Pentair plc (PNR) Earnings

Management highlights

### Strategic Acquisition of TACO (Keiko Group Holdings) - Pentair agreed to acquire TACO, a market leader in hydronic and water-based solutions, for $1.4 billion. The transaction aligns with Pentair's long-term strategic priorities and is expected to close in Q4 2026. - The acquisition broadens Pentair's water solutions portfolio, strengthens positions in high-growth secular end markets including HVAC, data centers, multifamily residential, and infrastructure, and expands the company's exposure to recurring aftermarket revenue (85% of TACO's revenue comes from replacement products, maintenance, and upgrades). - TACO adds ~$10 billion in addressable market, has a 40 million unit installed base primarily in North America, and is expected to be 10-15 cents accretive to adjusted EPS in 2027. Pentair expects $30 million in run-rate cost synergies within 2-3 years, with growth synergies expected to exceed cost synergies over the long term. TACO will operate as a standalone business unit within the Water Solutions segment to preserve its strong brand and customer relationships. ### Pool Segment Operational Restructuring - Management acknowledges Pool segment underperformance in Q2 2026 was driven by larger-than-expected channel inventory destocking, poor implementation of the 80-20 customer segmentation strategy that disrupted relationships with smaller independent dealers, and lost aftermarket share on 10-15 year old installed pads that lacked accessible like-for-like replacement product. - A comprehensive action plan has been launched to right-size channel inventory by the end of Q3 2026, re-engage dealers, align sales and marketing by region, refocus innovation on customer needs, and recapture lost aftermarket share, with the goal of returning Pool to robust growth in 2027. ### Capital Allocation - Pentair repurchased $150 million in shares in Q2 2026, has increased its dividend for 50 consecutive years (Dividend King status), and maintains a strong balance sheet with a net debt leverage ratio of 1.4x at the end of Q2 2026. - The TACO acquisition will be funded with cash on hand and committed bridge financing, with net leverage expected to hit ~2.4x at closing. Management will prioritize debt paydown to reduce leverage back below 1.5x within two years of closing, while continuing to support dividend growth and modest share repurchases. ### Core Segment Performance - Flow and Water Solutions both delivered record ROS even excluding tariff refund benefits, confirming the resilience of Pentair's diversified business portfolio and meeting full-year performance expectations.

Guidance

- Full year 2026 guidance (excluding the TACO acquisition) is unchanged from the July 14, 2026 pre-announcement: adjusted EPS is maintained at $4.60 to $4.80, and total company sales are expected to decline 4% to 7% YoY, with a midpoint of ~$3.95 billion. - Full year 2026 segment sales guidance: Flow sales are expected to grow mid-single digits to high single digits; Water Solutions core sales are expected to grow low single digits (flat overall after accounting for the 2025 commercial service business exit); Pool sales are expected to decline 18% to 22% YoY. - Full year 2026 adjusted operating income is expected to decline 5% to 9% YoY, with $55 million in net productivity savings and total tariff refunds of $35 million to $50 million. - Q3 2026 new guidance: total sales are expected to decline 4% to 6% YoY (midpoint ~$970 million), with Flow sales up high single digits, Water Solutions sales up low single digits, and Pool sales down 23% to 25% as inventory destocking continues. Adjusted operating income is expected to decline 14% to 16% YoY, and adjusted EPS is guided to $1.05 to $1.08. - Management expects significant sales, operating income, and EPS growth for Pentair overall and the Pool segment specifically in 2027, with Pool targeted to return to ROS in the low 30% range.

Segment performance

Total company Q2 2026 sales were $933 million, with adjusted operating income of $237 million, return on sales (ROS) of 25.4%, and adjusted EPS of $1.14. Segment performance details: 1. **Flow**: Q2 sales were $264 million, up 5% year-over-year (YoY), contributing 28.3% of total company revenue. Segment income grew 27% YoY, with ROS increasing 470 basis points to 26.5%. Even excluding tariff refund benefits, Flow delivered record ROS, driven by productivity gains, the Hydrostop acquisition, and price realization. Order wins across commercial building, data center, and desalination markets supported performance. 2. **Water Solutions**: Q2 sales were $422 million, down 5% YoY, contributing 45.2% of total company revenue. The sales decline was driven by the exit of the commercial service business in Q2 2025; core sales show low single-digit growth, with the pro channel continuing to grow from repeatable, high-quality demand. Segment income grew 17% YoY to $126 million, with ROS increasing 560 basis points to 30%. Even excluding its $18 million in tariff refunds (the largest among the three segments), Water Solutions delivered record ROS, driven by disciplined pricing and productivity. 3. **Pool**: Q2 sales were $247 million, down 42% YoY, contributing 26.5% of total company revenue. Segment income was $58 million, down 62% YoY, with ROS of 23.4% (down from 35.7% in Q2 2025). The steep decline was almost entirely driven by $170 million in channel inventory destocking to prepare for the 2027 pool season, with a smaller contribution from moderating end-market demand in North American discretionary residential markets. Price realization offset inflation excluding the one-time tariff refund benefit.

Risks & headwinds

- The Pool segment's near-term underperformance has been larger than originally expected, driven by pre-buy activity from large 2025 price increases that inflated channel inventory and implementation missteps with the 80-20 customer segmentation strategy that disrupted independent dealer relationships and led to lost aftermarket share. - Post-acquisition leverage will increase to 2.4x at closing, requiring multi-year debt paydown that temporarily reduces capital allocation flexibility for additional acquisitions or larger share repurchases. - Flow segment performance faces near-term macroeconomic headwinds in international markets, particularly Europe, that have suppressed core sales growth in the quarter. - Forward-looking statements about 2027 Pool growth and TACO acquisition synergies are subject to uncertainties around channel inventory rebalancing, integration execution, and general macroeconomic conditions that could cause actual results to differ materially from expectations.

Analyst Q&A

• Q: The pool destocking effort: is it concentrated in specific regions or product categories? What is the timeline for TACO's $30 million in cost synergies, and will TACO's profitability reach Pentair's segment margin average long-term? /

  A: The pool destocking is broad across all geographies and product categories, with no concentrated subset of inventory being adjusted. For the TACO acquisition, the $30 million in run-rate cost synergies (primarily from Pentair's purchasing power and economies of scale) will be fully achieved over 2-3 years, with some synergies accruing as early as 2027. Management prioritizes long-term top-line growth synergies over near-term cost gains, expects Pentair's business system will improve TACO's margin profile over time, and will run TACO as a standalone business to preserve its existing successful go-to-market strategy.

• Q: For 2027, what is your expected pool sales growth and margin range after the 2026 inventory reset? /

  A: Management expects pool sales to be around $1.45 billion in 2027, representing double-digit percentage growth from the 2026 expected full-year level, with a low 30% ROS target. This base case assumes flattish dealer sell-through, with upside potential from volume growth as Pentair implements its dealer engagement and product roadmap changes. No structural changes to the pool market or margin profile are expected, and incremental growth investments will be modest and targeted.

• Q: Why is Pentair seeing this large-scale channel destocking when competitors do not appear to have the same issue, and will business processes be updated to improve market intelligence going forward? /

  A: Pentair entered 2026 with double-digit growth expectations based on channel checks, but unforeseen macro headwinds (higher interest rates, higher energy prices, Middle East conflict) slowed sell-through after a pre-buy in 2025 driven by 7-8% planned price increases. The large size of the correction reflects the impact of a moderate percentage sell-through miss amplified by Pentair's large scale, and management made the proactive decision to fully right-size inventory in 2026 to avoid impacting long-term growth. Process adjustments to improve ongoing channel visibility have been implemented as part of the restructuring.

• Q: Did the 80-20 customer segmentation strategy cause disruption with smaller dealers that contributed to lost share? /

  A: Misimplementation of the 80-20 strategy, specifically incorrect assumptions about independent smaller distributors and dealers outside of the two largest distribution channels, did cause relationship disruptions that contributed to the lost aftermarket share Pentair has experienced. Management is actively reversing those incorrect decisions and working to reestablish those long-term dealer relationships to recapture the lost share.

• Q: What is TACO's historical growth profile, and how much of its growth is driven by the data center end market? /

  A: TACO has historically been a high single-digit grower, with accelerating growth in 2026 driven by expansion into data center infrastructure in addition to core strength in HVAC, hydronics, and multifamily residential. TACO's end-market exposure expands Pentair's addressable market by $10 billion, creates cross-selling opportunities with Pentair's existing product portfolio, and aligns with secular growth trends in energy efficiency, sustainability, and digital infrastructure buildout.