Zurn Elkay Water Solutions Corp Q4 FY2025 Earnings Call

Good morning, and welcome to the Zurn Elkay Water Solutions Corporation Fourth Quarter 2025 Earnings Results Conference Call with Todd Adams, Chairman and Chief Executive Officer; and David Pauli, Chief Financial Officer for Zurn Elkay Water Solutions. A replay of the conference call will be made available as a webcast on the company's Investor Relations website. As a reminder, this call contains certain forward-looking statements, which are subject to the safe harbor language outlined in Zurn Elkay's press release issued yesterday afternoon and in the company's filings with the SEC. In addition, some comparisons will refer to non-GAAP measures. The company's earnings release and SEC filings contain additional information about these non-GAAP measures, why they are used and why the company believes they are helpful to investors and contain reconciliations to the corresponding GAAP confirmation. Consistent with prior quarters, the company will speak to certain non-GAAP metrics as they feel they provide a better understanding of the company's operating results. These measures are not a substitute for GAAP. Zurn Elkay encourages you to review the GAAP information in its earnings release and SEC filings. With that, I'll turn the call over to Todd Adams, Chairman and CEO of Zurn Elkay Water Solutions.

Thanks, Rebecca, and good morning, everyone. I'll start on Page 3. We wrapped up calendar year 2025 with a pretty decent fourth quarter as sales grew 10% organically over the prior year Q4 and EBITDA grew 14% to $104 million, with margins expanding 100 basis points to 25.6%. In the quarter, we generated $83 million of free cash flow, bringing the full year to $317 million, which was up 17% over 2024. Over the course of the year, we repurchased about 3% of our outstanding shares for $160 million and paid $64 million in dividends. All this while leverage declined to 0.4x. Taken as a whole, we accomplished a lot over the course of 2025. The most important of which are the additional sustainable competitive advantages we've built in our business that will help us grow faster and be more profitable in the future, and I'll touch on those in just a bit. Along the way, 2025 afforded us the opportunity to live test the supply chain optimization plan that we have been deploying and talking about for several years and for the most part, it's worked flawlessly. We quickly celebrated 2025 here, our attention has turned to the next 3 years and even more specifically delivering another record year in 2026. For us, leveraging the Zurn Elkay Business System and everything we do, and how we operate, keeps us relentlessly focused on getting just a little bit better every day. To that end, one of the core pillars of ZEBS is our strategic planning and strategy deployment process. We wrapped up our annual 3-year strategic planning process in Q4 and are now actively deploying year 1 of that plan. It's a process we've used and done annually for about the last 18 years or so, and we think we've made continual improvements in that process. But this process isn't a desk exercise. It's a full contact sport where we evaluate every aspect of our business from our markets, competition and our industry to products, customers, channels and adjacency as well as larger, more disruptive ideas. We ask what's changed, what did we get wrong last year and what are our risks? And importantly, where can we further exploit the competitive advantages we've built? This defines and aligns our organization around what our priorities are going to be over the next coming 1, 2 or 3 years. The resources and investments required as well as the tools, processes and capabilities we need to leverage or develop to get there. While we're not going to be super specific this morning about the exact things we're up to, at least at this juncture, I can say this. We see more new organic growth opportunities, largely in adjacencies and underserved verticals than I can remember. We have a plan to attack these opportunities. And assuming we execute, which we have a reasonable track record of doing, I'm confident this only enhances our organic growth trajectory over the coming 2 to 3 years. I also believe that in time, our approach in attacking these adjacencies and verticals will have an incrementally positive impact on our M&A cultivations. Before I turn it over to Dave, I'll touch just briefly on our initial outlook and framework for 2026. The approach we're taking to our outlook this year is exactly the same approach we've taken in the past. We start with a range of outcomes that are reasonable, not back half weighted and in line with our demonstrated performance. We then go about retiring risks quarter-by-quarter while we work on our strategic breakthroughs. We gave everyone our view on the market last quarter, and that hasn't changed. We also have some carryover price from last year. And most importantly, we're executing well. All things equal, we're off to a really good start in January, but still 11 months to go in 2026. So now I'll hand it over to Dave to take you through some more color on the quarter.

Thanks, Todd. Good morning, everyone. Please turn to Slide #4. Our fourth quarter sales totaled $407 million, which represents 10% core and reported growth year-over-year. Continuing what we saw throughout 2025 and in line with our expectations going into the quarter, core sales growth in our nonresidential end markets outpaced the softness we experienced within residential and pockets of the commercial segment within nonresidential. In the fourth quarter, we continued to deliver positive price/cost position with respect to tariffs and saw the benefit of roughly 5 points of price in the quarter from our previously announced tariff-related pricing actions. Overall, we continue to have solid execution on our growth initiatives, and they helped to drive our sales performance above the outlook we provided 90 days ago. Turning to profitability. Our fourth quarter adjusted EBITDA was $104 million, and our adjusted EBITDA margin expanded 100 basis points year-over-year to 25.6% in the quarter. The strong margin and year-over-year expansion was driven by the benefits of our productivity initiatives, leveraging our Zurn Elkay Business System and continuous improvement activities across the organization that Todd will touch on in a few slides. For the fourth quarter, profit performance continued on a trend we saw all year of strong year-over-year margin expansion. In 2025, our sales and adjusted EBITDA have increased $129 million and $52 million, respectively, which represents a 40% drop-through on the year-over-year volume increase. Our full year adjusted EBITDA margin improved 120 basis points year-over-year as core sales grew by 8% in 2025. Please turn to Slide 5, and I'll touch on some balance sheet and leverage highlights. With respect to our net debt leverage, we ended the year with leverage at 0.4x, the lowest leverage we've had as a public company. We continue to repurchase shares in the quarter, we deployed $25 million to repurchases. That puts our 2025 full year repurchases at $160 million with an average repurchase price of $36.74. Free cash flow finished strong at $83 million in the quarter, bringing our full year total to $317 million or a 17% improvement year-over-year. We continue to cultivate and evaluate our funnel of M&A opportunities and our combination of management team capability, low leverage and cash flow generation all support our ability to execute on the right M&A opportunity. At the same time, we're actively working on entering organic adjacencies through investment in internal development. I'll turn the call back to Todd.

Thanks, Dave. I'm back on Page 6 here, where I want to briefly highlight a few of the things you'll see in our 2025 sustainability report that we'll be issuing later this month. So last year alone, our drinking water products provided 2.4 billion gallons of cleaner, safer filtered water while preventing 20 billion single-use plastic bottles from entering waterways. We launched Pro Filtration, our latest evolution of our trusted Bottle Filling Station line, advancing both water quality and sustainability for customers worldwide. Pro Filtration features included top-mount filter access for faster 30-second filter changes and reduced downtime, new 10,000-gallon filtration capacity for longer filter life—filter life gauges, UVC LED lights. We also introduced a filter that expanded filtration beyond PFOA and PFOS to capture the full family of PFAS, or forever chemicals. Filters are now certified to reduce microplastics, lead, total PFAS and much more. And we expanded our filtration portfolio with Liv EZ bringing commercial-grade water filtration into residences, commercial and hospital applications, helping people enjoy the same high-quality water trusted in schools, airports, hospitals and stadiums. We're especially excited to share that we have recently partnered with TerraCycle to launch a recycling program for used water filters. Customers can now return filters through TerraCycle's Zero Waste Boxes where plastic casings are repurposed into durable industrial materials and carbon media is responsibly managed. Activated carbon filters like ours retain more than 99.5% of PFAS, ensuring contaminants remain securely contained during disposal. And it's not just advancements in drinking water. The sustainability benefits of our products permeate into our other product categories. Our World Dryer hand dryers eliminated the need for 3.5 billion paper towels in 2025. We launched the SANITIZE + DRY sanitizing dryer, a breakthrough hygienic, sustainable hand dryer. Its cold plasma technology neutralizes 99.99% of common bacteria and viruses, including SARS, COVID, E. coli, Norovirus, Influenza A, and the common cold, all without chemicals. It's not why we do it, but our work continues to earn recognition. Zurn Elkay again maintained top-tier ratings from Sustainalytics, MSCI and S&P Global. And we were named to 6 leading sustainability lists, including Newsweek, TIME, Barron's, and USA Today. We are proud of our efforts to expand access to clean water. Our Fountains for Youth program continued delivering filtered bottle filling stations to under-resourced schools, helping ensure students have reliable access to clean, safe drinking water. And in total, we reached $1.9 million in philanthropic giving in 2025. All in, another really solid year of walking the talk with respect to sustainability and watch for the report in the coming weeks. So the last one for me is on Slide 7. And last quarter, I shared our 1-page slide on ZEBS that depicted how we think about and manage our business, leverage our operating philosophy and ultimately, how we measure ourselves. In the middle of all of it, we highlighted that the glue to this was the Zurn Elkay Business System, our common language, which is rooted in a deep culture of continuous improvement. We found that continuous improvement can connect and engage everyone, in every location, function and role around the simple idea of making things 1% better every day. And the best part of it is it compounds every day and improves quality, better customer satisfaction, more engaged associates, lower cost, career development, the list goes on and on. We have an internal portal creatively named #CI, where we ask our associates to communicate and share in real time some of the things they're doing or have done to get better. This creates a way to celebrate successes, share ideas and radiate these across the company regardless of position or location. Back in 2024, our team of roughly 2,500 managed to log 3,741 #CI submissions. In 2025, that same group of roughly 2,500 people submitted 5,568, an increase of almost 49%. And if I was a betting man, which for the record, I'm not, I take the over on what our team will do in 2026. And now I'll turn it back to Dave for the outlook.

Thanks, Todd. I'm on Slide 8 with our 2026 guidance framework. As Todd mentioned earlier, our approach to the guidance is the same as we've taken in the past, providing a framework that we have confidence in our ability to deliver taking into account the fact that we are 1 month into the year and a range of outcomes are possible. With respect to the full year and based on the assumptions I'll touch on shortly, we expect core sales to be up mid-single digits, incremental adjusted EBITDA margins of approximately 35% on the increased sales and generate approximately $335 million of free cash flow in 2026. On the upper left-hand side of the slide are a few assumptions embedded in our outlook. From an end market perspective, our outlook assumes our markets in total look a lot like what we just saw in 2025. Institutional and waterworks end markets continue to grow at low single digits. Commercial end markets to be flattish and a continued tougher residential end market. The result of these individual end market expectations combines to an overall assumption that the market is generally flat to slightly positive. In terms of price, we will have a higher price impact in H1 as by the second half, we cycle against quarters that already have the tariff-related price realized. One of the uncertainties that will impact 2026 that we are actively monitoring is the evolving tariff environment. Our guidance assumes that the tariff countries and their respective rates remain consistent throughout the year and are consistent with today's levels. As a business, we navigated through the 2025 tariffs very well and continue to action our strategy to exit direct material purchases from China. We are on track and with some products ahead of schedule to our goal of having only a few points of COGS spend coming out of China by the end of 2026. As we did in 2025, we again remain confident in our ability to execute to positive dollar price/cost impact from tariffs in 2026. For the first quarter of 2026, we are projecting core sales growth to increase 7% to 8% over the prior year with incremental adjusted EBITDA margins of approximately 35% on the year-over-year growth. At 35% incremental margins, the EBITDA margin for Q1 will be approximately 25.5% to 26%. It's roughly 60 basis points of margin expansion over the prior year at the midpoint of the range. In Slide 8, we've included our first quarter and full year outlook assumptions for interest expense, noncash stock compensation expense, depreciation and amortization, adjusted tax rate and diluted shares outstanding. We'll now open the call up for questions.

And at this time, your first question comes from Bryan Blair with Oppenheimer.

Very solid close to the year.

Thanks Bryan.

I guess starting with your core sales outlook, maybe speak to what your team is seeing to kick off 2026? And then how we should think about the build to mid-single digits in terms of market outgrowth and price carryover or perhaps incremental price being baked in.

Yes. I mean I would sort of decouple those 2 for a moment and say, if you look at what we're saying for Q1, we're looking at 7% to 8%. I think we're off to a really good start. I think as I also mentioned in my intro comments, there's 11 months to go. And so I don't know that there's a discrete framework that marches you from 7% to 8% to mid-single digits other than there's probably a little bit more price in the first half than second. But all things equal, I think we endeavor to beat what we're saying for the year. And we're off to a really good start, Bryan, I think is the only way to characterize it.

Understood. That makes sense. And as a follow-up, your balance sheet is in a pretty fantastic position. You're obviously generating a lot of cash flow. Maybe touch on the deal environment now. It's been a while since your team has executed a transaction. I know that's not based on inactivity behind the scenes. Just curious how your funnel has developed, how we should think about actionability this year, whether there's, I guess, any excitement on that front.

Yes, as we discussed, we've gone through our strategic planning process and have been thorough in examining potential opportunities. There’s a renewed perspective on the opportunities in our pipeline, and we are seeing ongoing progress in initiatives that have been in development for some time. We haven't identified any transactions that we regret missing. Therefore, I am hopeful that our ongoing cultivation efforts, combined with a fresh outlook on adjacent possibilities, will be beneficial, both organically and inorganically. We have significant flexibility this year to buy back shares, reassess our dividend, and ideally pursue mergers or acquisitions that align with our criteria and can generate value. While I remain optimistic, I'm not making any predictions or projections.

Your next question comes from the line of Nathan Jones with Stifel.

This is Adam Farley on for Nathan. Following up on that last M&A question. Could you provide any more color or detail on maybe some of the adjacencies or verticals that you've identified through that your planning cycle?

Adam, you're a little bit muffled. I can't quite hear what you're saying.

Yes. So following up on that last M&A question, could you provide any more detail or color on maybe the new adjacencies or verticals that you've identified in your 3-year planning cycle?

Yes. I guess, I will give you a little color. I mean, I think it looks and feels a lot like things we do today. So it's North American-based. It's in and around water, professional-grade plumbing. It could have flavors of leveraging certain lead products into different verticals. And I'll take you back to what we did in fire protection 5, 7 years ago, where we identified we had some niche products and then we built out a portfolio around that and then grew our fire protection business into something that's substantial. And so it's got a lot of that flavor where we start with maybe a larger application where we have some products that are involved and then what else can we add to that bundle, either organically or inorganically to all of a sudden be a formidable supplier into that vertical or into a discrete market adjacency. So I think you'll see some of these things roll out over the course of the year. And when we do that, I think it will become obvious as to why it makes sense for us to get into these and the kind of incumbency that we have right next door that we can leverage that kind of expertise, that go-to-market, that supply chain into these adjacencies and be a formidable competitor right away.

Okay. That's helpful. And then looking at the 2026 guide, given some of the more recent increases in metal prices and continued general inflation, I mean, do you think you need to or maybe already have been out to the market with additional price increases?

Yes. I mean it's certainly something we're watching. We're not oblivious to it. But in the same breadth, I think when you look at what we're doing with our supply chain, our costs are coming down month by month as we continue to move and leverage the new supply chain base that we've created. That being said, yes, we've seen and watched metals. And I think it's one of those things where we'll be as judicious and smart about any incremental price as we can for our customers and the industry itself. But it is something we're watching. But for the time being, we feel like we're relatively well positioned.

Your next question comes from the line of Michael Halloran with Baird.

This is Pez on for Mike. I wanted to ask about the drinking water business. I know in October, the Lead and Copper Rule was introduced by the EPA, and I understand there were presentations and educational initiatives in November, along with some adjustments to the plan in December. I'm curious if you see that as a catalyst for growth in the drinking water sector, particularly in schools, or more as a means to maintain the positive trends in attachment and acceptance that you've experienced since the merger?

Pez, I think we view it as helping to sustain. I think things like what the EPA came out with only help to continue to raise the awareness around drinking water and some of the drinking water quality issues that we have here in the U.S. So whether it's lead, whether it's lead and copper rules, whether it's PFAS, microplastics, I think any of the legislation or pending things that you see around that is only helpful for us. I think it continues the trajectory that we saw and don't see it as an accelerant to what's already out there, but it doesn't hurt the overall drinking water story.

Yes, Pez, the way to think about it is that bottle filling is a relatively new category. There are 6 million of these drinking fountains installed. As people become more aware, it will help with that. This market has a long growth potential. I am not sure we actually need an acceleration; I believe it’s just a consistent progression of improved products, increased awareness, and timely funding. Once the installed base continues to expand, the filtration opportunity will grow significantly from there. I concur with Dave's perspective that this may not speed up the process as much as it serves as another step towards converting this vast installed base.

Understood. That makes a lot of sense, particularly given the traction that you've already been seeing. Maybe switching gears a little bit. When we take a look at the incremental margin guidance, obviously, execution has been exceptional. The 42% pull-through last year, the supply chain optimization, it feels like that 35% is probably a prudent approach to 2026. And I know that you said that you're taking a similar approach to guidance as you have in the past, trying to remain prudent in mitigating potential risk through the year. As we move forward, do you see an opportunity for that baseline incremental margin to move higher over time, just given some of the work that you've done on supply chain optimization, the new product innovation and just the mix of overall business evolution?

We are focused on continuing to invest in organic growth as we have discussed. Currently, our fastest-growing categories and products are performing above the fleet average. This mix will naturally lead to an increase in the overall incremental margin over time, especially as we allocate resources and invest further in growth. We believe that a 35% margin is a solid baseline for us. If we execute as we expect over the next 2 to 3 years, there is definitely potential for that number to increase.

Your next question comes from the line of James Ko with Jefferies.

So I wanted to ask about kind of just the construction industry kind of overall. I mean, you obviously track many different indicators, but data continues to kind of suggest elevated planning pipeline, but the conversion remains weak given kind of declining billing. So what are some tangible signs that you're watching that would suggest inflection point in project conversion here?

Yes. When we review the situation, James, if you refer back to some information we shared during our last earnings call, we consider several indices. We specifically pointed out some of the Dodge square foot data. The guidance we provided for 2026 reflects our current observations. We see an institutional market that keeps growing, a slower commercial market, and a residential market that we initially viewed as flat at the beginning of 2025, but it turned out to be a bit more challenging. Analyzing our incoming order rates and project starts through our representatives nationwide gives us good insight into construction activity levels, and we are confident that the guidance we provided for 2026 will closely resemble what we experienced in 2025.

And I wanted to touch on the drinking water business here again. Can you kind of update us on how filter attachment rate is kind of progressing with the Pro Filtration? And it seems like gallons of filter water kind of increased like mid-single digit in 2025. So how should we think about that in terms of filter sales?

Yes, we've observed strong initial adoption of Pro Filtration, which is the product Todd mentioned with its unique features that launched this summer. The features and benefits Todd outlined were directly requested by consumers and maintenance personnel who use the product daily. One of the advantages of this product is that as we sell it, the attachment rate is quite high. We've introduced a proprietary head designed specifically for our filters, and to ensure the unit operates correctly, it's essential to change the filter regularly. Pro Filtration will aid us in maximizing that attachment rate. Additionally, we’re seeing noteworthy growth in the volume of filtered gallons. We can track how many filters we've sold and the corresponding gallons filtered. This reflects the ongoing efforts of our team to integrate the latest Pro Filtration specifications and ensure we promote the associated filtration effectively.

I don't think we will be measuring the attachment rate every 30 or 90 days. With the recent launch of Pro Filtration and its very high attachment rate, as it becomes a larger part of our overall shipments and integrates into the installed base, it will undoubtedly raise the overall attachment rate. It's a good question, and we are monitoring it, but I believe it's not something that requires a 30- or 90-day timeframe. We need to get Pro Filtration units into the market throughout the year. We know its attachment rate is exceptionally high, and as time goes by—over the span of 1, 2, and 3 years—this will compound, demonstrating a very promising trajectory for filtration.

Your next question comes from the line of Jeff Hammond with KeyBanc.

Can you provide the pricing for the fourth quarter and what is included in the first quarter? Additionally, regarding your announced pricing for this year, does it align with a return to normal rates, or does it include a higher annual price increase due to new tariffs or copper inflation?

Yes. I think any price increases that we've put in place this year, Jeff, are sort of back to normal course. And then in terms of what's in Q4 and what's in the guide, I think Dave will.

Yes, Jeff. Yes, so Q4 was about 5 points of price. And I think the way to think about price in 2026 is I'll just walk you through what we experienced in 2025 and 2026 looks like the inverse. So Q1 was light price. Q2 1 point or 2 of price. And then in the back half of 2025, we had 4 to 5 points. And so as it rolls into 2026, it's almost the exact opposite. You've got 4 to 5 points of price in the beginning and then starts to lap some of the price increases that we put to the back half of the year.

As you consider these adjacencies and new products, I recall when you were thinking about entering the Elkay market before ultimately acquiring it. Do you see, Todd, how these organic opportunities can lead to inorganic ones? Please discuss how you envision these working together as you evaluate some of these adjacencies.

Yes, that's a great question, and it relates closely to our strategic planning approach. As we analyze our work alongside competitors and markets, we evaluate the necessary steps to compete effectively. This process initiates two pathways: identifying internal priorities that may pave the way for potential M&A opportunities. We assess these options for some time before deciding which direction to take, and we commit to that decision. This methodology has been in place for quite a while. Recently, as we've broadened our perspective on our addressable market, we've discovered more potential for M&A that we may not have previously explored, alongside our capability for organic growth. This approach aligns with what led us to Elkay, as you mentioned. We see significant potential if our market grows by $1 billion, $1.5 billion, or even $2 billion. Even a growth of 1% translates to $17 million and 2% to $34 million. This represents a great opportunity over the coming years to boost our organic growth rate, either through organic means or beneficial transactions that we’ve already assessed and are familiar with. We are optimistic that positive outcomes will arise from these efforts.

Your last and final question comes from the line of Brett Linzey with Mizuho.

Just a follow-up on the adjacent market strategy. So I understand you don't want to expand too much on the product categories. But maybe just a finer point on the expense or the product development spending you think is required this year as you ramp up and get set for any type of commercialization there.

Yes. I mean, there was clearly some throughout 2025, there will be more in 2026. It's measured in the millions of dollars for sure. But it's all sort of embedded in sort of that $35 million for the year, maybe better. But yes, it's going to be one of those things where we're not going to specifically call it out, but just know that it's millions of dollars in '25 and it will be millions of dollars in '26 as well.

Got it. And then just a follow-up on data centers. Currently not a big market for Zurn. We're seeing orders accelerate as we exit '25. Is this a growing focus for the company internally? And I guess, what is your right to play and win in that vertical, whether it's drainage or filtration and other addressable opportunities? Any color would be great.

Yes. It's funny because we have, I would say, the commensurate amount of content in a data center as we do in anything else. So when you think about a commercial building that requires lots of water, plumbing, drainage to either heat or cool or provide fire protection, we do participate. And I know some people have questioned whether or not we're in it at all? We absolutely are. It's absolutely growing quickly for us. Do I ever see it being a wedge in our pie? Perhaps not. But nonetheless, it's clearly a growth category for us. We have a great suite of products that we compete with others that are in the space. We don't have the heating or the cooling, but we've got everything else that touches water. And so I think we're doing quite well there. And it certainly is helping us as we exit '25 and grow into '26.

I will now turn the call back over to David Pauli for closing remarks.

Thanks, everyone, for joining us today. We appreciate your interest in Zurn Elkay Water Solutions, and we look forward to providing our next update when we announce our March quarter results in late April. Have a good day, everyone.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.