Pentair plc Q4 FY2024 earnings call

Management Statement and Operational Highlights

• 2024 was a transformative year with record profitability and cash flow. Transformation initiatives delivered over $100 million in productivity savings. The 80/20 strategy was launched across segments, moving beyond analysis to action plans.
• Record adjusted operating income, ROS, and adjusted EPS in 2024. Full year 2024 sales were $4.1 billion, adjusted operating income $959 million (up 12%), ROS 23.5% (expanding 270 basis points), and adjusted EPS $4.33 (up 15%).
• Introduced 2025 adjusted EPS guidance of $4.65 to $4.80 (up 9% at midpoint). Expect Transformation and 80/20 to drive margin expansion in 2025 and beyond.
• Strong free cash flow in 2024 ($693 million) and 49th consecutive dividend increase in 2025.

Segment Performance

• Flow: Q4 2024 sales down 5% to $361 million; reportable segment income up 13% to $X and ROS increased 320 basis points to 20.4%. Full year 2024 sales decreased 4% to $1.5 billion; reportable segment income grew 13% and ROS increased 320 basis points to 21%, a record margin.
• Water Solutions: Q4 2024 sales decreased 4% to $258 million; reportable segment income grew 21% to $62 million and ROS expanded 500 basis points to 24.1%. Full year 2024 sales decreased 4%; reportable segment income grew 3% and ROS increased 160 basis points to 22.6%, a new full year record.
• Pool: Q4 2024 sales grew 5% to $354 million; reportable segment income increased 14% and ROS increased 250 basis points to 33.8%. Full year 2024 sales grew 7%; reportable segment income increased 14% and ROS increased 220 basis points to 33.2%, a new annual record.

Guidance

• 2025 adjusted EPS guidance: $4.65 to $4.80 (up 9% at midpoint).
• Full year 2025 ROS expected to be approximately 24.5% to 25%.
• Target strong free cash flow in 2025 of 100% of net income.
• Acknowledges impact of China tariffs within guidance and has captured potential Canada and Mexico tariff risks.
• First quarter 2025 sales expected down 3% to 4% ($975M to $985M), adjusted EPS ~$1 to $1.02 (up ~6% to 9%).

Risks

• Tariffs: Potential impact of tariffs on China, Mexico, and Canada, though pricing is expected to offset some costs.
• Macroeconomic uncertainty: Continued headwinds in residential housing markets due to higher interest rates and delayed recovery.
• Geopolitical uncertainties: Impact on supply chains and market conditions.

Question and Answer

Q: Brett Linzey from Mizuho asked about the split between legacy Transformation program and new 80/20 and cumulative value savings of 80/20.

A: John Stauch responded that 80/20 helps focus the business, identifying growth areas and benefiting Transformation pillars, with savings captured in the productivity column.

Q: Julian Mitchell from Barclays inquired about seasonality and tariff phasing.

A: John Stauch noted Q1 2025 as a challenging quarter due to headwinds, with most tariff impact rolling out between Q2-Q4. Bob Fishman discussed Pool market inventory and new build market health.

Q: Steve Tusa from JPMorgan asked about tariffs embedded in guidance and inflation.

A: John Stauch and Bob Fishman explained that China tariffs are embedded with price offsetting, and inflation is moderating but slightly impacted by tariff-related price increases.

Q: Bryan Blair from Oppenheimer asked about Transformation's impact on segments and G&F acquisition.

A: Bob Fishman discussed segment participation in ROS expansion, and John Stauch highlighted the G&F acquisition's strategic fit in the Pool offering.

Q: Jeff Hammond from KeyBanc inquired about margin expansion and Water Solutions resi and commercial outlook.

A: John Stauch addressed residential headwinds due to interest rates and consumer financing, and commercial ice market challenges related to China rollout.

Q: Nigel Coe from Wolfe Research asked about $80 million initiatives and Water Solutions Mexico exposure.

A: John Stauch clarified the $80 million is net of investments, and Water Solutions has more exposure to Mexico due to residential product manufacturing there.

Q: Adam Farley from Stifel asked about 80/20 near-term revenue headwinds and Quad 1 growth investments.

A: John Stauch stated 80/20 isn't a revenue limiter, with Water Solutions seeing exits of Quad 4 revenue to drive margin performance, and Quad 1 customers showing opportunities.

Q: Deane Dray from RBC Capital Markets asked about Pool growth rates and normalized levels.

A: John Stauch discussed low new pool build levels, expecting mid-2025 recovery as rates stabilize, and mentioned hurricane and wildfire impacts on Pool demand.

Q: Andrew Krill from Deutsche Bank asked about 2026 margin targets and 80/20 sales bridge.

A: Bob Fishman explained 2026 ROS target of 26% assumes mid-single-digit growth, and John Stauch noted 80/20 has no more than ~one point headwind from Quad 4 exits overall.

Q: Vince Valentini from TD Cowen asked about debt paydown and residential end market improvement.

A: Bob Fishman discussed balanced capital allocation including debt paydown, and John Stauch expected modest residential improvement in the second half as rates stabilize.

Q: Saree Boroditsky from Jefferies asked about 80/20 growth in top clients and products and tariffs on sourcing.

A: John Stauch discussed focusing on core products and customers, and strategizing on sourcing in Mexico to offset tariff impacts.

Q: Brian Lee from Goldman Sachs asked about Pool price/volume and tariff competitive dynamics.

A: Bob Fishman noted Pool price expectations, and John Stauch discussed global competitiveness and reacting to tariff uncertainties.