Bob Fishman
Chief Financial Officer at Pentair
Thank you, John and good morning everyone. Let's start on slide 11, titled Q2 2023 Pentair Performance. We delivered record second quarter sales of nearly $1.1 billion, up 2% Year-over-Year. This is compared to a previous sales record in last year's Q2 of $1.06 billion post the separation of nVent from Pentair in 2018. Our IFT and Water Solutions segments continued another quarter of strong sales performance, which more than offset lower Pool volumes. Sales growth in Q2 included strong price contributions and the Manitowoc Ice acquisition, which closed in July of 2022. The volume decline in Q2 was primarily related to our Pool and other residential businesses which was partially offset by strength within commercial and industrial.
Please note that before I reference record results I'm referring to Pentair's performance post the separation of nVent from Pentair in 2018. Core sales improved 9% in both IFT and water solutions with Pool declining 28%. Compared to the prior year periods, pool sales increased 19% in Q2 2022, and 49% in Q2 2021. Second quarter segment income increased 14% to a record $234 million and return on sales expanded 230 basis points Year over Year to a record 21.6%. This improvement was driven by price, more than offsetting inflation, accretive segment margins from Manitowoc Ice acquisition, the elimination of 2022 manufacturing and supply-chain inefficiencies, and productivity benefits from our transformation initiatives.
We delivered record adjusted EPS of $1.03. Net interest expense was $33 million and our adjusted tax rate was 15% during the quarter, with a share count of $166.1 million. Please turn to Slide 12, labeled Q2 2023 industrial & Flow Technologies Performance. Industrial & Flow Technologies sales increased 9% Year-over-Year, driven by commercial sales growth of 28% and industrial sales growth of 13% which more than offset a decline in residential sales of 4%. Segment income grew 27% and return on sales expanded 250 basis points to 18.2% marking the fourth consecutive quarter of equal to or greater than 200 basis points of improvement.
The strong margin expansion was a result of price offsetting inflation and continued progress on our transformation initiatives. Please turn to Slide 13, labeled Q2 2023 water solutions performance. In Q2, Water Solutions sales increased 51% to $336 million, driven by our Manitowoc Ice acquisition volume and price. Manitowoc Ice has continued to exceed our expectations. Q2 sales were approximately $135 million, up roughly 30% compared to the prior year period. Segment income grew 130% to $75 million and return on sales expanded 760 basis points to 22.2% driven primarily by our Manitowoc Ice acquisition as well as efficiencies from our transformation initiatives. Within our residential business, we are seeing North America stabilize. We have also been evaluating our SKU mix and reducing complexity.
Please turn to Slide 14, labeled Q2 2023 Pool performance. In Q2, Pool sales declined 28% to $334 million. The volume decline of 36 points was primarily due to channel inventory corrections in Q2 this year a strong Q2 2022 comparison and cooler and wetter than usual US weather. The pricing benefit of eight points help partially offset the volume decline. Despite lower Pool sales in Q2 2023 return on sales expanded 190 basis points due to price significantly offsetting inflation, rightsizing direct labor to align with lower volumes, the elimination of 2022 manufacturing and supply-chain inefficiencies, and benefits from our transformation initiatives.
Please turn to Slide 15, labeled Pentair Pool sell-in versus estimated industry sell-through. This slide provides an illustration of our Pool sales sell-in and the estimated comparison to industry channel sell-through since 2019. Here you can see the imbalance of sell-in and sell-through beginning in 2020 and continuing to expand in 2021 and 2022 due to record inflation and supply-chain disruption. In 2023, we have returned to normal lead times and sell-through was returning to normalized levels. We expect sell-in and sell-through to rebalance by 2024 following approximately $150 million of channel inventory correction in 2023. We expect this 2023 inventory correction to become a tailwind in 2024.
Please turn to Slide 16, labeled transformation initiatives. Our transformation initiatives focused on four key themes. Pricing excellence, strategic sourcing, operations excellence, and organizational effectiveness. As we've mentioned in past quarters, we expect strategic pricing actions to benefit the topline of all three of our segments. We expect our other three transformation initiatives to help improve our overall cost structure. As a result, we are targeting ROS of approximately 23% by the end of fiscal 2025. Expanding margins over 400 basis-points as compared to fiscal 2022.
Please turn to Slide 17, labeled transformation runway. As you look at each of the four key themes you can see that the work within these transformation initiatives is in various different stages. For example, in 2023, we are beginning to see early readouts from wave one within pricing, sourcing, and operations. We are beginning wave two within each of these three themes and expect margin benefits to read-out in 2024. You can see how each new wave compounds on the other to drive expected margin expansion year over year through 2025 and beyond. In pricing excellence, the strategic pricing playbook has been developed, which is planned to be rolled out by category within each segment. We have completed internal training and plan to implement these actions over the next few months. In strategic sourcing, the implementation of wave one is underway with savings currently reading out.
We expect to kick off wave two later this summer with readouts beginning in 2024. Incremental to our strategic sourcing waves we have seen benefit from our rapid renegotiation process that is part of our transformed sourcing excellence work. In operations excellence, we have completed the consolidation of two facilities while continuing our execution on lean transformation plans across our sites. In organizational effectiveness, we are in the earliest stages with wave one and expect margin benefits to be realized beginning in 2024. Due to the staggered nature of these transformation initiatives. You can see that what we expect wave three to begin to readout post 2025 in operations excellence and organizational effectiveness.
Overall, we are excited about the savings, we have begun to realize from the early waves and remain confident that our teams can execute on pricing actions and savings we have identified particularly in sourcing. Please turn to Slide 18, labeled balance sheet and cash flow. With our record free-cash flow in Q2 of $433 million, up $144 million from the prior year period and the repayment of debt, we have lowered our pro forma net debt leverage ratio to 2.2 times, down from 2.6 times in Q1. As a reminder, our second quarter is typically our highest free cash flow quarter. We expect our full-year free cash flow to be in line with our historical performance of approximately 100% net income.
Our return on invested capital was 14.9% which includes debt from the Manitowoc Ice acquisition but only approximately four quarters of Manitowoc EBITDA contribution. Our target ROIC is high-teens. In Q2, we entered into interest-rate swaps and collar agreements in order to hedge our variable-rate debt. Our variable to fixed debt is now 48% and 52% respectively, with an average rate of approximately 5.3%. We have no significant long-term debt maturing for the next five years, and the majority of our debt is in term loans going out three to five years. We plan to remain disciplined with our capital and continue to focus on debt reduction amid the higher interest-rate environment.
Moving to Slide 19, titled Q3 and full-year 2023 Pentair Outlook. For the full year, we are raising our adjusted EPS guidance to approximately $3.65 to $3.75 increasing the midpoint to $3.70. Also for the full-year, we expect sales to be roughly down 2% to flat, which is unchanged from our prior guidance in Q1. Segment income to increase 10% to 12% as compared to up 7% to 10% in prior guidance with corporate expense of approximately $80 million. Net interest expense of roughly $125 million and adjusted tax rate of approximately 15% and a share count of $165 to $166 million. Our assumptions on corporate expenses, net interest expense, adjusted tax rate, and share count remain unchanged from guidance provided last quarter.
For the third quarter, we expect sales to be down approximately 7% versus last year's near record Q3. This is mainly attributable to lower Year-over-Year Pool sales as we expect the channel inventory correction to be completed by quarter end. We are also introducing adjusted EPS guidance for the third quarter of approximately $0.84 to $0.89. We expect segment income to decrease 1% to 6% with corporate expense of approximately $21 million. Net interest expense of roughly $31 million and adjusted tax rate of approximately 15% and a share count of $165 to $166 million. Moving to slide 20, titled full year 2023 guidance at midpoint. At the midpoint we continue to expect total Pentair sales to be down approximately 1% to approximately $4.1 billion.
Due to strong Q2 performance in IFT and water solutions, we have updated our segment sales assumptions as follows. We now expect IFT sales to be up approximately mid single digits up from low-single digits. Within IFT we expect residential to be down approximately mid single digits and commercial and industrial to be up low double digits. Water Solutions sales are expected to be up high teens versus mid teens. Commercial is expected to rise approximately 50% with residential sales down roughly 10% and the expected Pool sales range remains unchanged at approximately down mid teens, although, we now expect sales to be down at the higher end of this range due to a softer Q2.
As we have discussed in prior quarters our Pool sales consist of approximately 40% from new and remodeled pools and 60% from aftermarket. Within our current Pool guidance, we now expect new pools and remodels to be down approximately 25% to 30%. Versus previous assumptions of down approximately 25% and inventory and aftermarket to be down roughly 20% unchanged with approximately 2/3 of the decline relating to inventory corrections. We expect price to be up roughly mid single digits. We expect Pool sales to return to more normalized sell-in in 2024 after absorbing significant inventory correction headwinds in the current year.
Segment income is now expected to increase approximately 11% at the midpoint as compared to 9% previously with ROS expansion of over 200 basis points to 20.9%, up 40 basis-points from our Q1 guidance. Overall, we are excited about the future. We believe the diversification of our portfolio has proven that we can weather challenges in one segment while continuing to grow total Pentair sales and expand margins across all three segments despite significant volume declines in our residential businesses. We are seeing progress in our transformation initiatives, generating strong free cash flow, and further strengthening our balance sheet with the repayment of debt.
Before I turn the call over for Q&A, I wanted to highlight why we believe that Pentair is a compelling investment opportunity. Please turn to slide 21. There are six distinguishing characteristics that we believe sets Pentair apart. We are an industry-leader with a diversified brand portfolio and our focus on driving innovation across all three segments. We have a transformation strategy that is expected to drive operational efficiencies and margin expansion. Our ESG focus is on making life better for people and the planet with our smart sustainable water solutions. We recently published our 2022 Corporate Responsibility Report highlighting progress towards our strategic targets.
We have favorable secular trends driving end-market growth. We have a strong balance sheet and cash-flow which we expect to drive additional value creation and we are a dividend aristocrat with 47 consecutive years of increased dividends. I'd now like to turn the call over to the operator for Q&A after which John will have a few closing remarks. Joe, please open the line for questions. Thank you.
