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 11, titled Q4 2023 Pentair Performance. I will also be discussing our full year performance on slide 12. We delivered another strong quarter of earnings and significant margin expansion despite sales being down 2% year-over-year. Volume continue to improve sequentially with substantial progress in Q4 as compared to Q2 and Q3, driven primarily by improvement in Pool volume. Sales for Q4 were down 2%, which was slightly better than we guided. Core sales across all three segments were down slightly as compared to last year's record Q4, when our lead times began to improve from a recovering global supply chain, enabling us to ship more backlog orders.
As we move into 2024, we expect to see a more normalized operating environment. Fourth quarter segment income increased 8% to $198 million and return on sales expanded 190 basis points year-over-year to 20.1%. This improvement was driven primarily by our transformation initiatives. Adjusted EPS of $0.87 was up 6% versus the prior year. For the full year, sales were flat at $4.1 billion with core sales down 5%, driven by growth in Flow and Water Solutions, which were offset by lower Pool volumes. Segment income grew 11% and return on sales expanded 220 basis points to a record 20.8%. All three segments significantly expanded margins and set new records. Adjusted EPS increased to a record $3.75.
Turning to slide 13, labeled Flow at a Glance, you can see the impressive five-year financial performance. Sales rose over 4% compounded annually and margin expanded 300 basis points since 2019. In 2023, Flow continued to reach new records in sales and ROS. We have also provided a sales view by region, channel, and solution, reflecting 2023 sales and the diversified nature of the business. We have eight iconic brands, some over 100 years old. And we ranked first in quality, technical support, and customer service.
Please turn to slide 14, labeled Q4 2023 Flow Performance. In addition to the fourth quarter performance for Flow, I will also be referencing the full year performance on slide 15. Note that we have recently renamed our Industrial & Flow Technologies segment to Flow. In Q4, Flow grew sales 1% in the quarter to $379 million, our record fourth quarter. Industrial solutions was up 9% and commercial was up 2% with residential down 7%. Segment income was flat, and return on sales decreased 20 basis points to 17.2% due to a return to more normal seasonality following a record Q4 2022, and an unfavorable mix from our residential business.
For the year, Flow sales increased 5% to $1.58 billion, primarily due to double-digit growth in commercial and industrial solutions. Residential was down 4%, showing improvement sequentially from Q3. Full year segment income grew 17% and return on sales increased 170 basis points to 17.8%, a record margin for Flow, driven by transformation and price more than offsetting inflation.
Turning to slide 16, titled Water Solutions at a Glance, you can see the strong five-year financial records with a compounded annual sales growth rate of 17%, and over 400 basis points margin expansion since 2019. Our iconic brands include Everpure and Manitowoc Ice. Our residential water solutions products have helped reduce the need for 7 billion single-use water bottles in 2023.
Please turn to slide 17, labeled Q4 2023 Water Solutions Performance. In addition to the fourth quarter performance for Water Solutions, I will also be referencing the full year performance on slide 18. In Q4, Water Solutions sales decreased 5% to $270 million, following a record Q4 2022. Commercial sales were down 4% primarily due to the timing of projects within our services business, partially offset by growth in Manitowoc Ice and filtration. In residential, Q4 sales were down 6%, but reflects significant improvement sequentially from Q3 of this year in which residential sales were down 14%.
Segment income grew 15% to $52 million and return on sales expanded 320 basis points to 19.1%, a new Q4 record, driven primarily by productivity from our Transformation initiatives and Manitowoc Ice. For the year, Water Solutions sales grew 19%. Segment income grew 66% and return on sales increased 590 basis points to 21%, a new full year record. Commercial sales increased 54% driven by the acquisition of Manitowoc Ice and growth in filtration. Manitowoc Ice had a record sales year with growth of 23% versus the prior year.
Please turn to slide 19, titled Pool at a Glance. Looking at the five-year financial performance, Pool was able to grow the top line significantly and increase margins to a record 31%, or up 320 basis points since 2019. Our Pool business benefits from a very large installed base with roughly 80% of sales coming from remodel and break and fix.
Please turn to slide 20, labeled Q4 2023 Pool Performance. In addition to the fourth quarter performance for Pool, I'll also be referencing the full year performance on slide 21. In Q4, Pool sales declined 2% to $336 million driven by a 6-point drop in volume, which was partially offset by 4 points of price. Note that volume improved significantly compared to the 28-point decline in Pool volume in Q3. For the year, Pool sales were down 18%, segment income decreased 10%, and return on sales increased 270 basis points to 31% driven by price and our Transformation initiatives.
Please turn to slide 22, labeled Transformation Initiatives. Similar to last quarter, we believe this slide provides a good illustration of our Transformation initiatives and our ultimate goal of driving margin expansion. We have been targeting ROS of approximately 23% by the end of fiscal 2025, expanding margins over 400 basis points as compared to fiscal 2022. In 2023, we delivered ROS of 20.8% as Transformation began to read out in Q3 and Q4. And we expect to deliver roughly 22% by the end of full year '24, which we believe puts us on track with our Transformation initiatives.
Please turn to slide 23, labeled Transformation Runway. We have kept this slide as a reference to illustrate the staggered nature of each of the four initiatives and the various stages of each. We are pleased to note that we believe we are executing well on these initiatives going into 2024.
Please turn to slide 24, labeled Balance Sheet and Cash Flow. In Q4, we generated $97 million in free cash flow, up nearly 100% year-over-year, reflecting another strong quarter. For the year, our free cash flow was $550 million, up nearly 94% year-over-year. Our net debt leverage ratio was 2 times, down from 2.6 times in Q1. Our total debt was less than $2 billion and the average interest rate was approximately 5.2%. Our ROIC was 14.3%, which includes the full impact from the Manitowoc Ice acquisition. With a focus on being good stewards of capital, we continue to target high-teens ROIC. We plan to remain disciplined with our capital and continue to focus on debt reduction amid the higher interest rate environment with the potential for share buybacks.
Moving to slide 25 [Phonetic], titled Q1 and Full Year 2024 Pentair Outlook. For the full year, we are introducing our adjusted EPS guidance of approximately $4.15 to $4.25, which represents a year-over-year range of up 11% to up 13%. We expect total Pentair sales in fiscal 2024 to be up approximately -- to be approximately $4.2 billion or up about 2% to 3%. We expect Flow sales to be up low single digits, reflecting low to mid single-digit growth in our commercial and industrial businesses, offset slightly by a low single-digit decline in residential.
Water Solutions sales are expected to be essentially flat comping record 2023 performance driven by our commercial water business. Commercial sales in full year '24 are expected to be up low single digits and residential to be down low to mid single digits. Pool sales are expected to increase approximately 7% in full year 2024, which aligns the historical compound annual growth rates of mid single digits pre-pandemic. We expect Pool sales to increase, driven primarily by inventory headwinds in 2023 that we do not expect to repeat in 2024 and some benefit of price. We expect this growth to be slightly offset by the uncertainty that still exists regarding the macroeconomic environment, higher interest rates, the potential impact of financing for new and remodeled pools, and potential repaired deferrals in the aftermarket. We believe Pool remains a highly-attractive market for us and we look to deliver strong growth in 2024, while being mindful of macroeconomic dynamics.
We expect segment income to increase approximately 10% with ROS expansion of roughly 150 basis points. Also for the full year, we expect corporate expense of approximately $95 million, net interest expense of roughly $100 million, an adjusted tax rate of approximately 16.5%, which is inclusive of changes in the global tax standards for a total impact to Pentair of about $0.07 per share, and a share count of approximately 166 million to 167 million. Lastly, we expect to deliver approximately $1 billion in EBITDA in full year 2024, a milestone we are very proud of.
For the first quarter, we expect sales to be down approximately 2% to 3%. As a reminder, many of our businesses were working down large backlogs in Q1 last year as supply chains improved and we were able to ship more backlog orders. In 2024, we expect more normalized seasonality in our businesses. We expect first quarter segment income to be flat to down 3%, primarily due to lower sales with corporate expense of approximately $25 million, net interest expense of roughly $29 million, an adjusted tax rate of approximately 16.5%, and a share count of approximately 167 million. We expect Q1 to drive ROS expansion, both sequentially and year-on-year. We are also introducing adjusted EPS guidance for the first quarter of approximately $0.88 to $0.91.
For the first time since 2020, excuse me, we believe we are seeing a return to a more normalized operating environment globally. Thus, we expect to see seasonality resume to historical norms across all three of our segments in 2024, with Transformation driving margin expansion. In the first half of 2024, we expect adjusted EPS to be slightly less than 50% of our full year adjusted EPS guide. Q1 is expected to be the lowest quarter for sales, segment income, ROS and adjusted EPS as compared to the remaining three quarters in full year '24. We have continued to accelerate Transformation funnels and remain focused on investing in the long-term growth of our company.
Turning to slide 16, titled 2023 Reflection. Our business continued to execute well and delivered what we said we would do. We drove margins as a result of our balanced water portfolio and Transformation initiatives. Manitowoc Ice posted a record year exceeding expectations. We drove performance accountability across the organization, ended the year with an even stronger balance sheet and free cash flow, and maintained a disciplined capital allocation strategy. We believe we are well positioned going into full year '24.
I would now like to turn the call over to the operator for Q&A, after which John will have a few closing remarks. Drew, please open the line for questions. Thank you.
