Zurn Elkay Water Solutions Corporation Q4 FY2025 earnings call

• The company wrapped up 2025 with a 10% organic sales growth in the fourth quarter, and EBITDA grew 14% to $104 million with a 100 basis points margin expansion. - It successfully live-tested the supply chain optimization plan that had been deployed for several years. - The annual 3-year strategic planning process was wrapped up in the fourth quarter, and year 1 of the plan is being deployed. - There were significant sustainability efforts in 2025, such as drinking water products providing 2.4 billion gallons of cleaner water, the launch of Pro Filtration, a partnership with TerraCycle for filter recycling, World Dryer hand dryers eliminating 3.5 billion paper towels, and recognition for sustainability. - The Zurn Elkay Business System's continuous improvement culture was highlighted, with #CI submissions increasing from 3,741 in 2024 to 5,568 in 2025.

Fourth quarter sales totaled $407 million, 10% core and reported growth year-over-year. Nonresidential end markets' core sales growth outpaced the softness in residential and some commercial segments. Fourth quarter adjusted EBITDA was $104 million, with the margin expanding 100 basis points to 25.6% year-over-year. In 2025, sales increased $129 million and adjusted EBITDA grew $52 million, with a 40% drop-through on the year-over-year volume increase. The full year adjusted EBITDA margin improved 120 basis points. The company ended 2025 with leverage at 0.4x, the lowest as a public company. It repurchased about 3% of outstanding shares for $160 million in 2025 and paid $64 million in dividends. Free cash flow was $83 million in the fourth quarter and $317 million for the full year, which was a 17% increase over 2024.

• For 2026, core sales are expected to be plus mid-single digits, with incremental adjusted EBITDA margins of approximately 35% on the increased sales and free cash flow of approximately $335 million. - In the first quarter of 2026, core sales growth is projected to be 7%-8% over the prior year, with incremental adjusted EBITDA margins of approximately 35%, and the EBITDA margin will be approximately 25.5%-26%, which is about a 60 basis points margin expansion over the prior year at the midpoint. - The outlook assumptions include end markets generally being flat to slightly positive, higher price impact in the first half of 2026 as it cycles against quarters with tariff-related price realized, monitoring the evolving tariff environment, and being on track to exit direct material purchases from China by the end of 2026 with a positive dollar price/cost impact from tariffs in 2026.

Q: Starting with the core sales outlook, speak to what the team is seeing to kick off 2026 and how to think about the build to mid-single digits.

A: Todd states that Q1 is seeing 7%-8% growth, is off to a good start, and there are 11 months left in 2026, and there isn't a discrete framework from 7%-8% to mid-single digits other than more price in the first half.

Q: Touch on the deal environment and funnel development.

A: Todd says the company went through the strategic planning process, has a fresh view on the funnel and adjacencies, is optimistic about the cultivation work, has flexibility to repurchase shares, look at the dividend, and is optimistic about M&A but not predicting.

Q: Provide color on the adjacencies or verticals identified in the 3-year planning cycle.

A: Todd says it looks like things the company does today, is North American-based, in and around water and professional-grade plumbing, and leverages products into different verticals like the fire protection example.

Q: On the 2026 guide, given metal prices and inflation, need for additional price increases.

A: Todd says the company is watching it, costs are coming down with the supply chain, and will be judicious with incremental price.

Q: View on the EPA Lead and Copper Rule on the drinking water business.

A: David says it helps sustain, continues awareness, and Todd says it's a relatively new category with a steady drumbeat.

Q: Incremental margin guidance and the opportunity for the baseline to move higher.

A: David says yes, mix weighting and investment in organic growth will raise the margin over time.

Q: Tangible signs of an inflection point in project conversion in the construction industry.

A: David says it looks at various indices and the 2026 guidance is what the company is seeing today.

Q: Update on the filter attachment rate with Pro Filtration.

A: David says there's good early adoption, Pro Filtration has a high attachment rate, and Todd says Pro Filtration units in the field will pull the overall attachment rate up.

Q: Price in Q4 and 1Q, and announced pricing for 2026.

A: David says Q4 was ~5 points of price, and 2026 price is the inverse of 2025, with Q1 being light price and the back half of 2025 having 4-5 points.

Q: How adjacencies and new products go together, organic to inorganic.

A: Todd says it's part of the strategic plan, a dual path of internal and M&A, and is excited about enhancing the organic growth rate.

Q: Expense or product development spending for the adjacent market strategy.

A: Todd says there are millions of dollars in spending in 2025 and 2026.

Q: Data center as a growing focus, right to play and win.

A: Todd says the company participates in the data center market, is growing quickly for them, and has a great suite of products.