that will deliver cleaner, safer water for millions. These results reflect our commitment to all stakeholders, shareholders, employees, customers and partners and our purpose-driven approach to value creation.

I will now hand the call over to Nick to discuss our balance sheet and 2026 guidance.

Thank you, Bob. It's been a privilege to partner with you these last few months and to learn from and work with you the past few years. Good morning, everyone. Please turn to Slide 16, labeled Balance Sheet and Cash Flow. We maintained a strong financial position with record annual free cash flow of $748 million, a healthy leverage ratio of 1.4 times and we've delivered return on invested capital of 16.7%, up from 15.5% in 2024.

We expect to continue to have a balanced capital allocation strategy focused on delivering shareholder value with flexibility to invest in organic growth, pursue strategic acquisitions, repurchase shares and pay dividends, all guided by our high-teens return on invested capital targets as well as earnings growth.

2025, we repurchased 2.3 million shares for a total of $225 million and announced a new share repurchase authorization for up to $1 billion.

Moving to Slide 17, titled Q1 and Full Year 2026 Pentair Outlook and Expectations. Looking ahead, our priorities are clear, continue to deliver for customers and create value for shareholders as we accelerate innovation, deepen our quad on customer relationships and drive operational excellence through the Pentair business system.

Our guidance reflects customer obsession, continued investment in focused priorities, portfolio optimization and disciplined capital allocation. For the full year, we are introducing our adjusted earnings per share guidance range of approximately $5.25 to $5.40, which represents a year-over-year increase of 7% to 10%. We expect total Pentair sales in fiscal 2026 to be up approximately 3% to 4%.

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 increase approximately 3% in fiscal 2026.

Within our 3% to 4% sales guide for total Pentair, we expect full year volume to be roughly flat, price to be up 2% to 3% and FX, acquisitions and divestitures to be an approximate 50 basis points benefit.

We expect total Pentair adjusted operating income to increase approximately 5% to 8% with return on sales expansion of roughly 100 basis points to approximately 26%. We expect price to offset inflation and another strong year of transformation savings of approximately $70 million net of investments, which delivers on our 26% return on sales target set at our last Investor Day in March 2024.

We expect pool to improve its return on sales slightly and flow in Water Solutions to continue to benefit from complexity reduction and transformation savings. We expect flow to improve its return on sales in line with the company's return on sales expansion and Water Solutions to do better than the overall company.

Also, for the full year, we expect corporate expenses of approximately $90 million, net interest expenses of roughly $67 million, an adjusted tax rate of approximately 17% and a share count of approximately [$165 million.]

For the first quarter, we expect sales to be up approximately 1% to 2%. We expect flow sales to be up approximately high single digits, Water Solutions sales to be down approximately low single digits, with core Water Solutions roughly flat and pool sales to be approximately flat year-over-year.

We expect to maintain normal seasonality trends where sales in Q1 are typically the lowest and Q2 are typically the highest. The rate of year-over-year growth is expected to be slightly higher in the second half of 2026 than the first half as is typical for our business.

We expect first quarter adjusted operating income to be up 2% to 5%. We expect return on sales expansion in Q1 for total Pentair including return on sales expansion in each of our three segments. Similar to sales, we expect return on sales to follow a normal seasonality pattern, with the highest rate in Q2, followed by Q3 and then Q4. We're also introducing adjusted EPS guidance for the first quarter of approximately $1.15 to $1.18, an increase of approximately 4% to 6%.

In the first half of 2026, we expect adjusted EPS to be approximately 50% of our full year adjusted EPS guide, roughly in line with our historical norm. Q1 adjusted EPS is expected to be roughly 22% of the full year, consistent with the prior three years. We are targeting strong free cash flow in 2026 of approximately 100% of net income. As a reminder, Q1 is a cash use quarter in any given year, while Q2 is typically our highest cash generation quarter.

At this time, our 2026 guidance assumes a balanced contribution from Flow, Water Solutions and Pool. We have not included a residential recovery in our guide, which we believe would be upside. We expect transformation, 80s, 20s and innovation to drive growth across our balanced portfolio. We expect new pool builds, remodels and aftermarket to be similar to 2025. We expect tariffs will have an incremental impact on Q1.

Please recall that new tariffs impacted us beginning Q2 of 2025. We expect to maintain a disciplined capital allocation strategy and deliver strong free cash flow.

Moving to Slide 18. We had roughly $70 million of tariff impact in 2025, and we expect approximately $30 million in incremental tariffs in 2026, primarily in Q1, but we believe our carryover pricing and ongoing mitigation strategies position us to offset these impacts.

Let's move to Slide 19. We look forward to welcoming you at our upcoming Investor Day on March 4, where you'll hear more about our updated long-term strategy and outlook, our growth strategies and expectations to drive future growth our Pentair business system and how it fuels continuous transformation and growth, new product launches and innovation and a lot more.

As I step into the CFO role, I'm committed to upholding Pentair's legacy of financial integrity, discipline, transparency and stakeholder engagement. I look forward to embarking on the next phase of our journey together and meeting many of you at our Investor Day in March and then throughout the year.

Thank you for your trust and partnership. Together, we are building a Pentair that is not only stronger financially but also making a lasting impact by helping our customers move, improve and enjoy water, like most essential resource.

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).

Andrew Kaplowitz, Citigroup

Hey good morning, everyone. So can you give us a little more color on what you're seeing in your commercial Water Solutions business. I think you said for Water Solutions in general start out flat in the quarter in Q1 after being down in Q4. I think you're guiding to low single digits for the year. So the visibility into that improvement that you're modeling and maybe any difference you're seeing between Manitowoc and Everpure.

Yes, I'll just start with '26. I mean, we think CWS, those two businesses returned to growth in 2026 as far as (inaudible) and filtration and remind you that even throughout '25, the North American market remained relatively strong, the volatility that we're generally seeing in the business is more of the international and the China sales and how they're flipping a little bit what the metrics look like in North America.

So we feel like we've ended the year positioning ourselves in a really good position to grow again in 2026. They're both very high-margin businesses, and we expect the contributions next year to be very solid from both.

Thanks, and then maybe just a follow-up on sort of this combination of residential flow and residential water. I think you said it has 25% of your factories, which is obviously quite a bit of a high number. So maybe you could talk a little bit about the incremental productivity opportunity that you have. I would assume something you'll highlight a little more for us at the Investor Day, but what kind of time line could you get these improvements that you're talking about?

Yes. I don't want to give away my Investor Day, but I'll give you an inter these businesses come together, form a roughly $1 billion what we call water quality management business. And as you saw from the pie charts that we shared, we get our channels aligned better on go-to-market.

If you recall, residential water treatment, which was in Water Solutions, was historically a specialty filtration play with people just designed to be high-end servicers for water softeners where the market has shifted, we believe, is into the North American plumbing channel, well diggers, which we service from the R&I side. And we believe we can bring the technologies and the channel opportunities together to create some growth synergies and begin to merge into the utility room opportunities in a broader way.

On the cost side, they both have large regional global operations, both factories and regional sales and G&A structures, and we do see a substantial amount of margin improvement in the combined business over the next several years.

Appreciate the color.

Michael Halloran, Baird.

Hey, morning everyone and thanks for everything so can we just stand on the pool side of things, maybe some help on what you're seeing in the first quarter here for that flattish guidance, all else equal. The price volume dynamics, inventory levels and the confidence in seeing that normalize through the year a bit.

Yes. So since we're thinking Bob, I promised Bob, a normal pool year when he joined the company and said it was the most steady easily to predict business that Pentair had. I still believe it's the best business Pentair has had and one of the best businesses I've ever seen. '25 ended from a full year perspective, if you look at it, mostly normal, but there was anything but normal as the quarters unfolded. So I want to start there.

I think we're well positioned in the industry. I think we're still waiting for the markets to recover. We wanted to put out a guide that reflected no residential recovery in 2026, which means a flattish pool year. And I also wanted to make sure I mentioned, Mike, that, that would also include no indication of a '27 recovery. Not that we don't believe it will happen, but that we don't want it in our guide.

And as '27 starts to recover, we would expect that demand to work its way into the back half of the year.

But we don't see that yet, and we have no evidence that that's going to happen. So we wanted to put the pool opportunity on the upside versus putting risk out in 2026. With that, I'm going to let Nick answer a couple of the dynamics.

Yeah. I'll just add, when you look at sell-in for Q4, it's up a little bit relative to sellout, which we believe balances in Q1. And then we see volume up Q2 through Q4 for flat volume for pool in our guide for the year. And we think we're being pragmatic with this guide. When you look at weather patterns in Q1, some of the freezes in the South, tariffs driving some buying patterns, we think that it's a pragmatic guide we're, again, as John said, we're just not assuming a change in residential recovery in 2026.

Okay, makes sense. And then secondarily, could you just maybe talk about capital priorities outside of the dividend, which I know you guys are going to still keep moving that higher. But buyback, how interested are you guys pursuing the buyback side? Any thoughts on the M&A side of things and actionability in the channel?

Yes. So first of all, it's good to have a healthy balance sheet. I think we're well positioned. We generate a lot of cash and don't use a lot of capital. So those are lesson to have. We're moving into our 50th year of raising the dividends and dividend King status.

So let's say we're going to continue to raise that likely. And then I look at buyback and M&A is what creates the best longer-term value if we find more hydro stops, if we find more golf streams, those are really nice acquisitions to tuck into the portfolio, and we're always actively looking for those bolt-ons. And if not, we'll begin to nibble at the stock and continued return to shareholders through buyback.

Thanks everyone

Nathan Jones, Stifel.

Please go ahead.

Good morning, everyone I guess I'll start off -- well, first, congratulations on your retirement. Bob, and thanks for all the help over (inaudible). And I start off with a couple of questions around 80s, 20s. Sometimes early in 80s, 20s, you see some headwinds to revenue from revenue that you're walking away from you guys have targeted a bit more as a growth tool. Can you talk about kind of the impact that you're expecting 80s, 20s to have in 2026 on organic growth? Is it a headwind? Is it a tailwind start there?

No headwind. All of those early, let's allow businesses to walk away from Quad four revenue are behind us. And what we have going forward is what should be a higher level of growing the 80s, which is the Quad one and the top customers we have, and we would expect those relationships to bear fruit and drive revenue higher in the upcoming next several years.

Thanks for that. I guess I'll ask a question on pricing. You did talk about seeing more inflation than expected in Q4, primarily, I think it was in the pool business. John, you talked about the amount of price that's gone through in pool, especially over the last few years and maybe the difficulty of passing through any more price.

Can you talk about how you've approached pricing for kind of normal 2026 price increases, whether you pulled back a little bit on that, whether you have any concerns about market acceptance of further price increases or just how you guys are thinking about price this year? Thanks.

Yeah. So just -- real quickly, Nathan, I just as a reminder, all of us in the equipment side of pool have our own proprietary technologies, and we buy from our unique motor suppliers, unique drive suppliers and have our own relationships.

So it's not like other industries where you have the same central buying pattern. So sometimes tariffs affect us differently across depending where our supply chains are.

I think our goal is we're not trying to do more than offset cost with price. Now we're not always able to get that perfectly, but that's our going-in general position is that we have a right to recapture our inflationary pressures in the form of price.

What we want to do, though, is work more cooperatively with our channel partners to incentivize the products we want to sell and to make sure that our dealers and our distributors are benefiting from the sale of products as well as we are. And that's how we're thinking about 2026.

We're all at our best if we're adding content to the pad from a volume perspective and not just adding price. And so we're the new innovations. We've offered a few of those in our earnings call here today of things we're trying to drive, and we want the industry to rely on us again to create that innovation pathway and everybody benefits when we're adding content and adding capability to the homeowners. So that's what we're off doing, Nathan.

Thanks

Deane Dray, Rbc Capital Markets.

Good morning, everyone. Hey, I Just on the leadership announcements, just want to say welcome to Nick, Bob, and it was noted before. I think this is your second retirement. So we'll be watching for a potential third act. And then I know he's not on the call, but Dr. Phil, I just want to congratulate him for over two decades of thought leadership in the water space, and I wish him all the best.

Thank you for that, Deane. He's been an absolute contributor to us. He's heading off to North Carolina, but we'll pass along those wishes, and we -- his contribution is enormous here.

Absolutely. I appreciate that. And I know we've already touched on price and pool, but I would love to hear what the contribution from new products were part of that price increase. And you didn't mention any early buy. I don't think it was needed at this time, but was there any contribution there?

Yeah, so just as a reminder, Deane, early buy is really about us trying to balance our manufacturing over Q4 and Q1, and we take orders into Q4 at pre next year's prices, which means we don't raise prices on those orders.

Generally, the order intake on early buy was in line with previous years and reflected in our 2026 guide. There is NPI contribution in all of our businesses. It's generally harder to find when the volume in the industry is not, but we're really excited about our new product introductions, and we shared a few of them, and we're hopeful to continue to update more of that at Investor Day, and we're excited about that early innovation aspects on all the industries that we serve.

Good to hear. And just as a follow-up, what struck me on the slide on the tariffs, Slide 18. A year ago, we were all pretty nervous about what the fallout would be and what the reactions and how could you offset. And when I look at the slide, the one that jumps off the page is how you offset all of the China impact.

And so just give us a sense of how you were able to work as the supply chain adjustments, but that zero on there, I know it came through a lot of hard work, but just some color there would be helpful.

And this is Bob. Just a clarification on that particular chart. So the first column represents the tariff impact in 2025. And so call it, $70 million. The 2026 column would be the incremental tariff impact in 2026. So think of $30 million more tariffs in 2026 than 2025.

And what happened in China, is there was some earlier headwinds at the beginning of the year on the higher tariffs, and they started to mitigate in the back half of the year, and now they're basically flat year-over-year from a China perspective mean.

Good to hear. Thank you.

Brett Linzey, Mizuho.

Hey, good morning. I appreciate all the detail and congrats to Bob. Just a follow-up on the transformation. So lots of moving pieces here, expect to deliver the $70 million in '26 and you're implementing this wave three. Maybe just talk about the phasing of that as you progress through 2026 is a little bit more heavy lifting. I know one and two continue, but as you shift to that next wave.

Yeah. So a couple of things. I mean I think we're anticipating another $70 million of year-over-year transformation next year, which, if you're doing your math correctly, kicks off that three-year contribution that Bob promised in 2024. And certainly, I am accountable for. And Nick and I are going to update everybody at Investor Day of how we see transformation in '27 and beyond.

But I think that is a net number, as I want to remind everybody. So it's net of headwinds that we see. It's also net of investments. And some of our investments are going to hit us earlier in the year, which means our overall contribution and transformation will be a little bit more skewed to the Q2, Q3 and Q4 range, but we fully expect to achieve it. And most of that is already in the funnel and to be realized versus having to be created.

Great, thank. And then just a follow-up on Slide 18, so the tariff impact and specifically, the steel aluminum copper line. So $10 million in $25 million grows to $14 million and $26 million. Does the $14 million include tariff plus some assumption for just general inflation of metals?

No, it's just the tariff impact. And if inflation continues to go forward, we kind of picture that -- pick up that in the overall right-hand side where we mentioned metal inflation is running hot. But what you see on the far left is just the tariff impact and then the right would be just your normalized inflation.

And we felt like needed to call it out because I think as we work with our channel partners, we work at our customers, we're pricing both for tariffs. We're pricing for wage inflation, and we're pricing for just general inflation overall and trying to align that by industry.

Got it. Best of luck. Thanks

Saree Boroditsky, Jefferies

Hi, good morning. Appreciate you taking the question. Just building on some of the previous guidance commentary, I believe the guidance assumes around $70 million of EBIT improvement, but I think you just said you had $70 million in cost out in 2026, plus I think you have about $10 million to $15 million from the hydro deals. So can you just talk about any headwinds embedded in the guidance that are offsetting these cost savings and deal contribution. Thank you.

Yeah, your math is correct. I think we have an investment that we're planning to make on digital and innovation and strategic priorities that comes within Adrian's role. We've got some new product launches that we're generating and getting behind we have modest volume contribution in this plan, and we have year-over-year price generally equal costs. So your math is correct a lot of moving pieces behind it, but the overall read on your view of our guide is accurate.

Appreciate that. And then maybe a bigger picture question. I know you talked about the nondiscretionary demand and pull being flattish this year, but do you expect to see any benefit from the replacement of equipment that was put in during the code as we're about five years out now. And then any benefit from the recent cold weather in the nonseasonal markets?

Yes, hard to track both. I mean both are out there is incremental demand that we think are tailwinds for us eventually to time it exactly and assume what's going to happen each year is hard. The weather is a timing issue.

Your -- the weather sometimes delays overall shipments and in sales and then the weather that we see and especially when it freezes in the northern part of Warren states, generally means breakage of product and a replacement cycle for that product. So all of that is properly captured in the guide right now and Hard to see upside at the moment.

Appreciate the color, thank you.

Andrew Krill, Deutsche Bank

Hi, good morning, everyone, So John, in some of your recent presentations, you started to like the role more consistently. It seems like Pool clearly checks that box, maybe the other two segments are a little further away from there, at least right now, the question, any like changing views on potential portfolio reshaping to achieve that?

Yes. I don't -- I mean I like the businesses we have. I mean, obviously, some are in a higher-performing space than others. I mean, I think what we'll do at Investor Day is I want to give you a look at the four businesses that kind of fall underneath the segments today share with you where we think the margin opportunities are. Certainly, remind everybody that our margin goals are a combination of growing high-margin business faster.

That would be our food service businesses and our pool businesses and making sure that our underperforming businesses or the businesses that aren't yet at industry margins are leaning into both some growth contribution, but really going after their operational efficiencies, and that's how we get to a Pentair number.

Right now, I think everybody's got the ability to feature value, which is growing EBITDA and taking advantage of our multiple times EBITDA from a value creation standpoint. We're always looking wanting to tuck in or add and be more relevant to the channels we serve as well as find adjacencies that might be growing faster than the markets, we're in, and that's what our M&A funnel and profile looks like today.

Great. That's very helpful. And then the building a little on Terry's question. Just last year, I think you were pretty explicit there was a contingency in the guide, mostly related to tariffs. So this year, have you approached the guide similarly?

Or do you think the certainty is a little bit better this year and you don't need as much of a cushion? Or would it be similar to how you -- any way you can quantify that for us? Thanks.

Yes, I'll kick it off and I'll let Nick add a word or two as he's going to be leading in as the accountable party to all of you, of course, I am as well. I think what we've done is allowed for our view of the markets and the residential view in the guide versus what we think it will be to be a little contingency as we head into the back half of the year.

We want a more balanced contribution, which is what you should be able to calculate here that all three segments generating equally contributing. That's important to me because I want to make sure, we continue to invest in Pool over the next couple of years, while we're also waiting for that recovery to occur, which means stepping up the contribution on transformation of the other two segments and making sure that we've got growth contributions across our businesses. Nick, do you want to address the contingency at all?

Yeah. I just mentioned, we think it's a very pragmatic guide. As we mentioned earlier, there's no residential recovery in our guide. And the transformation number is net of investments. We are investing in many of these businesses. We'll talk to you more about this at Investor Day, how we have differentiated investment in a couple of different pieces of our portfolio. And we expect a balanced contribution across the existing portfolio in our 2026 guidance.

Thank you.

C. Stephen Tusa, JPMorgan.

Hey guys, good morning. The pool pricing, you guys had a great fourth quarter, but I guess you're guiding -- I'm not sure I heard it correctly, but like a low single-digit type of trend line into next year. Anything you're seeing on like the competitive front that's influencing that? It just seems a little bit light relative to how you're exiting the year?

Yeah, fair point, Steve. You'll see a fairly sizable year-over-year in Q1 and then that number starts to level off as we get into more year-over-year inflationary was equal and generally the same in '25 as it was '26. So think of a higher number starting off the year and moderating as the year goes on. It's still double the normal pricing that we generally expect to have, but less than the 25% contribution by a couple of points.

But I mean, are you seeing anything? Is the consumer given where they are and where the market is? Is the consumer looking at or the dealer looking at cheaper products or any kind of like mix dynamics there?

Not in a meaningful way, Steve, but it's definitely at the front and center of my mind. I think we can't just keep adding price and enforcing consumers to pay more money. I think we've got to make sure we're working with our channel partners and that include the dealers and distributors to giving value and making sure that value is realized. And so we are raising price to cover inflation, but we're not moving price beyond what we need to cover inflation, if that answers your question.

Okay. And yes, sorry, so just for the total company, it's like 1.5 points of price, something like that or maybe 2 points of price for the total company in the bridge?

Yes, that's about right, Steve. And it's going to be slightly more than that in pool because pool has more of the inflationary pressure through the metals and the copper and also the tariffs.

Okay, awesome thanks a lot.

Nigel Coe, Wolfe Research

Good morning, Just wanted to follow up on that last point, the 2 points or so of price. Is that enough to cover the inflation. And obviously, pool is strong. So I'm assuming that the answer is yes. But think about Water Solutions, you do have a lot of raw mats especially in the Ice business. So just wondering if we're covering inflation across the portfolio.

Right now, with what we've shared, we are covering inflationary pressures. I mean obviously, if things change and there's more inflation, and there's more tariffs, we will need to go back and work with the channel to incrementally price to reflect what those new tariff impacts would be.

And just to be clear, John, is that covering a price or is some of the productivity, $70 million covering that as well? Because if we just layer in $70 million on top of your revenue guide, EPS guide does look quite conservative.

Right now, our pricing assumptions for Pentair, total Pentair are roughly a couple of points, which would mean that, that's roughly an $80 million price contribution that's offsetting roughly $80 million in overall company expected inflation.

Okay. That's very clear. And then just a quick one on FX. I think it's $9 million a pinch in 4Q, $5 billion over solutions. Just wondering what that was? And is that just a 4Q impact? Or do we see some of that coming through in 2026 as well?

Question again was on FX at the company level or at the Water Solutions?

No, FX -- $9 million for Pentair total, $5 million for Water Solutions. You had positive sales contribution but negative EBIT. Just wondering what that was. And is that a factor in 2026?

No. I mean we basically set 2026 at any point. We always set the guide and plain point where we are today. There's a small tailwind for FX in next year's guide, but it's not really a meaningful number.

(multiple speakers) particular Water Solutions headwind in income related to a cash build in certain countries. And as the local currencies strengthened. We had a negative impact in the quarter, but we have strategies in place to offset that risk going forward.

Okay, thanks, Bob, and good luck.

Brian Lee, Goldman Sachs.

Yeah, Squeezing me in. Maybe just a couple here. On M&A, I guess, you guys have been pretty active over the last couple of years. Given where valuations are, kind of how would you characterize how attractive the pipeline of opportunities is today versus maybe last year?

There's a lot. So let's say, quantity of opportunities. Our certainly emerging. I think what we're spending time on is understand the quality, and we're going to do deals that we think are bolt-on or tuck-in nicely to our current strategies. That is our first priority.

If we were to step into slight adjacencies, we've got to be really comfortable that we understand the dynamics of the businesses and make sure that the multiples we're paying would create returns for shareholders, which is why we've been doing a little bit of buyback along with the dividend and waiting for opportunity on the right M&A to come along.

Yeah, and then maybe just going back to the resegmentation, I'm not sure if you covered this, but can you kind of level set us on the revenue and margin profile of the residential flow business? And then maybe the time line to realize some of the synergies from the resegmentation, is this pretty immediate or more of an effort that impacts beyond the '26 outlook? Thank you guys.

Yes. So we did put the actual R&I business finances into the deck for '23, '24 and '25. Going forward, they'll be in the '26 actuals. So you can see what that margin profile looks like in the back. Combined, the residential piece of Water Solutions was on the lower end of the average, right?

So if you've got a couple close to 30% margin businesses, you could get to a low -- you're definitely in the teens for the residential component. So when you put those two businesses together, they're on the lower side of the contribution for overall Pentair, which means they have the most amount of future ROS potential.

Okay, makes sense. Thank you guys.

Julian Mitchell, Barclays

And thank you, Bob, for all the help the last five years. Maybe just my question was to try and focus on the organic volume guide through the year? Because based on the previous comment, it sounds like price starts out a big tailwind in Q1. And then fades quite dramatically as the year goes on. So it implies that volumes conversely start the year down decently and then have a nice bounce in the back half.

Maybe help us understand what's driving that volume assumption? Is there just some basic elasticity element here, something around comps, maybe flesh out the confidence in the volume reversal to pick up in the back half?

Yes, you're spot on with the comp and the comment around some decremental volume the first part of the year with incremental volume in the back half of the year, which leads to the flat full year volume. There's been a series of investments in several of our businesses to help drive some of that incremental growth in the back half of the year. And we think that's going to start to read out in pool in Q2 and then in our commercial water businesses in Q2 and through the rest of the year. So spot on, on the growth in the back half for volume versus the first half.

Yeah, I'd just add that I think if you take our Q1 guide is completely in line with where we've historically delivered a percentage of EPS than a percentage of revenue. So we believe it aligns nicely with the overall guide for the year. I think the difference in the '26 guide versus the two years prior is, I think the industry overall was optimistic on residential recovery. And generally, was buying in, in Q1 to take advantage of what the Q2 demand would be for the residential recovery. And we don't have that plan this year.

And therefore, we think we're going to take -- and have a more year-over-year in Q1, that's normal, meaning we're going to be slightly upside down in volume in Q1 because of that year-over-year dynamic. But then we get easier compares as we work through the rest of the year because as that again, we're expecting the next year to recover in the industry, and it's not recovering, then the buy-in from the inventory side starts to be muted in that back half of the year. And this year, we'll be in a positive scenario regarding that with this guide.

That's helpful. And then just a quick one. I know we're at the top of the hour. Just to address sort of full on the question marks, we get on increased competition in the pool industry from cheaper sourced products and so forth. Are you seeing any sign of that behavior sort of becoming more prevalent at distributors and so forth? Or do you think the competitive landscape in pool is unchanged versus a couple of years ago?

Well, I wouldn't say unchanged. I would say that on the cleaner side, which we don't participate in with our own cleaner strategy, definitely, you've got China-based AI product there on the cleaner side, which is involved in the industry.

And then on anything that's not technologically advanced or doesn't have automation or IoT, there's always a threat of a lower-cost solution replacing it, which is why we're really focused on making sure we got a fully automated pad. We driving automation solutions. We're driving higher levels of technology and value to our customers.

And regarding those particular technological solutions, we don't see the China impact influencing our outcomes at all.

Jeff Hammond, KeyBanc Capital Markets

Hey, good morning. Thanks for putting me in.

Just on -- maybe to go at transformation a little bit differently. You had buckets kind of in the last Analyst Day. Can you talk about what buckets kind of ran ahead and where there's still opportunities as you look into the next transformation period. Seems like maybe you were a little behind on sourcing because of the volume not coming through and then footprint.

Jeff, I'm going to start off and then I'll have Nick preview a little bit of where we're going. First of all, I think, as I said, we hit our transformation goals on a dollar basis, both on a margin basis. But if you go against the original expectations, we underperformed on one element, which was the volume leverage and operational efficiencies in the factory.

We still have that as opportunity, meaning we've been driving the labor overhead efficiencies, the factory efficiencies. And when volume comes back, you'll see that start to work its way through the transformation savings of the organization.

We overperformed in sourcing, and we did really, really well on pricing to not only drive value but also to offset the dynamics around tariffs. But I don't know what you want to add give them all of the Analyst Day that you give.

Yeah, I would say that the $70 million that we've got, I just want to remind everyone again, that is net of investment, which means we're investing in our businesses and delivering the $70 million. The sourcing pipeline that we have for 2026 is robust. The operational efficiency pipeline is robust.

And then we've got some org excellence opportunities as well. And we'll talk to you about by category, by business, how we're thinking about transformation.

Certain businesses are better poised for growth. We're going to invest incremental dollars for them to grow, whereas other businesses have more of that sourcing, operational excellence opportunity that we're going to focus on in '26 and beyond.

Jeff, I will say that we expect to be more balanced between growth contribution and transformation as we go forward, but transformation is a long way from over. Okay. I just want to thank everybody for joining the call today. In closing, I want to reiterate some key themes on Slide 20.

We delivered our 15th consecutive quarter of margin expansion and drove another record year in sales and profitability. We introduced our 2026 sales and adjusted EPS outlook and remain confident in our long-term strategy.

We expect a long runway of productivity, savings driven by transformation and 80s, 20s and our focused water strategy and strong execution continue to build a solid foundation with optimal operational efficiency to help drive long-term growth, profitability and shareholder value.

Lastly, we believe we are well positioned to address opportunities from favorable secular trends in water with the right long-term strategy. I want to thank everyone, and we look forward to sharing our story at our Investor Day on March 4. Have a great day.

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