Pentair PLC

NYSE:PNR

Good morning, everyone, and welcome to the Pentair First Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, today's event is being recorded.

At this time, I'd like to turn the conference call over to Shelly Hubbard, Vice President of Investor Relations. Please go ahead.

Thank you, operator, and welcome to Pentair's First Quarter 2025 Earnings Conference Call. On the call with me are John Stauch, our President and Chief Executive Officer; and Bob Fishman, our Chief Financial Officer. On today's call we will provide details on our first quarter performance as outlined in this morning's press release.

On the Pentair Investor Relations website, you can find our earnings release and slide deck which is intended to supplement our prepared remarks during today's call and provide a reconciliation of differences between GAAP and non-GAAP financial measures that we will reference. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP. They are included as additional clarifying items to aid investors in further understanding the company's performance in addition to the impact these items and events have on the financial results.

Before we begin, let me remind you that during our presentation today, 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. Following our prepared remarks, we will open the call up for questions. Please limit your questions to 2 and reenter the queue if needed to allow everyone an opportunity to participate.

I will now turn the call over to John.

Thank you, Shelly, and good morning, everyone. Let's turn to the Q1 executive summary on Slide 7. We delivered our 12th consecutive quarter of margin expansion and another strong quarter of earnings growth while operating in a dynamic environment. Our businesses and functional teams continue to execute with agility across our move, improve and enjoy water segments to mitigate tariff impacts, launch innovation, win awards, generate new accounts, expand existing key accounts, delivered margin expansion driven by transformation and continue to implement 80/20.

I am very grateful for how our teams continue to rise to the challenge and deliver for customers while creating value for shareholders. In the first quarter, sales were down 1% and were better than expected with Pool growing 7%, offset by difficult comparisons at the water within Water Solutions and continued challenges in residential and irrigation markets within Flow. Adjusted operating income increased 12% to $243 million. ROS expanded by 260 basis points to 24% and adjusted EPS was $1.11, up 18%. We repurchased $50 million of shares and increased our dividend for the 49th consecutive year, further solidifying our dividend aristocrat status. Lastly, we maintained our full year '25 sales and adjusted EPS guidance of $4.65 to $4.80, which is up approximately 9% at the midpoint year-over-year.

Let's move to the tariff and inflation update on Slide 8. We are remaining agile in a rapidly changing environment. Bob will provide more detail on our estimated tariff impact and mitigation strategies in a moment. Our initial guidance on February 4 incorporated estimated impacts from tariffs and an expectation that volume would likely decline as prices rose. As a result, while the tariff amounts by country have changed since our last earnings call and some tariffs have been paused, we feel comfortable maintaining our initial 2025 sales and adjusted 2025 EPS guidance with the current tariff index. We have taken several steps to mitigate tariffs across our portfolio and continue to position our businesses to be successful in both the short term and the long term.

We believe we have multiple advantages, including a 2-step distribution model, representing about 75% of our sales that generally enables us to pass along price increases when we are not unique in dealing with inflationary pressures. A high recurring revenue base generated from a majority of nondiscretionary placement products, a global supply chain with reduced reliance in China, a strong U.S. manufacturing footprint, strong free cash flow, a solid balance sheet and a well-balanced capital deployment strategy across debt repayment, dividends, share repurchases and M&A. We are also applying our prior inflationary learnings to manage our channel and maximize our performance.

Let's turn to Slide 9. Despite a dynamic environment, we continue to deliver on our transformation goals to drive margin expansion. In 2023 and 2024 combined, we saved $174 million due to our transformation initiatives, and we expect to deliver another $80 million in [ shipments ]. We expect our sourcing waves 1 and 2 to continue to contribute to these savings. We are implementing wave 3, which we expect will begin to add another layer of savings in 2025 and beyond. Looking at operational excellence, we are driving operational efficiency with our factories through lean practices, automation and digital transformation and optimizing our operational footprint. We expect to rapidly accelerate productivity when volumes within our core markets return to normal.

As we continue to implement 80/20, we expect to drive high-value core sales growth long term by over serving our best customers and optimizing the rest. We have taken actions to transition our Quad 3 and 4 lower-margin customers to purchase directly from our top distributors or except new terms and conditions that we expect to enable us to become a larger and more profitable business. We are also optimizing the selection of products we offer to reduce complexity within our operations and advance productivity. Additionally, 80/20 actions have helped us to absorb higher inflationary costs. We see 80/20 as an enabler to transformation by reducing complexity and streamlining our businesses.

Let's turn to Slide 10. Before I hand the call over to Bob, I wanted to reiterate some key takeaways. We had solid execution across all 3 of our segments. In Q1, Pool grew 7%, while transformation and strong execution drove triple-digit margin expansion and double-digit earnings growth for Pentair. We delivered better-than-expected productivity savings from transformation despite lower volumes. We are maintaining our initial sales and adjusted EPS 2025 guidance provided on February 4, which includes estimated tariff impacts, mitigation strategies and the use of our 80/20 and transportation toolkit. We continue to build the foundation of optimal operational efficiency that can be leveraged when volume returns to normal. We have a balanced water portfolio with a capital-light business model and the ability to mostly pass longs. And finally, we have a strong key free cash flow, a solid balance sheet, a low net debt-to-EBITDA leverage ratio and a balanced capital deployment strategy.

As a water company providing solutions to move, improve and enjoy water, we continue to believe that we are well positioned to address opportunities from favorable secular trends by getting water to where it needs to be and away from where it doesn't and by filtering and improving water for people to drink and enjoy.

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

Thank you, John, and good morning, everyone. Let's start on Slide 11. We delivered another strong quarter of quality earnings with triple-digit margin expansion and double-digit adjusted income and EPS growth despite lower volume. Sales, margin and adjusted earnings outperformed our expectations. In Q1, sales were $1 billion, down 1%, adjusted operating income increased 12% to $243 million. ROS expanded 260 basis points to 24%, driven primarily by transformation and adjusted EPS increased 18% to $1.11. Core sales were down 1% year-over-year, driven by 4% growth in Pool which was offset a 3% decline in Flow and a 4% decline in Water Solutions. Pool & Water Solutions outperformed our expectations, while Flow was in line with our guidance.

Let's turn to Slide 12. Flow sales declined 4% year-over-year. Within Flow, residential sales were down 6% as higher interest rates continued to pressure residential end markets. Commercial sales rose 3%, marking the 11th consecutive quarter of year-over-year sales growth. And industrial sales were down 9% driven by a focus on profitable and higher-margin business. Segment income grew 8% and return on sales expanded 260 basis points to nearly 23%. The strong margin expansion was a result of continued progress on our transformation initiatives. Flow continued to benefit from changes in market strategies over the last 2 years and its focus on complexity reduction.

Please turn to Slide 13. In Q1, Water Solutions sales declined 5% to $258 million which outperformed our expectations. Sales in commercial filtration year-over-year, while ice performed as expected and residential performed better than expected. As a reminder, the ice business faced difficult year-over-year comparisons as Q1 in the prior year included in China. We expect ice to begin to return to more normalized growth rates going forward. Segment income grew 9% to $61 million and return on sales expanded 310 basis points to 23.5%, driven by higher productivity from transformation and 80/20 actions in Q1.

Please turn to Slide 14. In Q1, Pool sales increased 7% to $384 million driven by price volume and our Q4 2024 acquisition. Segment income was $126 million, up 4% and return on sales increased 200 basis points to 32.8%, driven by sales growth and transformation.

Please turn to Slide 15. We are well into our transformation journey and continue to see strong results. Last quarter, we increased our 2026 ROS target from 24% as provided in our March 2024 Investor Day to 26%. Our goal is to drive incremental sales growth through value-based pricing and 80/20 and to deliver return on sales of 26% in 2026 or margin expansion of over 700 basis points since 2022, utilizing the 4 pillars of transformation. We achieved 23.5% in 2024 and expect to deliver approximately 25% in 2025. We've made progress as our teams have continued to successfully implement those initiatives.

Please turn to Slide 16. Our balance sheet remains strong and our return on invested capital continued to improve, nearly reaching 16% in Q1. Long term, we continue to target high teens ROIC. Our net debt leverage ratio was 1.6x, down from 2.1x a year ago. During the quarter, we repurchased $50 million of shares. Over the last 2 years, our strong free cash flow has enabled us to deploy approximately $1.4 billion in capital via debt paydown, dividends, share repurchases and their strategic acquisitions. We plan to remain disciplined with our capital and have additional flexibility to strategically allocate capital to areas with the highest shareholder returns.

Let's turn to our outlook on Slide 17. For the full year, we are maintaining our adjusted EPS guidance of approximately $4.65 to $4.80 which is up roughly 7% to 11% year-over-year. Also for the full year, we are maintaining our sales guidance of approximately flat to up 2% which assumes FX and tariff-related price increases are roughly offset by anticipated tariff-related volume declines. We expect adjusted operating income to increase approximately 6% to 9%, which includes the assumption that price increases are offset by higher tariffs, net of mitigation actions and associated volume drop-through. We continue to expect to drive approximately $80 million in transformation savings this year, net of investments.

For the second quarter, we expect sales to be up approximately 1% to 2%. We expect Pool sales to be up approximately mid-single digits and Water Solutions and Flow sales to be roughly flat. We expect second quarter adjusted operating income to increase approximately 5% to 8% and we expect margin expansion across all 3 segments in Q2. We're also introducing adjusted EPS guidance for the second quarter of approximately $1.31 to $1.35, up roughly 7% to 11%.

Let's turn to Slide 18. The purpose of this chart is to highlight the estimated tariff impact based on what we know today. The estimated tariff impact of roughly $140 million net of mitigation actions is primarily from China, as you can see on the left-hand side of the chart. The remainder of the tariffs include smaller amounts from Mexico, Europe, rest of the world and the steel and aluminum tariffs. In our initial 2025 guidance, we had included an estimated impact of enacted and potential tariffs, and we began taking actions in Q1 to mitigate risk. We've taken further actions to mitigate the impact of tariffs.

Some example of these include tariff-related price increases, inventory pre-buys and capping orders to optimize our supply chain, inventory and production. Over 90% of goods that we import to the U.S. from Mexico, qualify under the current USMCA. And through our transformation sourcing initiatives, we have already lowered our supply and production from China over the last 3 years. We also expect that we can pass along pricing through our channel as 75% of our sales are to 2-step distribution in which we sell into distribution who then sells to dealers and ultimately the end consumer. As a reminder, over 75% of our sales are also aftermarket or brake fix related revenue.

We continue to monitor the rapidly changing landscape and remain agile to quickly adjust as necessary. We believe that we are taking the right actions to mitigate tariff impacts. We have a strong balance sheet and [ balanced ] capital allocation strategy. Our significant free cash flow enables us to continue to pay down debt, increase our dividend, repurchase shares and remain strategic on M&A. We plan to continue to deploy capital in areas that drive the highest return for our shareholders while being mindful of protecting capital during periods of macroeconomic and geopolitical uncertainty.

I would now like to turn the call over to the operator for Q&A, after which John will have a few closing remarks. Operator, please open the line for questions. Thank you.

[Operator Instructions] Our first question today comes from Julian Mitchell from Barclays.

Sorry about that. Maybe just my first question would be around the assumptions on organic sales as you're going through the year and help us understand the volume assumption embedded in the organic sales guide, do you assume a sort of offset one-for-one of higher price of, say, 3 points offset by lower volume?

Yes, Julian, as a reminder, I think when we started this year, we did not anticipate that we would see recovery in the North American residential housing, which is roughly 50% of our revenue. And we counted on it a little bit last year and thought we'd see lower interest rates. When we entered this year, we've kind of put that on the upside to our original guide. As you take a look at the way tariffs are coming through, they're different than what we anticipate on February 4, but they still are going to [ lead ] to higher prices through the channel. And we think we could see defeaturing, we think we could see consumers defer. So we're anticipating that. We don't know that, but that is the assumption in our current guide is that the more price goes up, the more volume we'll likely see start to soften.

That's helpful. And then just to understand on the tariff element, the sort of $140 million gross, is that annualized or is that sort of in year in fiscal '25. And any help you could give us on different in sort of phasing of the offsets through the year or differences in sort of offsets by segment. Any sort of color around that, please?

Yes, I'll start off, and I'll give it to Bob. I mean you're right on your assumption, it is the in-year 2025. I mean I think it would be slightly higher on an annual basis. We are getting some small benefits related to mitigation of buy-aheads and the things that we bought in Q1 and also the fact that we do have inventory on hand. So as you think about the tariffs, it will mostly hit the second half of the year as it unfolds. And then our pricing is staged between April actions, May actions and potentially June actions, if necessary. And so those, as we head into 2026, more than offset the tariffs, and they more than offset this year as they phase in, Julian.

And then Bob, do you want to give it by segment?

Yes. I think the only thing I would add is that we think of that $140 million net of mitigating actions is split about 1/3, 1/3, 1/3 between Flow, Water Solutions and Pool.

And our next question comes from Andy Kaplowitz from Citigroup.

John and Bob, you're assuming you could absorb the entire $140 million of -- amount of tariffs in your margin guidance which I think is decently handing your original tariff assumption from last quarter. And I think today, you -- Bob, you guided to the higher end of your margin range 25%. Is that basically all at prices that gets you there? Do you have higher embedded productivity in your forecast? And how much of it all is currency helping you in terms of talent?

Yes. From a -- I'll start with the last one. Currency helps a little bit. I think of it as being roughly 50 basis points, but not much help to the income or the bottom line. I would say that, to John's point, it's primarily us pricing to exceed the tariffs of volume drop that's roughly in line with that. We do benefit slightly from mix that's helping us out a little bit. But overall, we feel good that we're closer to that 25% ROS as we run the different scenarios.

That's helpful. And then John, you didn't change your Pool forecast growth for '25, but maybe give us a little more into what you're seeing as the selling season develops here in Q2. The rates, as you know, they look like they want to stay relatively high. Is 60,000 new pool still the right number, positive break in 6? Just any color would be helpful in the year.

Yes. I think we saw, as we normally see, if there was any movement in Q1, most of the movement that we saw in the sell-through sell-in was more what we think is weather related in certain regions getting off to a slower start. As we head into Q2, we're thinking that we're right in line with where we thought we were before. As the season unfolds, most of those pools were already being built or the permits were in place and they needed to get. And then we would anticipate in this particular outlook that we would see some softening in either the remodeling aspect of the Pool or as I said earlier, some discretionary pushouts on items as it relates to even the break and fix in the back half of the year.

So those price increases will go in and then we would expect that consumers will look for the best timing of when they should product. So I think that's a fair balanced approach. I think it's still a good industry in the sense that we're at more of a historical low level. So significant downside from here is hard to see. And we're going to have to work harder on getting consumers and getting our dealers to sell the high-end features that we want within this environment.

Our next question comes from Deane Dray from RBC Capital Markets.

I was hoping to get some more color regarding your prepositioning of inventory ahead of tariffs? What was the impact there? And then in the release, you talked about also capping orders for customers. Just what's the strategy there? How has that played out? And I was curious if anyone, any of your suppliers were capping any of your orders for prepositioning?

So Deane, I mean, just on the mitigating. Think about a couple of months of inventory being pretty basic throughout the channel. And given the fact that we're talking about the substantial tariffs coming from China, most of the things are preordered and on their way. And so that's -- it's a modest amount of number, but it does help the timing and the delay perspective, especially given the fact that most of it is raw materials, which is a subcomponent of a subcomponent. So it's -- I wouldn't say it's really on the action we took on. It's just the normal part of the supply chain that we were dealing with. As far as the overall environment of what we're looking at, I would say that we're capping the order strategy primarily as a learning from the supply chain issue we had, where if we let the channel just buy whatever it wants to buy, it's going to try to get ahead of all of the potential increases and you can create shadow inventory and inventory. So we're working with our top customers and giving them an ability to order at sell-through rates which then gives them the necessary inventory they have to meet the demand, but doesn't get us in a situation where we get behind or disruptive in the supply chain again. Just the learning from the last go around.

Got it. And then just broadly, what's your expectation for the businesses? Any demand destruction that's happened from all the tariff uncertainty and are you seeing any project pushouts, cancellations, anything that would be material in your outlook?

Not yet, Deane. I mean we are definitely looking for the fact. I mean we are a small part of usually a project, and we are definitely more in the break and fix or the needed components. But we're keeping an eye on the future projects where a large project could be paused or deferred and this would be more in the food and beverage side and/or the large infrastructure pump side. We have not yet seen anything, but we're keeping an eye on it and making sure that we're looking through sell-throughs and making sure we're looking at front log orders to make sure we're not in an adverse position there. Now most of those projects are local for local, and so they're not necessarily impacted by each tariffs.

And our next question comes from Mike Halloran from Baird.

So a little bit of a follow-up to that. How is the channel reacting at this point? I know you limited or eliminating the amount they can pre-buy. Is there any sense that they're trying to take inventory down on any levels? How are they responding? And earlier, you mentioned about the sales force having to be a little bit more proactive to upsell. Have you put that in place? And how are you interacting with the channel when it comes to...

I wouldn't say isn't a flip or joking way. This is probably the most exhaustive quarter I can ever remember that because we run so many different scenarios and so many different alternatives of what this could be. I mean think about the way this quarter played out, the way the announcements came, the way you heard about them, the reactions, the counter tariffs, the retaliatory. Tariffs are in, they're paused. And so I think the right answer to say is everybody is looking and seeking that solution like I think right now, as I mentioned, I think a lot of projects are getting completed now. We're put in motion a while ago, and you're just to the stage where you're going to finish that pool or you're going to finish that particular need and that housing development. I think the bigger decisions and the way we must going to react is still out there in a couple of quarters like depending on what scenario we see play out, just being honest.

Yes. No, and that makes sense. And that makes sense. On the capital usage side, any change in how you're thinking about buybacks in the short term? I'm guessing no shift on the M&A side. But if thing is interesting on that side, certainly curious there, too.

Yes. You noticed that we did do a $50 million share buyback in Q1. That's a little unusual for us. Usually, we wait to our bigger free cash flow quarter in Q2 but we felt good about the free cash flow. It's a $70 million better than the prior year. But overall, I would say we're continuing to be disciplined around our capital allocation, continuing to do debt pay down, share buyback. We increased our dividend by 9% this year. And looking at strategic M&A if they come our way. So that balanced approach has been good to us, and I think we'll continue to look at ROIC, which was close to 16% in the quarter and stay very focused on shareholder returns.

Our next question comes from Steve Tusa from JPMorgan.

Morning. Can you hear me okay?

Yes. No, we can.

Sorry about that. So I just want to make sure from an annual basis, you guys didn't provide the bridge, the profit bridge in the [ debt ]. Just wanted to make sure that the kind of $80 million of productivity is still there, kind of the core inflation number, I think it was roughly that is also still there? And then, I guess, if we just assume the $140 million gets entirely offset at the price, that would get us to like a 5% year-over-year price number for the company in total. Are those -- and then you just stick on the $140 million of tariff headwind? Is that are those kind of the moving parts of the bridge and then you back out volume?

Well, we didn't provide a bridge, but if we were, that would be pretty close to it. Steve, I'd answer, yes, yes and yes. Your price assumption makes sense to us. The productivity has stayed at $80 million net of investment, and we're off to pretty fast start here in Q1 versus last year. And then the core inflation number prior to tariffs make sense as well.

Got it. Okay. And then just one last one, just on Pool. I'm not sure if I caught this before, but how does the like channel telling you about? I think you would -- that if you address these tariffs, you would expect some demand destruction. Any feedback on the channel on that so far?

Not yet, Steve. I think we're well positioned to -- I mean, 80/20 has been a great tool for us. Keep in mind, we're really only shipping to a handful of key distributors now directly as part of the 80/20 effort. And so it's a lot less channel partners that we have to work through. And I think in -- from our perspective, we think all of them think they're being treated fairly. And I think right now, what you're hoping for is that you don't see large price increases that would be disruptive or having price decreases in the future. And so we paced out the price increases, and I think we've done that in a thoughtful way. And I think so far, it's given the channel heads up on what's coming and are prepared for it.

Our next question comes from Jeff Hammond from KeyBanc Capital Markets.

Just the tariff detail is great. Can you just level set us on what percentage of your cost of goods sold source kind of today versus 3 years ago, it seems like you've been moving it. And then if we kind of live in this world going forward, what are the big changes you're contemplating to your sourcing and manufacturing footprint long term?

Yes. I mean, mathematically, Jeff, when you calculate, you'll see that it's just less than $100 million that's sourced from China. It doesn't seem like a lot, but you put a big pretty hefty tariff on there, and it starts to impact us. It also is one of those situations where very little of it is finished goods. And so a lot of it is a set of a subset, which means it's spread across a lot of different products and a lot of different motors and items like that, that take time to actually unwind sense that we have to get certifications. We have to get approvals, we have to reengineer. So we're in a situation where even though it's not a lot, it's still enough to be annoying and we're working through that.

To answer your other question, it would have been about 2.5x that if we would have went back 3 or 4 years ago. And as we were looking through our transformation process, we were able to mitigate a lot of that single country exposure. Did not think this was going to come. I'm not going to say that's why we did it. We really just wanted to spread out the purchase by across many different suppliers so that we weren't in any risk situation.

Okay. That's helpful. And then is there anything in the guide contemplated around restructuring actions you might take if you do see that demand destruction and any kind of ability to pull forward or kind of ramp up transformation above that $80 million if we do start to see that demand destruction?

Yes, Jeff, we're in the process of looking at all that. We don't forecast the actual transformation impact. But I think the next wave of projects would be probably relatively reposition our supply chains and how do we reposition our factories to be more effective. Most of that would be realized in 2026 and beyond because it would take time to actually benefit from that cost out.

Yes. And from a transformation perspective, we're always working on a funnel that's 2 to 3x higher than our commit. And so that gives us the flexibility to use transformation as we need to.

Our next question comes from Nathan Jones from Stifel.

Good morning, everyone. I'll start with a question on competitive differences. I'm sure your supply chain is not always exactly the same positioning as your competitors' supply chain. Are there places where you see either risks or opportunities given an advantaged or disadvantaged supply chain relative to your competitors?

Yes. I mean, and is why I chose the wording I chose and that second bullet on the slide, that we're going to position ourselves to be the best for our business in the short run in the long run, meaning some of our businesses don't have the ability to just pull the price lever. They're going to have to compete, and we're likely to see some margin challenges there as we work through the longer-term actions and some of our businesses are in a situation where the price that might actually exceed the tariffs.

Okay. And I guess then on the China sourcing, it's less than it used, but it's still when you put a 145% tariff on it pretty material. Are there already plan enacted to move more of that supply chain out of China? Can you get the whole lot out of China? Are there things that you can only get from China. How should we think about that? I know you said that's probably until 2026 and that could happen.

Yes, yes and yes to what you just said. There's things we can only get from China. We're going to have to make a determination if customers still want that product. So embedded in some of that volume, which is some of the mitigating aspects as we just might not be able to carry that product line going forward because we can't be competitive, but it's the only place that could be sourced at. And then that addresses the mix issue that Bob said, how do we move somebody to -- it might be a more expensive product line on a normalized basis, but probably less expensive given the tariffs and probably provides a better solution. And then that helps free up what the supply chain could look like in the future and then we could start to assess what we need to do longer term.

Our next question comes from Bryan Blair from Oppenheimer.

Obviously, you're pacing ahead of the $80 million in transformation benefit for the year. And if we assume that $80 million is the number and that does not move higher. How should we think about the phasing or cadence of the remaining $56 million or Q2 to Q4? And how does that shake out by segment?

That $56 million would be pretty evenly spread for each of the quarters. And by segment, it continues to be a Flow play. Water Solutions also has some complexity reduction. So we usually look at Flow and Water Solutions first. And then Pool, this will be, if they drive the growth that we forecasted in Q2, this will be their executive quarter of top line growth, and that certainly helps the leverage. So again, feel good about all 3 segments participating in the transformation.

Understood. Appreciate the detail. And you maintained the consolidated ROS outlook for the year actually signaled at the higher end of the range, which is encouraging. Is there any change in expectation by segment you had last quarter, I believe, broken out around 100 basis points in the Pool, roughly equal contribution from the other segments. Just curious with everything that's going on and in cards of navigating this environment, if the platform level expectations have shifted.

Really, those estimates continue to track well for this forecast.

Our next question comes from Andrew Krill from Deutsche Bank.

So to step back and take a slightly longer-term view, but I know you mentioned again your 2026 targets, including the 26% margin. And I think as of last earnings, you said low single-digit growth this year and next year was kind of a path and assumption to get there. So just what's your level of confidence is still hitting that margin target in 2026. And let's say, we did have some form of a mini recession here. Like you still think you have enough contingency in those plans to get to that 26% margin next year?

Yes. We continue to feel good about that 26%. So something around 25% this year, 26% led by transformation next year. So I had that in my prepared remarks, and we continue to feel good about the 26% in '26.

Okay. Great. And on just April, I know it's in the quarter, but just anything noteworthy in the first week or 2, you might have some information on April [ next year ]?

No, our guide includes all that. Obviously, we'll expect to see a lot of different order patterns here in Q2 depending on how the channels are working through the various tariff impacts. And we're looking at sell-through. We're looking at all the data. And we think our Q2 is the best practical guide we have and full year is the best practical guide we have.

Our next question comes from Joe Giordano from Cowen.

John, you are around during the Tyco days. So to say that this is like the most exhausting quarter you remember. That is a strong statement.

That is true, and I had a dual job back in those days, too, but yes, this is the most exhaustive. And by the way, I don't mean that for me, I worry about all the finance teams and the operations and sourcing teams. I mean you're doing transformation and then layer on top of that, relooking at the supply chain again and all the different impacts. I couldn't be more proud and grateful for the work that the entire team has done.

So just curious on these price increases, are they different than normal ones? Like how specifically tied are they to tariffs like if something happened tomorrow and tariffs go away, do you have to go back out and cancel these price increases?

No. I mean, we generally don't have a channel that loves the charge or a specific incremental amount that's tied to a particular product line. It's easier to do more across the board types of actions. What I would say is different this time, and we are pacing them out. So we have more of 30-day increments, which allows us to continue to react to what's known and to anticipate what could happen. And I think that allows the channel to generally get ahead a little bit of where they need to be. So there's about 75% of the price actions to cover everything is included or has been actioned already and the rest has been notified that it's still coming.

Yes. We really like the phased approach around pricing. It allows us to [ react ] to the changing circumstances. So I would say that's something different than what we've done in the past.

Is there something -- is there exposure we need to consider on stuff that's currently on hiatus like some of the electronics that are on temporary exclusions from tariffs that may need to come in. That be already contemplated in the price increases you've announced?

I think it's not meaningful. I would tell you I had a worst-case scenario at one point and it literally said worst-case scenario, and then this exceeds the worst-case scenario. So I won't say that this is the final, final. I think we're going to see lots of movements, and we're going to have to capture by channel and by product line and by source, what those movements are and react accordingly. I do think if more tariffs come in, there's a likelihood that maybe some tariffs go away and we'll have.

Our next question comes from Brian Lee from Goldman Sachs.

This is Nick Ash on for Brian Lee. Can you guys hear me?

Yes.

Trickle back on 1 of the 80/20 questions earlier. I guess what impact are you seeing, if any, progress in relation to the tariffs and timing and not sure if we're thinking about this the right way. But if you're mitigant one of the tactics is to move from Quad 4 customers do Quad 3 or push them out by raising prices. Could this potentially accelerate 80/20 in that sense? Any color would be helpful.

Yes, it does. And it will get captured in volume. I don't think it's in the intention or acceleration of letting our customers go, it's the natural reaction to we want to take care of Quad 1, which is our best customers and our best products. And that's where the majority of the 80s are and that's our focus. So we want to get that right and we can't necessarily continue to make or produce or source a lot of the Quad 4 product because of the impact that tariffs have on it. So it's discontinuing it, which is part of the volume drop, it's one solution, raising those prices and moving the customers around the quadrants is another solution, but feel really good about having the 80/20 toolkit at our disposal and really happy as part of the Pentair business system, given what we're dealing with.

Our next question comes from Andrew Buscaglia from BNP Paribas.

So just based on a whole guidance and some of your commentary, I would assume you probably have some negative Pool volumes going forward or slightly negative, but your pricing is strong. So how do you think about being able to expand margins, especially relative to the comps you have in the back half of this year. Is that the goal here still?

Yes. We still feel good about that approximately 100 basis point improvement in Pool's return on sales. Again, there's not just the volume, but in addition to that, a number of the transformation pillars that they've been working on as well. So to drive the ROS improvement continuing to be very focused on costs and the mix of the business as well.

I'd add to it that we look at this as net of investment, and there's a fair amount of growth investment in the transformation number. And those growth investments are what we call sales plays, where we sample, a particular sales play in a different region, and then we'll scale it. And clearly, Water Solutions, parts of Flow and Pool have the majority of that. If it's an environment where no matter what effort we're trying to put at it, we're not going to see that incremental volume, then that's another lever that we have at our disposal as the year unfolds.

Okay. And then I was surprised to see the commentary around your distributors and raising prices. I would think you'd have some pushback. So I guess my question is to you...

Nobody wants them, I'll be honest. It's about first of all, do we have to do them. And if you have to do that, are they being fairly implemented and is everybody still feeling like they're getting the best possible price for their relationship. And that's what I'm responding to, not that anybody welcomes them or wishes for them.

Yes. I guess I was wondering the difference between the price increases and then like actual price realization. It doesn't seem like there's a big delta there. The distributors are generally taking it and without a ton of pushback but is what the takeaway is?

Yes, because everybody is doing it. And I think we're all in a situation where we're getting hit with these are stunning numbers, right? And when they come at you this quickly, I mean there's only one way to respond. And then I think they'll be looking for longer-term solutions and wanting to make sure that we're partnering to give the best possible value to their customers and their customers' customers which is still an obligation we have forward into '26 and '27.

Our next question comes from Scott Graham from Seaport Research Partners.

I wanted to understand something. You guys said that you were sort of gapping outpacing the pricing, but you also said 75% have been action, 25% [ noticing ]. Explain what you mean by that?

Yes. We went out with significant price increases in April across all the different businesses. And we have, as we mentioned, between both mitigating things, having the inventory on hand and also the timing of the tariffs notified that if things don't change and the assumption here is they don't, then we would be back out with modest price increases in May. And then if things don't change again, we'd have more modest increases in June. So 75% actions and the other 25% still coming in May and June time frame.

That's clear. That's much clearer. Last time we talked about the pool markets components, your thinking on the market was low single digit for the 3 components. I'm assuming that with sales potentially having a little bit of destruction demand-wise that do all 3 of them come down? Or is it more focused on the remodeling side?

No, no. I mean right now, we're guessing at what that impact would be. So we have very limited volume growth in this particular forecast. We're expecting that break and fix will still happen and the new Pool side is relatively flat. If we see softness, we, as I mentioned earlier, might be in the remodeling side or it might be in what I'd call a discretionary purchase. I think we'll have more clarity as the year unfolds, obviously, but right now, it's way too early in the season to tell.

And our next question comes from Nigel Coe from Wolfe Research.

Just a couple of quick ones for me. So just to double clarify on the pricing actions, John, these are regular price actions, not surcharges. And just the question really if there's a deescalation in these China tariffs that the prices would remain intact.

That is correct.

Hello?

I'm here. I said that is correct.

Can you hear me?

Yes, I can.

Did you get the question?

Yes, and I agreed with you. I said that is correct. Your assumption is correct.

Okay. Sorry, you didn't come through. It would be great. And then just maybe, again, I'm sorry if I missed this. Kind of how should we think about capital allocation in light of the balance sheet strength that you have currently into the year especially with the pullback in the stock price, just wondering if obviously, the $50 million of share purchases this quarter or last quarter. Any thoughts on that?

Yes, in a previous question. We discussed the balanced capital allocation strategy. So again, a nice mix of debt paydown, share repurchase, we've increased the dividend and then if the opportunity comes up for bolt-on M&A may be similar to what we did in Q4, all 4 of those make a lot of sense to us.

And ladies and gentlemen, at this time, we've reached the end of the question and answer session. I'd like to turn the floor back over to John Stauch for any closing remarks.

Thank you for joining the call today. In closing, I want to reiterate some key themes on Slide 19. We delivered our 12th quarter margin expansion and Pool group's top line 7%. We maintained our sales and its '25 BPS outlook, we expect a long runway of productivity savings driven by transformation in 80/20, our strategy and strong -- continued to build a solid foundation to drive long-term growth, profitability and shareholder value. And we believe we are well positioned to effectively manage challenges from the current volatility. Thank you, everyone. Have a great day.

Ladies and gentlemen, that concludes today's call and presentation. We do thank you for joining. You may now disconnect your lines.