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 eight. We delivered another strong quarter of quality earnings. Sales rose 2% to $1.1 billion, while adjusted operating income increased 16% to $271 million. ROS expanded 310 basis points to 24.7%, driven by sales growth and transformation.
All three metrics achieved new records post the separation of nVent from Pentair in 2018. Core sales were up 2% year-over-year, driven by 18% growth in Pool, which was somewhat offset by a 3% decline in Flow and a 7% decline in Water Solutions. Both Flow and Water Solutions reported record sales in the prior year period due to supply chain improvement and our ability to ship a large portion of backlog orders.
Sales across all three segments increased sequentially from Q1 as expected, our second quarter sales have typically been our highest sales quarter of the year. We are very pleased to see Pool return to growth for the first time in eight quarters.
All three segments drove significant margin expansion in the second quarter. Lastly, we delivered record adjusted EPS of $1.22 post the nVent split, which exceeded the high end of our guidance by $0.05 and was up 18% year-over-year.
Please turn to slide nine. Flow sales declined 4% year-over-year compared to a record quarter last year. Residential sales declined 10% as compared to the prior year quarter, but reflected an improvement sequentially from Q1.
Commercial sales rose 2% compared to a record prior year. Industrial sales were flat in Q2, reflecting our decision to discontinue certain projects that no longer met our profitability criteria. Segment income grew 13% and return on sales expanded 310 basis points to 21.3%, marking the first time ROS has reached or exceeded 21%. The strong margin expansion was a result of continued progress on our transformation initiatives.
Please turn to slide 10. In Q2 Water Solutions sales declined 8% to $311 million, driven by declines in both commercial and residential. We expected our commercial business to be down in light of a record prior year comparison driven by Manitowoc Ice's ability to work through a significant portion of backlog orders.
We were pleased with filtration sales strength in Q2. Segment income declined 3% to $73 million and return on sales expanded 130 basis points to 23.5%, driven primarily by transformation which continued to drive operational efficiencies as well as mix. This was the ninth consecutive quarter of ROS expansion. Margins have expanded nearly 900 basis points over the last two years.
Please turn to slide 11. In Q2, Pool sales increased 17% to $392 million. Segment income was $134 million, up 27% and return on sales increased 270 basis points to 34.1%, driven by sales growth and transformation.
Please turn to slide 12. At our investor day in March, we shared our updated three-year margin targets. We expect 2026 ROS to expand to 24% over 540 basis points as compared to 2022, driven by contributions from all four of our key transformation initiatives, pricing, sourcing, operations and organization.
And we have the opportunity to do even better as we discussed at our March investor day. In 2023, we achieved ROS of 20.8% and expect to continue to drive margin expansion to approximately 23% by year end 2024, an increase of nearly 100 basis points from our previous guidance.
Please turn to slide 13. As we mentioned in our March Investor Day, we expect 80/20 to enable and accelerate our transformation initiatives. It's another tool in our toolkit to help our businesses enhance the customer experience and reduce complexity. The 80/20 analysis uses a quadrant based strategy to assess customers and products.
Simplistically, the first quadrant reflects a combination of customers and products, which drive a majority of revenue and profit. Conversely, the fourth quadrant reflects customers and products that represent roughly 4% of revenue but includes 15% to 25% of total cost to serve.
We expect to focus on customer segmentation over product segmentation to enable us to implement customer strategies based on each quadrant. As a result, we can take specific actions tailored to each quadrant to drive higher and more profitable growth over time.
To date, we have assessed about 50% of our total revenue using 80/20 and are currently evaluating this analysis and developing action plans. 80/20 is about treating our customers fairly but differently depending on the circumstances. The objectiveness of the data frees the organization to make the right decisions.
We expect to see the largest benefit from 80/20 in operations. However, we also believe G&A and new product introductions will be impacted by the fourth quadrant due to the effort required to serve. We expect this to benefit our organizational excellence efforts as well.
We believe the 80/20 analysis is a great complement to our transformation program. We expect to see a noticeable contribution in 2025 as these plans are rolled out. I'm excited about the process and the findings, and I expect it to lead to larger transformation opportunities.
Please turn to slide 14. In Q2 we achieved record free cash flow of $522 million. We deployed capital to lower our long-term debt, restart share repurchases and pay our quarterly dividend. During the quarter, we repurchased approximately 600,000 shares for a total of $50 million.
We have an additional $550 million available on our share repurchase program. Our net debt leverage ratio was 1.6 times down, significantly from 2.2 times in the prior year period. Our ROIC was nearly 15%. Long term, we continue to target high teens return on invested capital.
We plan to remain disciplined with our capital and continue to focus on debt reduction amid the higher interest rate environment and share repurchases. As I mentioned last quarter, with the net debt leverage ratio within our target range, we have additional flexibility to strategically allocate additional capital to areas with the highest shareholder returns.
Moving to slide 15. For the full year, we are increasing our adjusted EPS guidance to approximately $4.25, which is up roughly 13% year-over-year and is at the high end of our previous guidance range.
Also, for the full year, we expect sales to be approximately flat to down 1%, driven by a continued sluggish economy. The second half of 2024 reflects the anticipated reality of a continued higher interest rate environment and its impact on the global economic landscape. For Pentair, this means we are lowering the back half revenue expectations by about $120 million at the midpoint of our guidance.
About $30 million of this is in Pool, which reflects the expectation of primarily slower Pool builds and remodels. About $30 million is in Water Solutions and is in lower margin commercial services and global water treatment end markets and about $60 million in Flow is primarily related to residential delayed industrial projects and being more focused around standardized offerings and recurring revenue to drive higher profitability.
We now expect Flow and Water Solution sales to be down approximately low-single-digits and Pool sales to be up approximately mid-single-digits for the full year. Within Flow, we expect residential to be down approximately high-single-digits, commercial to be up approximately mid-single-digits and industrial to be roughly flat as we continue to be selective around certain projects.
Within Water Solutions, we expect residential to be down approximately low to mid-single-digits and commercial to be down approximately low-single-digits, primarily due to services. We're also updating expected adjusted operating income to approximately increase 10% to 11%.
We are pleased to be able to increase our adjusted EPS guidance despite the lower revenue, we are increasing expected transformation savings to approximately $100 million for 2024 as compared to $75 million in our previous guidance, driven by higher productivity. We expect to improve our mix of higher margin businesses and continue our focus on pricing initiatives to offset inflation.
Due to a continued sluggish economy we expect sales to be down approximately 2% to 3% for the third quarter, but adjusted operating income to increase 10% to 12%. We are also introducing strong adjusted EPS guidance for the third quarter of approximately $1.06 to $1.08, up roughly 14% at the midpoint.
Before I turn the call over to the operator for questions, I want to say how pleased we are with our second quarter record performance. Our teams have been working diligently and effectively to mitigate uncontrolled risk like continued global economic pressures, while working to deliver strong financial results and executing our major initiative transformation, which now includes 80/20. We are very proud of the hard work and dedication of our entire Pentair team.
I would now like to turn the call over to the operator for Q&A, after which John will have a few closing remarks. Operator, please open the line for questions. Thank you.
