Chief Executive Officer at Pentair
Thank you, Jim and good morning, everyone. Please turn to Slide number 4, titled Executive Summary.
We are pleased to announce that our Q3 results were strong considering near-term challenges and were in line with our expectations. Sales growth of 9% and segment income growth of 15% included a partial quarter of our recently-completed Manitowoc Ice acquisition. ROS expanded 110 basis points, demonstrating that price and productivity offset inflation and our adjusted EPS grew 11% to $0.99 in Q3 which included incremental debt from our acquisitions and rising interest rates. We are very excited about the addition of Ice to our portfolio and the expansion of our commercial Water Solutions platform and the team and the integration process is off to a fast start. Bob will give more detail on our updated full year 2022 guidance later in this call.
While we have modestly reduced our full year expectations due primarily to increased FX headwinds and higher interest rates, the year is generally playing out the way we thought it would after our Q2 earnings call. We are seeing the previously communicated inventory correction in most of our residential channels which we believe the industry is now addressing as supply chain challenges begin to abate. With our updated guidance, we now expect that we will have cleared nearly $200 million of channel inventory pool by the end of the year. We are encouraged that underlying demand is still up year-over-year as evidenced by dealer and distributor sell through despite the rising interest rates within the US residential industry. I will speak in a few slides about some preliminary thoughts on 2023. But the main takeaway is that we believe we are well positioned to grow sales, segment income, margins and adjusted EPS next year.
Please turn to Slide number 5, labeled Water. With everything going on and the market reacting to shorter term challenges, I wanted to take a moment to remind you that we believe Pentair is well positioned to solve some of the world's toughest water challenges in a sustainable way. Today, over 70% of Pentair's solutions support water and energy efficiency through helping to reduce water usage, reuse or recovery of water, or requiring less energy to operate or operate more efficiently. With a lot of the ongoing challenges, we believe that our solutions are needed to improve the lives of people and sustain our planning.
Please turn to Slide number 6, labeled Purpose. Our purpose is important to our employees, our customers and is growing more important to you, our shareholders. We hold ourselves to very high standards and our annual sustainability report has shown progress. We believe that further progress not only benefits the planet but customers, employees and shareholders as well.
Please turn to Slide number 7, labeled Pentair at a Glance. Given how much focus has been on our residential businesses, particularly Pool, we wanted to take a step back and remind people of the diversity of the Pentair portfolio. Our mission as a company is to help the world sustainably move, improve and enjoy water, life's most essential resource. And we do this in Residential, Commercial, Agricultural and Industrial applications. On a pro forma basis, for the full year of our Manitowoc Ice acquisition and inclusive of our current 2022 guidance, US residential sales comprised roughly half of our revenue and the other half comes from our other served industries. I will spend the next few slides talking about our three businesses and how they help comprise the overall Pentair results.
We are on track to generate over $4 billion in sales this year and we have a strong focus on profitability with our ROS in the high teens. 75 is an important number for Pentair. 75% of our products are replacement inside a large installed base that benefits from over 75,000 trade partners. We believe the large served installed base and relationships with our trade channel partners drive resiliency of revenue and create a steady funnel for continued growth as new products and technologies are introduced. We have a long, successful track record of generating cash flow and being disciplined with our capital allocation. In fact, we have increased our dividend for 46 consecutive years and we are especially proud of our high teens ROIC, demonstrating that we have been good stewards with your invested loans. We believe we have a very solid foundation and we know there is still more that we can do.
Please turn to Slide 8, labeled Aligning Organization for Accelerated Success. We announced last quarter that effective January 1, 2023, we will be splitting our Consumer Solutions segment into two new segments, Pool and Water Solutions. Our Industrial & Flow Technologies segment will remain unchanged. We believe this new segment structure will help us accelerate our efforts to improve customer service, differentiate our products and drive profitability for our shareholders.
Please turn to Slide number 9, labeled Pool Business. Pool is a leading in-ground equipment maker with the largest installed base in North America, primarily across the Sunbelt states. Pool is on track to generate $1.6 billion in sales this year, has return on sales in the high 20s and has generated a 10 year revenue CAGR of approximately 10%. We are preferred business partners to Pool professionals and a trusted source for all things pools. Our Pool Business helps people sustainably enjoy water by using less energy and chemicals. One of the most attractive characteristics of the pool industry in North America is serving a large installed base of approximately 5.4 million pools. The average age of these pools is approaching 25 years. The industry is roughly 60% break and fix, 20% major remodeling and 20% new pools.
Over the last two years, there was undoubtedly an increase in demand for products such as heaters and cleaners that were not been deeply penetrated on the pool bath [Phonetic]. People were moving to warmer climates and buying homes with a pool or wanting to build a pool. The emergence of Airbnb and Vrbo was people rent homes with pools rather than staying in hotels. Our industry leading variable speed pumps have faced supply chain disruptions that have kept us from shipping as many as the industry wants but we are starting to catch up on these shipments as the supply chain improves. Only about half of our in-ground pools have some form of automation and we believe this is another long term opportunity for Pentair, the industry and consumers. Pool dealers continue to be constrained by the lack of available labor. While dealers may have been busier with new pools in the last two years, this has come at the expense of remodeling activity. We believe we have strong opportunities to continue to grow in key categories, particularly pumps.
Our new IF3 pump was soft launched this year, as we were not able to get enough chips and drives to meet demand. The initial feedback is very positive and we believe this is an opportunity to build on our leading technology position in pool pumps. We believe the long term outlook for the pool industry remains very positive and we are well positioned to enhance our position as a leader in North American pool equipment.
Please turn to Slide 10, labeled Water Solutions business. Our Water Solutions business has undergone a transformation of its own with our acquisition of Manitowoc Ice. On a pro forma basis, Water Solution's approaching $1.2 billion in sales with return on sales of roughly 20%. The business is approximately two thirds Commercial and one third Residential. Similar to Pool, our Water Solutions business sees a large percentage of its sales growth in distribution into trusted water treatment specialists. Our Water Solutions business improves water by providing great tasting, higher quality water and ice while helping our customers use water more productively. We have discussed our commercial Water Solutions business quite a lot this year given the acquisition of Manitowoc Ice. When put together with our Everpure filtration business and our KBI services business, we have created a leading platform to provide quality water and ice to our foodservice customers.
Our Residential Water Treatment business consists of components and systems. Our focus within Residential Water Treatment is reestablishing the core of components while also investing in differentiated point inventory and point of use systems. We have a strong position with our core pro-trade specialists. We have brands such as Flex and Rainsoft that have strong recognition in their respective channels. Commercial Water Solutions was already a high margin business where the focus is on driving growth. Residential water treatment is much more on complexity reduction and margin improvement while investing in core channels. We are excited about the opportunities for the soon to be Water Solutions segment.
Please turn to Slide 11, labeled Industrial & Flow Technologies segment. Industrial & Flow Technologies does not always get the same attention from investors as our other two segments but it's important to our long term strategy, as we help the world sustainably move, improve and enjoy water, our Flow business helps move water where you need it, when you need it more efficiently. While our Industrial Solutions business might not be as water focused as the rest of the portfolio, the business is focused on transforming waste into value. Our Flow business is just north of $1 billion in sales with healthy margins that are improving. Professionals represent roughly 80% of sales per flow and we have many highly recognized brands. Our deep relationships with channel partners are an important long term growth driver. Flow is roughly two thirds Residential and one third Commercial. We also serve irrigation and infrastructure on a smaller scale which helps bring balance to the business with a combination of short cycle products and engineered products that are longer cycle. Flow has seen solid margin improvement this year and we believe this business has a long runway ahead to drive margins even higher.
Our Industrial Solutions business is roughly $500 million as a technology leader in several niches, including beer membrane filtration and sustainable gas solutions. Industrial Solutions is the one part of our portfolio that is not tied to professional trade channels but this business provides filtration technology to help solve customers' environmental goals through smart and sustainable solutions. Similar to Flow, we believe there's a lot of opportunity for margin improvement within Industrial Solutions.
Please turn to Slide 12, labeled Transformation to Enhance Value Creation. We continue to believe that transformation will be a large value creation opportunity for Pentair. We are building capabilities and training businesses and new tools to use. We are furthest along on our sourcing initiatives. We have completed wave one that is focused on key categories like electronics, motors and drives, casting and indirect. In fact, we had an early win in the quarter regarding our MNO spend where we went from over 100 different suppliers down to one. This allows us to not only save money but it also reduces complexity across our entire organization in this channel. As we institutionalize our wave one learnings, we believe this will drive future ways as we look at additional categories. On pricing, we're establishing a foundation for pricing across our different go to market strategies. This includes looking at our dealer and distributor programs to better optimize them. We're gaining insight into profitability by customer and product category and using this data to better drive our forecast.
Pricing remains a big opportunity and this year has been about building capabilities and next year should start to see benefits materializing. We've made a few small strides on footprint optimization this year. We believe this presents longer term opportunities but not until 2024 and beyond as we build out the funnel. From an organizational standpoint, there remains ample opportunities for complexity reduction across the entire portfolio and a realignment of these skills within our top priorities. Transformation has moved from funnel to execution and we expect more material benefits to contribute to our longer term margin expansion targets. We'll be providing more detail regarding specific expectations when we introduce our 2023 guidance.
Please turn to Slide 13, labeled Early Thoughts on 2023. While we are not yet ready to provide full guidance for 2023, we did want to share some early thoughts as we go through our internal planning process. We expect to grow revenue next year for a few reasons. First, we expect the inclusion of Manitowoc Ice will contribute significantly. Second, we expect carryover pricing from the actions we have already taken this year. And third, we believe the diversity of our portfolio will be demonstrated and create resiliency. The focus from investors feel solely on our Pool business but we have many other contributing businesses in our portfolio. In fact, Pool has its own diversification with 60% breaking fix that we expect will likely continue to grow. While the smaller exposure to new pool construction may decline double digits and maybe there will also be softness in remodeling, we expect the 5.4 million in-ground pools in the break and fix portion of the industry will likely grow modestly. And this, along with carryover pricing, should help limit the anticipated declines from inventory correction early next year. The remainder of the Pentair portfolio has more exposure to some later cycle business, with Industrial & Flow Technologies that offers further diversification.
We also expect to grow income next year. Again, we expect that Manitowoc Ice and pricing carryover will be contributors. We are also taking actions this year to better align our manufacturing costs and overhead with the lower volumes we are experiencing. We also expect productivity to return to more normalized levels as manufacturing inefficiencies abate with improved supply chain performance. Transformation is also expected to be a big contributor to income and margin performance next year. We also expect to see adjusted EPS growth with the accretion from Manitowoc Ice, overall business performance and benefits from Transformation. We expect free cash flow to return to more normalized levels or perhaps even a little better as we expect better inventory performance and supply chain inefficiencies go away and backlogs are reduced. Overall, we believe we are positioned to grow in 2023 despite the challenges of softening economy, residential inventory and stocking challenges and FX headwinds.
I would now like to turn the call over to Bob to discuss our performance and our financial results in more detail. Bob?