Bob P. Fishman
Executive Vice President, Chief Financial Officer and Chief Accounting Officer at Pentair
Thank you, John, and good morning, everyone. Let's start on Slide 13, titled Q1 2023 Pentair Performance. We delivered better-than-expected first quarter sales growth of 3% driven by pricing benefits across all three segments and the contribution of our Manitowoc Ice acquisition, which were partially offset by volume declines in our residential businesses. Our higher-than-expected sales in the quarter were driven by better performance in IFT and Water Solutions, offset by slightly lower-than-expected sales in our Pool segment, primarily due to unusual weather in the West. Core sales declined 3% mainly driven by a 16% decrease in Pool, after Pool grew 23% in last year's Q1 and 48% in Q1 of 2021, partially offset by core growth of 11% in IFT and 2% in Water Solutions.
First quarter segment income increased 23%, and return on sales expanded 330 basis points year-over-year to 20.5%, driven by price more than offsetting inflation, productivity benefits from our transformation initiatives and accretive margins from our Manitowoc Ice acquisition. As John mentioned, both segment income and ROS in Q1 hit record levels post separation of nVent. We delivered better-than-expected adjusted EPS of $0.91, up 7% versus the prior year. Net interest and other expense was $33 million, and our adjusted tax rate was 15% during the quarter, with a share count of 165.8 million. Our better-than-expected segment income and adjusted EPS were driven by higher sales, price offsetting inflation and better contribution from our transformation initiatives. Please turn to Slide 14, labeled Q1 2023 Industrial & Flow Technologies Performance.
IFT sales increased 9% in the quarter, which included two points of FX headwinds. Core sales increased 11%, segment income grew 25% and return on sales expanded 200 basis points to 16.6%, marking the third 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. Sales growth in IFT was driven across all businesses, led by commercial flow and industrial solutions, along with growth in residential flow. Please turn to Slide 15, labeled Q1 2023 Water Solutions Performance. In Q1, Water Solutions sales increased 32% driven by our Manitowoc Ice acquisition and price. Core sales grew 2%. The three points of volume decline was primarily due to the continued inventory correction, across many product lines in our residential channels. Segment income grew 136%, and return on sales expanded 850 basis points to 19.3%, driven by our ICE acquisition as well as efficiencies from our transformation initiatives.
Please turn to Slide 16, labeled Q1 2023 Pool Performance. In Q1, Pool sales declined 16%, which was slightly below our expectations. The volume decline of 27 points was primarily due to unusual weather in the Western U.S. in the first quarter of this year, inventory corrections in this year's Q1, and a strong prior year comparison. The pricing benefit of 11 points helped partially offset the volume decline and was due to carryover from the prior year. Despite lower sales year-over-year, return on sales expanded 520 basis points to 31.9%, due to price significantly offsetting inflation, rightsizing to lower volumes and benefits from our transformation initiatives. Please turn to Slide 17, labeled Transformation Expectations. We continue to make progress on our transformation with realized successes in Q1 regarding pricing and sourcing, which drove margin expansion.
As we shared with you last quarter, we expect to drive ROS expansion of over 400 basis points by year-end 2025 as compared to 2022. As I mentioned last quarter, in pricing, we completed wave one, which 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 continue to gain insight into profitability by customer and product category, and use 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 a pricing playbook, across all of our product categories.
We are furthest along in our strategic sourcing initiatives. As I've mentioned previously, material costs represent roughly 40% of our revenue. We have completed wave one negotiations that focused on key categories like electronics, motors and drives, castings, packaging, logistics and MRO. Wave one included roughly 35% of material spend and identified over 12% in saving opportunities. We have unlocked value through supplier-dedicated resources supply base reduction, inventory solutions, enhanced supplier executive-level relationships and rebate programs. In Q1, over 120 Pentair cross-functional team members attended workshops to begin the wave one implementation process. Wave two was launched in Q1 and covers another 35% of material spend for commodity groups, such as metals, plastics and molding, purchased 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. 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 move transformation from funnel to execution, and we expect more material benefits to contribute to our longer-term margin expansion targets. We continue to believe that our transformation initiatives will be a large value-creation opportunity for Pentair. Please turn to Slide 18, labeled Balance Sheet and Cash Flow.
This slide reflects the closing of the Manitowoc acquisition at the end of July of last year. We ended the quarter with pro forma leverage at 2.6 times. Our ROIC was at 15.2%. And as a reminder, this includes debt from the Manitowoc Ice acquisition, with only approximately 3/4 of Manitowoc EBITDA contribution. We recently entered into interest rate swap and collar agreements in order to hedge our variable rate debt. We now expect the mix of variable to fixed debt to be closer to 50-50, by the end of Q2. We have no significant long-term debt maturing for the next few years, and almost the majority of our debt is in term loans going out three to five years.
We used $123 million of free cash flow in Q1, which reflects typical seasonality and was roughly $25 million better than the prior year. As a reminder, the second quarter is typically our highest free cash flow quarter of the year, and we expect full year free cash flow to be in line with our historical performance of 100% of net income. 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 Q2 and Full Year 2023 Pentair Outlook. For the full year, we are updating adjusted EPS guidance to approximately $3.60 to $3.70, raising the midpoint. Also for the full year, we expect sales to be roughly down 2% to flat. We expect segment income to increase 7% 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.
For the second quarter, we expect sales to be approximately down 1% to flat versus last year's Q2, as the contribution of Manitowoc Ice and our commercial and industrial businesses are expected to help offset expected volume declines from our residential businesses. We are introducing adjusted EPS guidance of approximately $0.94 to $0.96, which represents a year-over-year decrease of approximately 6% to 8%, primarily due to lower Pool volumes. We expect an improvement in the second quarter versus the $0.91 of adjusted EPS in Q1. We expect segment income to increase 5% to 7% with corporate expense coming in around $21 million, net interest expense of roughly $34 million, an adjusted tax rate of approximately 15% and a share count of 165 million to 166 million. Moving to Slide 20, titled Full Year 2023 Guidance at Midpoint. At the midpoint, we expect total Pentair sales to be down approximately 1%.
While the sales midpoint has not changed, our sales mix and assumptions have. We now expect IFT to perform better than we expected 90 days ago, and Pool sales to decline from our original expectations due to increased economic uncertainty and lower new pool construction. We now expect IFT sales to be up low single digits, Water Solutions to be unchanged with sales up mid-teens and Pool sales to be down approximately in the mid-teen range, as compared to down low double digits previously. As we have discussed in prior quarters, our Pool sales consist of 20% from new pools, 20% from remodels and 60% from the aftermarket. Within our current Pool guidance, we now expect new pools and remodels to be down approximately 25% versus previous assumptions of down approximately 20% and inventory in aftermarket to be down roughly 20% compared to previous assumptions of down 15% with approximately 2/3 of the decline relating to inventory corrections.
We expect price carryover of roughly mid-single digits. We do expect Pool to return to more normalized demand in 2024 after absorbing significant headwinds in the current year. Segment income is now expected to increase approximately 9% as compared to 8% previously with ROS expansion of nearly 200 basis points to 20.5%, as compared to 20.2% last quarter. We are encouraged by the diversity of our portfolio, the integration of Manitowoc Ice and the continued momentum of our transformation initiatives, which are expected to drive significant margin expansion. 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 a focus on driving innovation across all three segments. We have a transformation strategy that is expected to drive operational efficiencies and margin expansion. We have an ESG focus on people, the planet and governance to provide smart, sustainable Water Solutions. And we just 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 increasing dividends. I would now like to turn the call over to the operator for Q&A, after which, John will have a few closing remarks. MJ, please open the line for questions. Thank you.
