Robert P. Fishman
Chief Financial Officer at Pentair
Thank you, John, and good morning, everyone. Please turn to Slide 9, labeled Q4 2022 Pentair Performance. I will also be discussing our full year performance on Slide 10.
We delivered fourth quarter sales growth of 1% with core sales declining 3% as strong price contribution was not enough to offset volume decline. Consumer Solutions core sales were down 11%, as expected and previously communicated, due to residential channel inventory levels rebalancing and as a result of our lead times beginning to return to more normal levels. Industrial & Flow Technologies reported strong 11% core sales growth with strength in commercial flow and industrial solutions. For the full year, sales grew 9% with core sales up 6%. Consumer Solutions delivered 4% core sales growth, and Industrial & Flow Technologies saw core sales growth of 10%.
Fourth quarter segment income increased 10%, and return on sales expanded 130 basis points year-over-year to 18.2%, driven primarily by price, significantly offsetting inflation. Productivity was negatively impacted by lower volume in the quarter. Adjusted EPS of $0.82 was down 6% versus the prior year, but exceeded our guidance for the quarter. Net interest and other expense was $28.2 million, which represented our first full quarter of new financing post the Manitowoc acquisition. And our adjusted tax rate was 12.7% during the quarter, with a share count of 165.2 million. For the full year, segment income grew 12%, and return on sales expanded 40 basis points to 18.6%. Adjusted EPS increased 8% for the year to $3.68. Our tax rate ended the year at 14.5%, and our share count was 165.6 million.
Please turn to Slide 11, labeled Q4 2022 Consumer Solutions Performance. In addition to the fourth quarter performance for Consumer Solutions, I will also be referencing the full year performance on Slide 12. In the fourth quarter, Consumer Solutions sales declined 1% with core sales declining 11%, comprised of 15 points of price, offset by 26 points of volume decline. This was in line with our expectations. The volume decline was due to difficult year-over-year comparisons and the anticipated inventory correction across many product lines in our residential channels. Segment income grew 7%, and return on sales expanded 150 basis points to 23.1%, as strong pricing measures continued to play out along with the contribution from Manitowoc Ice.
For the year, Consumer Solutions sales grew 12% with core sales up 4%. Segment income grew 10%, and return on sales declined 40 basis points to 23.3%. Our pool business had sales growth of 4% for the year. Water treatment saw sales growth of 28%, led by contribution from the Manitowoc Ice acquisition, which was completed at the end of July.
Please turn to Slide 13, labeled Q4 2022 Industrial & Flow Technologies Performance. In addition to the fourth quarter performance for Industrial & Flow Technologies, I will also be referencing the full year performance on Slide 14. Industrial & Flow Technologies grew sales 5% in the quarter, partially offset by a 4% FX headwind with core sales increasing 11%.
Segment income grew 21%, and return on sales expanded an impressive 240 basis points to 17.4%, marking the second consecutive quarter of greater than 200 basis points of improvement. The strong margin expansion was a result of significant price contribution and moderating inflation. For the year, sales increased 6% with core sales increasing 10%. Segment income grew 14%, and return on sales increased 110 basis points to 16.1%, as strong price more than offset inflation and FX headwinds. IFT saw sales growth across the segment with residential flow up 3%, commercial flow up 6%, and industrial solutions up 10%.
Please turn to Slide 15, labeled Balance Sheet and Cash Flow. As a reminder, this slide reflects the closing of the Manitowoc acquisition at the end of July. We ended the quarter with pro forma leverage of 2.5 times, and our return on invested capital was at 15.7%, declining slightly due to the acquisition of Manitowoc Ice. I would like to remind you that given the rising interest rate environment, we are comfortable being two-thirds variable as we were less inclined to lock into higher rates for longer. We have no significant long-term debt maturing for the next few years and the majority of our debt is in term loans going out three to five years. We generated $283 million of free cash flow from continuing operations in the year, which was in line with our messaging on the Q3 earnings call.
Working capital was a significant headwind this year, primarily inventories, which has led to a timing issue on cash flow. Our inventories were higher largely due to inflation, buy-ahead and inefficiencies in the supply chain. We expect to benefit from working capital improvement in 2023 and generate free cash flow in line with our historical performance of 100% of net income. In 2022, we returned roughly two-thirds of our free cash flow to shareholders through dividends and share repurchases. We plan to remain disciplined with our capital, and we'll continue to focus on debt reduction amid the higher interest rate environment.
Please turn to Slide 16, labeled Segment Structure Beginning in 2023. As John discussed, we moved to three reporting segments effective January 01, 2023. We have included realigned historical information for these segments from 2019 to 2022 in the supplemental data section of our earnings presentation. Our Industrial & Flow Technologies segment had roughly $1.5 billion of revenue in 2022 with a ROS of approximately 16%. This business grows sales at roughly single digits over the long term in a very large industry. Water Solutions consist of residential and commercial and was roughly $1.2 billion of revenue on a pro forma basis when including a full year of Manitowoc Ice. This is a mid-single digit sales growth contributor over the long term, operating in a very large industry. Finally, Pool was roughly $1.6 billion of revenue in 2022 and is our highest profitability segment that we expect will grow sales mid-single digit plus over the long term.
Please turn to Slide 17, labeled Transformation Expectations. We have moved transformation from funnel to execution, and we expect more material benefits to contribute to our longer-term margin expansion targets. In 2022, we made strategic progress on our transformation initiatives with a primary focus on two of our four key themes: pricing excellence and strategic sourcing. Overall, we believe transformation will be a key driver in value creation over the next three years.
For example, through our transformation initiative, we have identified over 400 basis points of targeted margin expansion by 2025, up from the 300 basis points that we discussed at our previous Investor Day. A significant portion of that is due to a focus on material costs, which represent roughly 40% of our sales. By driving transformation excellence through pricing and sourcing, we believe this will have the most significant impact on overall cost efficiencies. With the work we have completed in 2022, we believe that we can expand return on sales to approximately 23% in 2025.
In pricing, we have completed wave one, which has established a new strategic pricing playbook. This creates a foundation for pricing across our different go-to-market strategies and includes looking at our dealer and distributor programs to better optimize them. We are gaining insight into profitability by customer and product category and using this data to better drive our forecast. We believe pricing remains a big opportunity. We are building capabilities and starting to see benefits materialize. We expect future waves to include the implementation of our pricing playbook across all categories.
We are furthest along in our strategic sourcing initiatives. We have completed wave one that focused on key categories, like electronics, motors and drives, castings, packaging, logistics and MRO. Wave one included roughly 35% of material spend and has generated over 12% in savings opportunities. We expect to unlock value through supplier-dedicated resources, supply base reduction, inventory solutions, enhanced supplier executive level relationships and rebate programs. We expect to reduce complexity across our entire organization and to see close to 80% supplier reduction in some of our commodity groups. Over 75 Pentair team members attended 3,000 plus hours of formal classroom instruction and workshops in supply chain topics. As we institutionalize our wave one learnings, we expect this will drive future waves as we look at additional categories.
Wave two is scheduled to start in 2023, and is planned to cover another 35% of material spend for commodity groups such as metals, plastics and molding, purchase finished goods, transportation, and indirect spend such as IT, fleet management and office supplies. We expect this will create a funnel of savings for 2023 and 2024.
In operations excellence, we are focused on reducing complexity and driving lean processes across all our operations. In 2022, we made a few small stride on footprint optimization. We believe this presents longer-term opportunities, but not until 2024 and beyond, as we build out the funnel. Lastly, in organizational effectiveness, we are focusing on sales and functional excellence to simplify our organization. From an organizational standpoint, we believe ample opportunities remain for complexity reduction across the entire portfolio and a realignment of needed skills within our top priorities. We continue to believe that our transformation initiatives will be a large value creation opportunity for Pentair.
Please turn to Slide 18, labeled Q1 and Full Year 2023 Pentair Outlook. For the full year, we are introducing adjusted EPS guidance of approximately $3.50 to $3.70, which represents a year-over-year range of down 5% to up 1%. We expect sales to be roughly down 3% to up 1%. We expect segment income to increase 5% to 10%, with corporate expense of approximately $80 million, net interest expense of roughly $125 million, an adjusted tax rate of approximately 15% and a share count of 165 million to 166 million. We are targeting free cash flow of approximately 100% of net income as we expect working capital to improve and inventory levels to come down.
For the first quarter, we are introducing adjusted EPS guidance of approximately $0.76 to $0.78, which represents a year-over-year decrease of approximately 8% to 11%. We expect sales to be roughly flat to up 1%, as the contribution of Manitowoc Ice helps offset expected volume declines from the rebalancing of residential channel inventory. We expect segment income to increase 5% to 8%, with corporate expense coming in around $21 million, net interest expense of roughly $33 million, an adjusted tax rate of approximately 15%, and a share count of 165 million to 166 million.
Please turn to Slide 19, labeled Full Year 2023 Guidance at Midpoint. The chart on Slide 19 shows a walk of sales and segment income at the midpoint of our full year 2023 guidance. From the sales walk on the left-hand side, you will see that we expect sales to be down roughly 1% at the midpoint. We expect volume to be down approximately 10%, primarily due to our residential businesses. We expect price benefit of approximately 5% and a benefit from acquisitions/divestitures of roughly 5%, primarily due to a full year of Manitowoc Ice, partially offset by exits in the residential businesses and water solutions.
We expect Pool sales to be down low double digits at the midpoint in 2023 after growing 14% in 2020, 40% in 2021 and 4% in 2022. We believe 2023 will be an inventory rebalancing year across the pool industry. We do think that there was a higher-than-normal level of demand in 2020 and 2021 that led to timing and supply chain disruptions in the industry and, therefore, created larger-than-normal impact between sell-through and sell-in reflected in our results. We estimate that from a sell-through perspective, the overall industry grew about 4% on a volume basis from 2019 to 2022, roughly in line with historical levels.
As we have discussed, our Pool sales consists of 20% from new pools, 20% from remodels and 60% from the aftermarket. At the midpoint, we expect that new pools and remodels will be down approximately 20% in 2023 and the aftermarket business, including inventory corrections in Q1 through Q3, will be down approximately 15%. We expect price carryover for Pool will be up roughly mid-single digit. We do expect the industry and our Pool revenue to return to more normalized growth later in 2023 and in 2024, reflecting a more even balance of sell-through and distribution buying patterns. As a reminder, even with an expected Pool year of down double digits in 2023, we expect to grow at a double digit CAGR in Pool from 2019 through 2023.
We expect our Water Solutions segment sales to be up mid-teens at the midpoint, including up approximately 40% in our commercial business with a full year of Manitowoc Ice and down approximately 10% in our residential business. We expect IFT sales to be up slightly at the midpoint with the commercial, industrial and infrastructure businesses up approximately mid-single digits, and residential down approximately double digits.
On the segment income side, we expect segment income to grow approximately 8% at the midpoint and to expand ROS roughly 150 basis points. We expect price to slightly exceed inflation. We expect approximately 35% ROS from our acquisitions and divestitures. Our transformation initiatives and productivity should deliver over 200 basis points of margin expansion. And we expect drop through of roughly 30% on the decrease in volume. We expect our greater than 200 basis points of transformation and productivity benefit will be the result of volume rightsizing actions that we undertook in the fourth quarter of 2022, inefficiencies in our 2022 results that will not repeat in 2023 and our transformation initiatives.
Our comments are based on the midpoint of the range. The lower end of our range would be reflective of higher interest rates, impacting housing demand and our residential sales and increasing our interest expense. As we think about the higher end of our range, our main drivers would be a better outcome in the residential businesses, primarily Pool, and overdriving some of the transformation benefits.
In closing, we expect the lower Pool year in 2023 to be offset by the strength of our diversified portfolio and our transformation initiatives. We are confident in the expected benefits from our transformation initiatives, and we believe we are gaining continued momentum, to not only drive savings in 2023, but to build a strong funnel for 2024 and 2025, with significant ROS expansion. We also expect ROS expansion as our residential businesses return to more normalized growth in 2024 and beyond.
I'd now like to turn the call over to the operator for Q&A, after which John will have a few closing remarks. Kate, please open the line for questions. Thank you.
