Zurn Elkay Water Solutions Aktie

Good morning, and welcome to the Zurn Elkay Water Solutions Corporation Third Quarter 2026 Earnings Results Conference Call with Todd Adams, Chairman and Chief Executive Officer; Dan Klun, Chief Financial Officer; Dave Pauli, Chief Operating Officer; Jeff Schoon, President; and Bobbi Belstner, Vice President and Corporate Controller for Zurn Elkay Water Solutions.

A replay of the conference call will be available as a webcast on the company's Investor Relations website. At this time, for opening remarks and introduction, I'll turn the call over to Bobbi Belstner.

Good morning, everyone, and thanks for joining the call today.

Before we begin, I'd like to remind everyone that this call contains certain forward-looking statements, which are subject to safe harbor language outlined in our press release issued yesterday afternoon and in our filings with the SEC.

In addition, some comparisons will refer to non-GAAP measures. Our earnings release and SEC filings contain additional information about these non-GAAP measures, why we use them and why we believe they are helpful to investors, and contain reconciliations to the corresponding GAAP information.

Consistent with prior quarters, we will speak to certain non-GAAP metrics as we feel they provide a better understanding of our operating results.

These measures are not a substitute for GAAP. We encourage you to review the GAAP information in our earnings release and in our SEC filings. With that, I'll turn the call over to Todd Adams, Chairman and CEO of Zurn Elkay Water Solutions.

Thanks, Bobbi, and thanks for joining us this morning. As you may have seen in the materials, we've got a lot to cover this morning, so I'll get right to it.

We grew our top line 9% in the quarter, 7% organically, and EBITDA grew 15% year-over-year as margins expanded 150 basis points to 28.3%.

In addition to that, we continue to generate significant free cash flow, which we used to invest in Zurn Elkay stock, repurchasing $35 million of stock in the quarter.

Our Board also made the decision to increase our annual dividend by 18%, reflecting the confidence we have in our business and desire to continue to reward shareholders with an ever-growing dividend amidst the capital allocation options that continue to have tons of flexibility.

This morning, aside from the results and outlook, we'll provide some details on how our adjacency work is coming along, including an update on the Inntilat acquisition.

In addition, as we typically do in the third quarter, we'll provide a market overview based on the Dodge information available and provide some perspective as to how that information translates to our business.

As we close out another record year in 2026 and begin to look ahead, we're excited about the progress we've made over the last several years to position ourselves to build on the track record we've built over the past 2 decades.

In that track record are a financial crisis, a pandemic, and several things over just the past couple of years, which on the surface seem like things that we couldn't overcome.

Sitting here today, and not surprisingly, the broader economy and parts of our end markets don't feel like they're going to be a tailwind for our business in 2027.

So we're going to simply do what we know how to do and what's worked by showing some grit and leveraging our culture and the Zurn Elkay business system to drive superior results.

We're excited to get through all of this this morning and take your questions at the end. And with that, I'll turn it over to our CFO, Dan Klun.

Thanks, Todd. Please turn to Slide 4. Our third quarter sales totaled $495 million, representing 9% reported and 7% core growth year-over-year, which led at the high end of our guide for the quarter.

We saw broad-based growth across the majority of our product categories, with water safety and control and drinking water again leading the fleet.

I'll walk through our end market outlook in a couple of slides. Unpacking our quarter's growth, Intellihot was performing in line with expectations and contributed 2 points, or $6 million of sales growth in the quarter.

Price also added another 2 points to our year-over-year growth, with the remainder coming from unit volume. As we have previously indicated, we have now cycled fully against the carryover benefit of our calendar '25 tariff-related price increases.

Turning to profitability. Our third quarter adjusted EBITDA was $140 million, up 15% year-over-year, and our adjusted EBITDA margin was 28.3%, up 150 basis points versus the third quarter of 2025.

The drivers of the expansion are consistent with what you've heard us discuss throughout the year: ongoing mix improvement as our highest margin products continue to lead our growth, productivity gains from the Zurn Elkay Business System, and continued benefit from our supply chain repositioning work.

Before moving on to our year-to-date results, I want to briefly address the tariff refund activity this quarter. During the third quarter, we recognized $1.5 million of IEPA and reciprocal refunds reflected in cost of goods sold in our GAAP financial statements.

Consistent with our treatment in the second quarter, this amount is excluded from our non-GAAP measures. On a year-to-date basis, net sales were $1.419 billion, up 10% year-over-year on a reported basis and 9% on a core basis.

Year-to-date, adjusted EBITDA of $392 million was up 16% with a margin of 27.6%, an improvement of 140 basis points versus the prior-year period, which translates into an incremental margin of 41%.

Please turn to Slide 5. With respect to leverage, we ended the third quarter at 0.4x after utilizing $107 million of cash to acquire Telehot earlier in the year.

As you can see on the left-hand chart, our leverage profile remains at historically low levels. Free cash flow in the quarter was $110 million. And on a year-to-date basis, we have generated approximately $264 million of free cash flow, excluding the net impact of tariff refunds and applicable cash taxes, keeping us firmly on track to attain our full-year free cash flow guidance of greater than $350 million.

Our liquidity, leverage, and cash flow generation continue to give us significant flexibility to reinvest in the business, to pursue attractive adjacencies, as you'll hear from Jeff, and to return capital to shareholders through buybacks and dividends.

With that, I'll now turn the call over to Jeff to cover the Wilkins RunPoint announcement on Page 6.

Thanks, Dan. I'm on Slide 6. Last quarter, I walked through IntelliHot, our entrance into commercial hot water.

We entered this space with the purpose of disrupting the category and bringing more value to our customers. IntelliHot's tankless condensing water heaters deliver better efficiency and lower operating costs than traditional boilers and tank units in a smaller mechanical room footprint and a segment growing faster than the overall category.

Today, I'm excited to introduce the next step: the Wilkins RunPoint Digital Master Mixing Valve. Let me start with the market opportunity. The hot water system is a critical but historically underserved part of the building plumbing infrastructure.

Mixing valves regulate water temperature and flow to deliver consistent, safe, hot water throughout a facility and to help manage the risk of Legionella growth in stagnant or improperly tempered water.

With the IntelliHot and RunPoint together, we are establishing our position at the core of the domestic hot water system, both generating the hot water and controlling how it is delivered throughout the building.

Mixing valves open a complementary market of more than $200 million. Expectations in this area are rising. Health care facilities are required to maintain water management programs, and schools, hotels, and other building owners are increasingly adopting active temperature monitoring.

That's driving a shift to digital, where RunPoint competes. This digital segment is growing double digits. From a product standpoint, RunPoint is differentiated in several ways.

It is meaningfully easier to install, commission, and maintain compared to legacy alternatives. It provides continuous temperature and flow monitoring with real-time alerts, and the digital architecture makes it straightforward for facilities teams to document compliance.

The product is completely field-adjustable and connects to existing building management systems. And it carries the Wilkins name. Wilkins is the #1 brand of technology in backflow prevention with deep relationships with engineers who specify, the reps and wholesalers who sell, and contractors who install.

RunPoint goes through those same existing channels. We don't need to build anything new; we are putting a new product in the strongest specification and distribution network in the industry.

The combination of our core portfolio, competitive position, and our go-to-market strength is why we believe mixing valves can become a $50 million category for us over the long run.

We are focused on developing the highest-performing products for our customers, and throughout 2027, we will continue to add products and services to our hot water portfolio.

Turning now to Slide 7. I want to transition now to our annual market update. As we've done in prior years, I'll walk through the key published market indicators we track.

This is third-party publicly available data. It's one of several inputs we use to evaluate market conditions, but our business is hyperlocal through reps and varies meaningfully by region, vertical, and building type.

So we read these as directional signals, not forecasts. At the top of the page, you'll see 3 macro indicators. First, the Dodge Momentum Index, which measures the value of nonresidential building projects entering planning against the year 2000 baseline.

Think of it as roughly a 9- to 12-month preview of what's likely to start. It blends price, end markets, and geographies, so it's directional rather than precise.

On that basis, the DMI has improved meaningfully in recent months and is at the high of its recent range. That is a constructive read as we look into 2027.

Second is the Architecture Building Index, a monthly survey of whether architecture firms' billings grew, declined, or remained flat. 50 is neutral. A reading above 50 tells you more firms saw growth, not how much growth, and it's not weighted by firm size.

The ABI has been below 50 for an extended period, which points to a continued softness in design activities. So the DMI and ABI are sending different signals right now, which is exactly why we don't anchor to any one indicator.

Finally, construction backlog, which measures how many months of work contractors have under contract. As the latest release, commercial and institutional backlog remained stable at high levels, roughly 8-plus months.

Taken together, these give us useful direction, but to reinforce that, as we've said before, our business is hyper local, hyper regional, and these macro indices offer limited insights into what happens on an individual product basis.

The bottom of the slide is specific to Zurn Elkay. On the left, you can see that our portfolio participates across the full construction cycle, which averages about 18 months.

Flow systems tend to go in early in the build cycle; water safety and control are mid-cycle, and hygienic and environmental solutions and drinking water are installed at or near completion of the project.

This breadth across the cycle gives us visibility and durability across different phases of activity. In the center, what we call the lag effect. This is how Dodge starts translate to our new construction revenue.

In a typical year, roughly 3/4 of our new construction revenue comes from prior-year starts and about 1/4 of revenue from current-year starts.

Looking ahead, that means 2026 starts will drive most of our 2027 new construction revenue next year. When you layer on our portfolio mix of roughly 50% new construction and 50% MRO and retrofit, you begin to appreciate the degree to which our business is insulated from new construction volatility.

I'll pass it over to Dan, and he'll walk through the starts information.

Thanks, Jeff. Moving to Slide 8. As we've done for a number of years around Q3 earnings, we aggregate and analyze the Dodge construction market forecast as it relates to our end markets.

This data set is based on a semiannual report released on September 26. It covers the actual starts data from '22 to '25 and Dodge's projections out to 2030.

It's important to note that this data set is often subjected to reporting delays and/or assumption changes that can introduce a measure of volatility.

All of this data is publicly derived and forecasted. And on this call, we're simply organizing it and unpacking it through a lens that is most applicable to how it might impact our business.

Additionally, as Jeff mentioned, when looking at these projections, it is important to recognize that the new starts data in the Dodge report must be appropriately lagged to how Zurn Elkay participates across the construction cycle.

On this slide, we have summarized the Dodge institutional and commercial starts on a square foot basis, which represents our largest end market exposures.

We focus on square footage because it eliminates the noise of pricing, renovations, and alterations, giving us a clearer picture of new construction activity.

On a relative basis, the institutional end market has been a stable category over time and is less sensitive to private funding or interest rate swings and short-term discretionary demand.

Projects in this category generally have long-term planning pipelines and are funded from bond referendums, appropriations, and endowments, not by developer debt or tenant demand.

This end market represents approximately 50% of Zurn Elkay's exposure and contains a number of public building types. Education and health care together account for the majority of the Dodge institutional starts at 57%.

Switching to commercial. This is our second largest end market that comprises approximately 30% of our business. This end market can be more volatile due to the variability in subverticals that comprise it.

Interest rate spikes and credit tightening have a more direct impact on this category. While commercial headline starts are relatively flat over the last few years, there's a large mix shift occurring in its subverticals.

Inside these figures is a large mix shift away from warehouse, commercial's largest subvertical in terms of square feet, from a high watermark of 64% in 2022 to 43% in 2026, largely in favor of office. This increase in office building type is exclusively driven by data centers.

Dodge is forecasting the 2026 mix by building type to remain relatively consistent over the forecast horizon.

As a reminder, when digesting the Dodge starts data, it is also important to understand that end market and building type mix at the overall Dodge level must be further tailored to our business, as our exposures are weighted differently in our own portfolio.

Please turn to Slide 9. Here, we have the same Dodge data in terms of square feet, but now broken down in our key subverticals. On the top left is an excerpt of education and health care.

Over the last 4 years, this category has contracted by a CAGR of 4%. And over the next 4 years, the combination of these subverticals is expected to grow at a 3% CAGR.

As I mentioned, these 2 building types represent approximately 57% of all institutional square footage within Dodge, but comprise roughly 72% of our exposure to the institutional market.

The takeaway: we remain consistently over-indexed to the most stable parts of institutional construction. On the bottom left, we highlight the aggregation of retail, office, and hotel, which represents our core subverticals inside of the commercial end market.

The combination represents approximately 38% of the overall commercial starts within Dodge, up from about 30% a year ago due to the growth in data centers, and roughly 77% of our exposure to the commercial market.

As a side note, Dodge classifies data centers inside of the office category. In the aggregate, office, retail, and hotel have grown at a CAGR of 7% over the last 4 years and are expected to grow 4% over the next 4 years.

However, data centers significantly skew these numbers. When you exclude data centers from this grouping, growth over the last 4 years declined to a 1% CAGR and is expected to grow at a 3% CAGR on a forward look.

As you know, end market is only one input to our growth algorithm. We have other factors driving our outlook, such as continued secular growth within drinking water, share gain from our key initiatives, and price.

As Dave will highlight, our growth track record has been remarkably consistent. I'll now turn the call over to Dave to cover Slides 10 and 11.

Thanks, Dan. Please turn to Slide #10. Dan just walked through a lot of good information, and I'll try to help frame what that means for Zurn Elkay.

I think it's important to understand that while Dodge data is an input into how we think about the market, it's certainly not the only input we use.

We monitor a host of other data points, including quote volumes, conversations with our reps in local regions, and the backlog of construction jobs in various phases, among other sources.

The chart at the top left-hand side of the slide helps to illustrate how resilient our business has been and shows our year-over-year core growth alongside the year-over-year square foot growth based on Dodge data of our end markets.

What you see is that we have not had a year in the last 5 years where the institutional, commercial, and residential markets have all been in our favor. Or, in the case of this chart, all shown as green.

What we have seen is a tough residential market, choppiness in the commercial space, and a more steady institutional end market. The good news is that even with some tougher end markets, we have demonstrated the ability to deliver core growth.

Historically, you can see we have navigated a mix of red, yellow, and green in our end markets. However, Zurn Elkay core growth has remained green or positive each year, ranging from plus 3% to plus 11% core growth.

While the starts data has evolved this year as events like changes to tariffs, war overseas, oil prices, and the projections around interest rates move, the level of construction starts, pure square feet of construction starting, remains strong.

Ultimately, we like our chances in a variety of end market scenarios. And that's where our long-term growth algorithm comes in. We have strategically built our portfolio over years, being intentional with where we play, the markets we serve, and the M&A we transact.

The strategic position is grounded in a couple of items. We are focused on a single geography here in North America. Our retrofit exposure has increased over the years to 50%.

Our portfolio has the advantage of some secular growth tailwinds. We know drinking water has been a focus, and we have seen excellent growth in our filtration business as an example.

In the last 4 years, our filtration sales have grown by over $40 million alone. We are deploying resources at the local and regional levels where we win every day.

There's not a single contiguous non-res market here in the U.S. This is a hyperlocal, hyper-regional business. There's no one-size-fits-all non-res market, but rather distinct local markets that can vary greatly.

And lastly, as we've discussed, there's a focus on adjacent markets that we believe can provide some meaningful growth opportunities. Not only have we been intentional with the strategic position of Zurn Elkay, but we also have a business model that allows a lot of flexibility in a variety of market conditions.

Our margin strength has come from leveraging our variable cost model and relentless continuous improvement through the deployment of the Zurn Elkay business system.

We have highlighted our journey with #CI, or continuous improvement, and we continue to gain valuable insights and improvements from our associates every day with the goal of getting just a little bit better each and every day.

These factors all add up to very strong [Technical Difficulty]. If we look back, our expectations of incremental margins around the time of the Elkay merger were 25% to 30%. We quickly raised that to 30% incrementals.

At the start of this year, we guided to 35% incremental margins. And in the second quarter, we talked about an increase to those expectations up to 40%.

We have a high level of confidence in our ability to continue to grow earnings, and 2027 specifically is no different.

Sitting here today, 2027 looks like 40% incrementals plus, with the plus coming from some SCOFR benefits that we have been executing on behind the scenes and will provide a benefit in 2027.

We will provide further detail when we give guidance in 2027, but the impact of the work we have done is meaningful. Think about it as a benefit to EBITDA of around $5 million or more in 2027, on top of our year-over-year 40% incremental.

All that sits on top of a balance sheet that has never been in a better spot. Dan talked about it earlier.

We are hovering around the lowest leverage we have had as a public company with a flexible balance sheet, allowing us to increase our return of capital to shareholders via a dividend and share repurchases while, in the background, cultivating M&A and investing in adjacencies.

I'll wrap up with Slide 11, which gives some further detail on the growth algorithm I just mentioned. The core growth trends section of the slide walks through the more detailed components of our growth.

Starting from 2022 to 2026, Zurn Elkay core growth CAGR was plus 6%. That was made up of a flat to slightly down market, low single-digit price and share gain, about 1 point from secular growth tailwinds, offset by about 1 point of product line simplification as we executed on a number of 80/20 initiatives.

And with the exception of our recently completed acquisition of IntelliHot, those years from 2022 to 2026 have been all core as we focused on the successful integration of Elkay.

While we won't provide guidance on 2027 until next February, I did want to share some thoughts based on the market detail we just walked through. Just like the track record for the past 16 years, we see growth in 2027.

Share gain initiatives, secular growth areas, our MRO break-fix at 50%, price, and adjacencies all help drive growth despite a market that, sitting here today, looks to be likely down a couple of points next year.

How the market in 2027 actually shakes out, we will see. And in the meantime, we'll continue to monitor as we look to provide further clarification on our outlook next February when we guide 2027.

While the market has had its ups and downs over a long period of time, we have demonstrated an ability to deliver core growth through a number of different market dynamics.

Over the last 63 quarters, we've had positive core growth 59x, and our long-term core sales CAGR back 10 years is 6%. The bar chart at the bottom of the page does a nice job of illustrating our continued growth over the last 16 years, when we have seen a number of different market dynamics play through.

All in all, the punchline is that we have a lot of confidence in our ability to grow profitably, and our long-term growth algorithm that has delivered positive core growth year in and year out remains intact.

I'll turn the call back to Dan to cover guidance.

Please turn to Slide 12 for our outlook. For the fourth quarter, we expect sales in the range of $430 million to $437 million.

We anticipate adjusted EBITDA to be between $120 million and $123 million. Our adjusted EBITDA guidance reflects the continued strength of our operating model.

For the full year 2026, we are raising our adjusted EBITDA outlook to a range of $512 million to $515 million, and we maintain the expectation of full-year free cash flow of greater than $350 million, excluding the net impact of tariff refunds and taxes.

Within our presentation, we have also included the fourth quarter and full-year outlook assumptions for interest expense, noncash stock comp, depreciation and amortization, adjusted tax rate, and diluted shares outstanding.

We look forward to updating everyone on our Q4 and calendar year 2026 results in early February. With that, please open the line up for questions.

[Operator Instructions]

Your first question comes from the line of Bryan Blair with Oppenheimer.

Another solid quarter, and I appreciate all the color on the market backdrop and DWS framing. To level set on trends, the decel to 7% core growth in the third quarter, which was still obviously above your guidance framework.

Was that simply a price differential from Q2 to Q3? Obviously, you're lapping tariff-driven pricing from the year prior. Just curious if there was any area of underlying volume deceleration in the quarter?

At a high level, Brian, I think price is clearly the biggest mover underneath, and I think as the guys pointed out, we walked into the year knowing that the market would soften throughout the year.

So when we say it's been consistent with what we expected, if you look at that Dodge starts data from '25 and how that rolls through, we were anticipating the market to slow a little bit.

But the biggest difference from Q3 to Q4 is clearly the change in the price realization year.

And it's great to see 40% plus incremental margins officially cited as part of the DWS growth algo.

We know a lot has gone into that, and there seems to be an overlay of incremental SCOFR benefits and some other actions that will come through in '27.

I'm curious if, in addition to that, the entrance into the hot water adjacency for your team, anticipated growth, and profit trajectory there also influence the call to make the official incremental targeting.

I'm not sure that it specifically did. I think it clearly is a category that will punch at or above our fleet average. And so as that grows, it will clearly be beneficial to our underlying margins.

But I would say the 40% and the adoption of that, if that's what you want to call it, really comes from our core business as it sits today. So we're not projecting really the impact of it other than to say that it's not going to be a headwind as that part of our business continues to grow.

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

I just wanted to think about the longer-term growth here. I mean, you talked about the 2027 end market being potentially down a bit.

But I think your Dodge data shows that education and health care starts turning from like negative 4% CAGR to positive growth over the next few years, and you're obviously over-indexed there.

So does the market finally become a contributor rather than a drag over the next few years? And with kind of adjacency revenue on top, can you now do better than the historical 5 years in terms of the growth rate here?

Well, it's all assumption-based, James. So if that market projection that Dodge has for education and health care comes through, it would be the first tailwind, I think, that we've obviously seen in a really long time.

So that would clearly help our underlying growth rates. And then obviously, on top of that, as we enter adjacencies and things like that that go into those same subverticals, we think that we probably get a double benefit there as the market recovers and we enter the category.

So it's too early for us to make that call. But if you sit back and look beyond '27, I would suggest that we're probably due for some market improvement relative to where it's been.

And if that comes to fruition, I think you will see an increase in our underlying organic growth rate.

And as a follow-up on the adjacencies. I think in July, you mentioned several new products in adjacent categories in the second half of 2027.

How many are still to come, and roughly what is the next wave? And I think RunPoint was developed in-house, and IntelliHot was acquired. So how do you decide which route to take? And what does the M&A pipeline for adjacencies look like now?

Yes. To think about '27, I would think about it again in categories in the $100 million to $200 million range, and there will be more of those as we head into '27.

And as it relates to the choice to develop it versus acquire it, we always look at both. So we're obviously cultivating things. And if for some reason, we come to the conclusion that it's not going to happen, then as you see with RunPoint, we go out and do it on our own.

And I think doing it on our own is a little bit of a longer road for sure, but we think we've developed just a dynamite, far superior product at far less cost, but it's a little bit of a long game. And so we're going to continue to look at and do both, and it's really on a situation-by-situation basis.

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

This is Adam Farley on for Nathan. Maybe first on pricing again. Inflation has picked up again this quarter. How should we think about maybe incremental pricing actions for the rest of this year and then going into 2027?

Well, we're not guiding yet for '27, but I think you should think about price in the regular way. So a couple of points on pricing in '27.

And obviously, it's something we're monitoring both from an input perspective and competitively. And so should the need arise, we obviously, I think, have proven the ability to price accordingly.

But at this point, I would think about it as a regular way. We don't have any incremental price assumed in our fourth quarter other than what's already been implemented.

And we've got a teed-up price increase for next year that you should think about in a regular way at this point. And obviously, subject to change depending on what happens with input costs and really our competitive set.

I appreciate the commentary on nonresidential construction being hyper local. So maybe to that point, are there any regions within the U.S. that are showing maybe more relative strength or weakness?

Yes. No, as you said, it is hyper local. I think as you look at this year, we've seen strength in the Northeast, in the Gulf region, and in the West.

And again, I think as you look at it year-over-year, it kind of ebbs and flows. The West had challenges a few years ago and then bounced back, and we see that remaining strong for us.

But again, I think since the Elkay merger, we've been able to really strengthen our regional rep networks, our resources that we have in these regions. And we feel that across the board, we've been able to take market share and outperform most of these regions.

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

So I'm intrigued by the hot water loop and the new product in Intellihot. I just think, Todd, you said internally developing it maybe takes a little longer.

I'm just wondering how far along or how rich the pipeline is in terms of introducing and developing new products in that hot water loop or other adjacencies?

Yes. I mean, over the last couple of years, we've been identifying it, talking about it, cultivating, growing our own internal resources to do some more of this heavy lifting. And they're all in various stages of fruition.

So we wouldn't be able to commit to adding served market in '27, if not for some of that being underway already. So I think it's always going to be a combination, Jeff, of stuff that is under development and stuff that's being worked on and then stuff that ideally is coming to market.

So getting that flywheel to turn on a more consistent basis, I think, is what we highlighted probably about a year ago.

And I think we're well underway with that and excited about what that can mean both for organic growth, but also what it can mean for cultivating M&A opportunities along the way because obviously, if we find a good fit, but for whatever reason, the counterparty is unwilling to sell, we do have the ability to do it on our own.

And so I think it's a great push-pull to help our M&A activities. But I also think that we're coming into these markets one way or another. And so I think it's a little bit of both, and I expect more to come out of the pipe in '27.

And then I think you said most of your subverticals or markets were up. I'm just wondering if anything has weakened, and just with some of the rate spike and nervousness there, if you've seen any defers, delays, noise near term around that?

Yes. We really haven't, Jeff. I think if you look at this quarter, Dan mentioned that our water safety and control and drinking water businesses both had nice quarters.

And then obviously, resi is down, and resi has been in a tough spot. So that would be the one to maybe call out as a little bit weaker.

Your next question comes from the line of Jeff Reive with RBC Capital Markets.

So just a question on construction backlogs.

They remain pretty stable. I was curious if you're seeing any changes in the pace at which projects are progressing through construction. Or, in other words, are projects taking longer to complete, and could that affect the timing of your shipments?

I wouldn't necessarily view it from the standpoint of timing of shipments. I think as Todd talked about, we came into the year knowing the back half would soften a little bit.

That's how we approached the year from a planning standpoint. And I think it's played out similarly to that. So some of it has had delays. But I wouldn't say it's above and beyond what we assumed coming into the year and what we've seen over the last 90 days or so.

And then maybe just a follow-up on the hot water loop. You talked about adding products and services. On the services side specifically, like what type of services are you contemplating adding?

Yes, I think so we talked a little bit about it last quarter. So with IntelliHot, there's also an IntelliPro network, which is a certified network that supports IntelliHot.

And so we'll continue to bolster that and leverage the rep networks that we have in regions. And then as we continue to add products into that portfolio, we'll be able to better size, specify with the engineers, but then also support the contractor from the standpoint of commissioning and troubleshooting of the overall hot water network.

So really building off of an asset that we acquired with IntelliHot and then applying our breadth and capability that will play over the long term.

There are no further questions at this time. I will now turn the call back to Bobby Belstner for closing remarks.

Thanks, everyone, for joining us on the call today. We appreciate your interest in Zurn Elkay Water Solutions, and we look forward to providing our next update when we announce our fourth-quarter results in February.

Have a great day.

This concludes today's call. Thank you for attending. You may now disconnect.

Good morning, and welcome to the Zurn Elkay Water Solutions Corporation Second Quarter 2026 Earnings Results Conference Call with Todd Adams, Chairman and Chief Executive Officer; Dan Klun, Chief Financial Officer; Dave Pauli, Chief Operating Officer; Jeff Schoon, President; and Bobbi Belstner, Vice President and Corporate Controller for Zurn Elkay Water Solutions. A replay of this conference call will be available as a webcast on the company's Investor Relations website.

At this time, for opening remarks and introduction, I'll turn the call over to Bobbi Belstner.

Good morning, everyone, and thanks for joining the call today. Before we begin, I'd like to remind everyone that this call contains certain forward-looking statements, which are subject to the safe harbor language outlined in our press release issued yesterday afternoon and in our filings with the SEC. In addition, some comparisons will refer to non-GAAP measures. Our earnings release and SEC filings contain additional information about these non-GAAP measures, why we use them and why we believe they are helpful to investors and contain reconciliations to the corresponding GAAP information. Consistent with prior quarters, we will speak to certain non-GAAP metrics as we feel they provide a better understanding of our operating result. These measures are not a substitute for GAAP. We encourage you to review the GAAP information in our earnings release and in our SEC filings.

With that, I'll turn the call over to Todd Adams, Chairman and CEO of Zurn Elkay Water Solutions.

Thanks, Bobbi, and good morning. I'm on Page 3 in the slide deck. So this morning, I'll start with some comments on the quarter and trends in our business. Then our CFO, Dan Klun, will cover the Q2 results and then just a little bit later, our outlook. You'll then hear from our President, Jeff Schoon, on the Intellihot acquisition, followed by our Chief Operating Officer, Dave Pauli, who will provide an update on drinking water as well as some color on the operations and what's driving our record operating results. After that, we'll open it up to your questions.

Sales grew 10% organically in the second quarter, while EBITDA grew 15% as margin expanded by 120 basis points to a record 27.7%. In the quarter, we generated $112 million of free cash flow and repurchased $50 million of Zurn Elkay at roughly $48 a share, bringing our year-to-date investment and repurchases to $100 million. With respect to the Intellihot acquisition, this is a category and a company we've been interested in for a really long time. It's a terrific adjacency for us and a category that we feel we can really grow over the coming years as we leverage all the capabilities we bring to bear. The most important being the approach we're going to take to really scale this business by leveraging the Zurn Elkay business system.

The great thing about Intellihot is that its products are best-in-class from a performance perspective, but there is work to do around the integration. The primary integration work centers around the things that we're really good at, scaling a specified product into our core verticals through the same path we take to market with respect to specification, relationships at the end user, engineer, contractor and at the wholesale level, all nationally, followed by supply chain excellence and finally, the power of bringing this additional content to market alongside our leading market share positions within our core verticals in institutional and commercial nonresidential construction.

In terms of the deal, we paid $109 million in the transaction, a $100 million net of a tax asset for a business that will generate about $37 million of sales this year, with 50% gross margins and low teens EBITDA margins. We see a very clear path for a double-digit return on invested capital in 3 years. In our view, we believe that Intellihot can be a $100 million business with a 30% EBITDA margin in the next 5 years. To be conservative, maybe it's 6. The point is that to get on that kind of trajectory, we're going to invest in it, add products around it, work the efficiency and regulatory angles and grow the installed base. A great example of where we've done that with great success is what we've been able to do with the Elkay and filtration. Dave will take you through an update on that as part of his remarks in just a couple of minutes.

The final point for me this morning is on our full year outlook. We've had a solid first half and are raising our outlook for the year for sales, EBITDA and free cash flow. From an underlying market perspective, there's always a few small puts and takes to our underlying assumptions, but generally consistent from what we've assumed for the year. For the year, we've got 3 to 4 points of price, 1 point of market growth and the rest coming from share gains or simply our exposure to higher secular growth categories, some of which the guys will point out later in the call.

The highlight to point out in our outlook is the increase in our anticipated EBITDA margins and free cash flow, which at the midpoint equates to 140 basis points of margin expansion year-over-year. As you've heard us say many times, we developed a 3-year strategic plan annually. We then prioritize a small handful of things to focus on, and we call these breakthroughs. We then leverage the Zurn Elkay business system to create capabilities to bring these to life, whether it's product, channel, supply chain and sometimes it's some or all of the above. What you're seeing in our results and outlook is the compounding benefit of the success of those things happening over the last 3 to 4 years. With the fastest-growing parts of our business also happen to be amongst our most profitable. We've also leveraged a disciplined approach to prune certain things in our business that we don't feel provide us the ability to create a sustainable competitive advantage, which then gives us the flexibility to flow resources to and reinvest the management time into things that can.

Last but not least, I think it's critical to highlight the significant competitive advantage we've created with all of our supply chain work over the last several years, which provides us enormous advantages and flexibility in these years being impacted by trade and tariff policy. But cherry on top of all this is the compounding benefit of the thousands and thousands of continuous improvement activities our people do year in, year out. The net result is a focused business that can meaningfully outgrow its served markets with terrific profitability and cash flow that allows us to continue to invest in our business to drive even higher levels of growth and performance.

With that, I'll turn it over to Dan.

Thanks, Todd. Please turn to Slide #4. Our second quarter sales totaled $491 million, which represents 10% core and reported growth year-over-year, above the high end of the guidance we shared at the outset of the quarter. Our end market continued to perform in line with our expectation as our institutional end markets continue to show positive momentum, partially offset by residential and pockets of commercial softness. While we're experiencing broad-based growth across all product categories, our overperformance in the quarter was led by strong demand within our water safety and control and drinking water product lines, both growing above the fleet average. Similar to the first quarter, we saw price contribute approximately 5% of growth in the quarter.

Turning to our profitability. Our second quarter adjusted EBITDA was $136 million, and our adjusted EBITDA margin expanded 120 basis points year-over-year to 27.7% in the quarter. This exceeded the high end of our guidance range of 27% to 27.5%, and this margin performance in the quarter represents our highest quarterly margin since the Zurn Elkay merger. The strong margin and year-over-year expansion was driven by operating leverage on higher volume, continued productivity from our Zurn Elkay business system and ongoing mix improvement as our highest margin products continue to lead our growth.

With respect to the first half, our sales and EBITDA have increased by $91 million and $36 million, respectively, year-over-year, delivering a year-over-year incremental margin of 40%. Our first half EBITDA margin of 27.3% improved by approximately 140 basis points year-over-year. During the second quarter, we received $48 million in cash related to IEEPA and reciprocal tariff refunds, inclusive of $2 million of accrued interest. This refund is reflected in the cost of goods sold caption on our income statement and had a significant impact on our reported GAAP earnings and EPS for the quarter. I want to be clear that this item is excluded from our adjusted earnings and free cash flow. This cash receipt strengthened our already healthy balance sheet, but is not a recurring item and as such has been excluded from our adjusted results. As of June 30, we have approximately $6 million of IEEPA and reciprocal tariffs that remain uncollected and unrecognized in our financial statements.

Please turn to Slide 5, and I'll touch on some balance sheet and leverage highlights. With respect to net debt leverage, we ended the quarter at 0.3x, the lowest leverage we've ever had as a public company. Free cash flow in the quarter was $112, and our balance sheet, liquidity, leverage and free cash flow generation remain in excellent shape and reflect the financial flexibility we have to continue to invest in the business as evidenced by the recently closed acquisition of Intellihot.

I'll now turn the call over to Jeff to cover the transaction in more detail on Page 6.

Thanks, Dan. I'm excited to walk through the Intellihot acquisition we announced last week, a relationship we've cultivated for years. This transaction expands our available market by $1.1 billion, within which the tankless segment represents over $200 million today. Tankless is growing meaningfully faster than the overall commercial water heating category. It's a strong initial step into a highly complementary adjacent category and one with some of the most favorable regulatory and demand tailwinds we've seen in the space. A few drivers give us real conviction here.

First, the DOE's efficiency mandate requiring new commercial water heater installations to meet condensing level efficiency. Second, we are seeing owner mandates emerge around health and safety as it relates to Legionella liability, moving brand preference to tankless. Third, tankless systems deliver a meaningfully smaller mechanical room footprint, which developers and owners increasingly value. And fourth, tankless delivers real operating savings on a large spend category for building owners reinforced by local and state-level efficiency mandates layered on top of federal standards. Since the announcement, we've received strong support from the industry and our combined teams are energized by the growth opportunity ahead, which brings me to why Intellihot itself is such a strong fit and natural complement.

Like our core business, it's a specified product sold through the same rep and wholesale channels we dominate today. We have -- they have a growing installed base with nearly 40% of the revenue already coming from MRO, backed by a growing certified contractor network, which we plan to bolster and leverage. Their tankless condensing water heaters deliver meaningful better efficiency cost savings than boilers and traditional tank systems for commercial and institutional customers. Combined with Zurn Elkay's specification, contractor and wholesaler relationships, we're confident this accelerates our product road maps and our growth.

Shifting now over to core growth. A big part of why we consistently outperform the market and take meaningful share comes down to our commitment to the Zurn Elkay Business System. Through our business system, we continuously seek voice of customer feedback and look for ways to drive continuous improvement in how we serve our customers. This discipline has translated into consistent high customer ratings and loyalty, which we do not take for granted. We continue to challenge our teams and partners to find ways to improve. We feel that we have developed the best commercial team and local rep agencies in the industry. Over the past 4 years, we've made sustained investments in new product development, technology that supports ease of doing business and our technical and commercial resources. We've used 80/20 to create focus and over-resource our largest growth opportunities such as drinking water, high-growth regions and key institutional verticals.

Together, these investments are what allow us to deliver consistent above-market growth. Right now, drinking water, water safety control and flow systems are our fastest-growing businesses, and all 3 operate above fleet average margins. With our strategy, our investment in NPD and adjacencies and our focus on operational and commercial excellence through ZEBS, we are confident we can continue to outperform the market. With that, I want to share 2 wins in this past quarter that show the strategy playing out, delivering over $3 million of sales.

First, we leveraged the drinking water facilities relationship to address a health and safety concern tied to recent Legionella outbreaks. We worked with the end user to upgrade the drinking water and commercial faucet units to Zurn Elkay with connected technology, solutions that monitor usage and automatically flush water lines during low-use periods to help reduce Legionella risk and lower the cost of our -- of their overall water management plan. And second, out of our institutional vertical focus, we leveraged our specifier and contractor relationships to pull through our full suite of products on a recent hospital expansion in Virginia. As we continue to build out our adjacencies and the breadth of our product offering, the value we deliver to specifiers, contractors, wholesalers and owners will continue to increase.

With that, I'll pass it over to Dave.

Thanks, Jeff. I'm on Slide 7 and wanted to give a quick update on our margin performance over the past couple of years. This is the output of our relentless commitment to the Zurn Elkay Business System and getting better each day. On a trailing 12-month basis, our adjusted EBITDA margins have improved 660 basis points from Q1 of 2023 to Q2 of 2026. On a point-to-point basis, our adjusted EBITDA margins are up 820 basis points over the last 14 quarters. That starts with 19.5% margins in Q1 of 2023 compared to this quarter's adjusted EBITDA margins of 27.7%. Talked about it last quarter, and we'll provide some additional color on our margin improvement over the last 3 years.

First, part of the Zurn Elkay Business System is sharing ideas and wins across the organization so that we can replicate successes. These has #CI ideas, as we call them internally, are associate-led ideas that save time, eliminate waste, enhance the process or reduce costs to name a few examples. No single #CI on its own is material. They do become material when we have thousands submitted across the organization throughout the year. The graph on the left-hand side of the slide highlights how #CI submissions have grown over the years.

Our associates across the organization have bought into the concept and are continuing to find ways to improve their work each and every day. Second, we are seeing unit volume growth in the most profitable areas of our business. Water Safety and control, flow systems and drinking water have all grown over the last several years, while we have continued to systematically exit our lowest margin products within the portfolio through the application of 80/20.

This strategy has allowed us to reposition resources to focus on growth opportunities, while simultaneously reducing complexity and excess cost in our business. I'm going to highlight drinking water on our next slide, but take filtration as an example. The year before our merger with Elkay, the filtration business was less than $25 million of sales. Now 4 years later, that high-margin business has more than doubled as it will end at over $60 million of sales this year. We did this with focus and intention around filtration, building a dedicated team to focus on filters, investing in innovation and listening to our customers' filtration needs.

Our 80/20 work is not a once-and-done process, but something we are continuing to look at, understanding customer buying patterns, eliminating unnecessary SKU complexity in our offering and making sure that we focus on the core products that matter and make sense from a margin perspective. You will see us continue to challenge our product portfolio and deploy 80/20 on a go-forward basis.

Third, we continue to make positive structural changes, consolidating our footprint to reduce overhead, introducing and sustaining the Zurn Elkay Business System lean tools into the Elkay manufacturing facilities and continuing to challenge our strategy around internal manufacturing versus outsourced alternatives. And lastly, our supply chain has been a clear competitive advantage that has allowed us to improve profitability, while successfully navigating the tariff environment. Our efforts to move sourcing out of China have proven to provide us with both geopolitical risk mitigation, as well as a lower landed cost profile.

Combination of these 4 factors have led to solid incremental margins, which we are currently seeing at around 40%. From 2024 to 2025, our actual incremental EBITDA margins were 40%. Year-to-date this year, our incremental margins have also been at 40%, ahead of the original 35% incremental margin that we guided to at the start of the year.

Turn to Slide 8. It's been 4 years since the completion of the merger with Elkay, and we tend to get a lot of questions on the drinking water business, so I wanted to provide an update. Our most notable product launch since the merger was the recent introduction of Elkay Pro Filtration. We listen to our customers, solicited feedback from installers, maintainers and users and built Pro Filtration with them in mind, incorporating their feedback and addressing their concerns. Simply stated, Pro Filtration clearly differentiates Elkay from our competitive set, but the list of upgrades within Pro Filtration is significant. Filters are now at eye level and can be changed with a simple drop-down cover and quarter turn on the actual filter. Anyone can now change a filter in a matter of seconds.

Historically, our units had 1 filter. Pro Filtration now has the ability to house 2 filters, allowing customers the flexibility to increase their capacity, increase performance or protect against sediment through a variety of filter combination options suited to optimize customer needs. We've updated the aesthetics of the unit to appeal to architects and engineers. Pro Filtration has an enhanced user interface to more clearly articulate the remaining life of the filter. The units are smart and connected to allow for notifications on filter changes or remote line flushing.

Filters now are designed with a proprietary head that does not allow for counterfeit filters to work in the units. And as I will talk about in a minute, we updated our line of filters as well. So far, we've seen very positive reaction in the market to Pro Filtration. Our team is working with architects and engineers across the country to change the legacy Elkay specs to Pro Filtration based on the improved features and benefits. We've also put a significant focus on not just selling any unit but selling filtered units. Our internal team and third-party reps are focused on growing the installed base of filtered units as we retrofit the large installed base.

In 2023, 50% of the units we sold were filtered. In 2026, over 60% of the units we will sell will be filtered. And our internal goals are to continue to increase that to 70% filtered in 2027. Team's efforts, legislation and water quality concerns are all helping to drive the percent of filtered units higher. And lastly, the technology around filtration has improved considerably over the last 4 years. At the time of the Elkay merger, Elkay's main filter was a 3,000-gallon lead filter, and we've evolved the filter technology over time to provide both longer-lasting and higher-performing filters.

In 2022, we added a high-capacity 6,000-gallon lead filter to help reduce the number of filter changes our customers needed to make. Then in 2023, we released the first point-of-use PFOA and PFOS certified filter that was rated for 2,250 gallons. In 2024, all of our filters were certified to protect against microplastics. And later in 2024, we added a pre-sediment filter to our lineup. In Q3 of 2025, we started shipping units with a proprietary head to prevent counterfeit filters from being used and at the same time, launched the ability to incorporate UV filter technology in Pro units and added a longer-lasting 10,000 gallon filter, further upping the bar from our current industry-leading 6,000-gallon filter.

We also added the total PFAS filter rated for 4,000 gallons, which is the longest-lasting total PFAS filter in the industry. Pro Filtration customers get longer-lasting filters with less maintenance events and the maintenance event itself is significantly easier and quicker than non-Pro units. Drinking water has performed ahead of our expectations through the first 4 years, and we see a lot of opportunity for continued growth in the coming years with drinking water.

I'll turn the call back over to Dan to walk through our outlook.

Thanks, Dave. Now on to the guidance on Slide 9. For the third quarter of 2026, we are projecting core sales growth of 6% to 7% over the year and adjusted EBITDA margin around 28%. Core growth rate in the third quarter and second half reflects the roll-off of last year's tariff-related price increases that largely became effective in the back half of calendar 2025. As a result of our strong first half performance, we are also updating and raising our full year 2026 outlook. We now expect core sales growth for the fourth quarter to be in the mid-single digits, and I would estimate the Intellihot contribution for the second half to be approximately $18 million in net sales for the last 5 months of the year.

Inclusive of the recently closed acquisition of Intellihot, we expect full year adjusted EBITDA to range between $503 million and $513 million and full year free cash flow to be at least $350 million, excluding any past or future IEEPA reciprocal tariff refunds. Lastly, our outlook fully contemplates the transition away from the expired Section 122 tariffs to the new Section 301 tariffs announced late last week.

In the guidance slides, we have included our third quarter and full year outlook assumptions for interest expense, noncash stock comp, depreciation and amortization, adjusted tax rate and diluted shares outstanding. Please note that the D&A figures do not include the incremental impact of the Intellihot acquisition as we have not yet contemplated a preliminary purchase price allocation. We will update our outlook for these items on our next quarterly call.

We will now open the call up for questions.

And your first question comes from the line of Bryan Blair with Oppenheimer.

Really solid quarter. You mentioned the continued outgrowth of your higher-margin platforms, water safety and control, drinking water flow systems. Curious if you could rank order those. I assume that drinking water is leading the pack. And then hygienic and environmental, how much below the growth rates of the other platforms is that currently?

Yes. I don't know that it's discernible between water safety and control and drinking water are sort of above -- a little bit above flow control flow systems. And then hygienic and environmental is still positive and much more so on a unit volume basis because that's a more competitive category. It's our smallest category in general, but it's still positive, but that's the ranking as you've asked the question.

Okay. Understood. And Intellihot is a very intriguing deal for your team. Maybe offer a little more color on the uniqueness of the asset, why Intellihot specifically was the right deal for you to enter this adjacency. And then you gave us a snapshot of current operations and profitability and the medium, long-term outlook and what your team can do with the business. Can you offer any additional detail on what we should anticipate for year 1 or 2027 as we contemplate shorter-term outlook?

Yes. As you probably can assume, it's a complicated category to get into. And so when you look at the competitive set, it's a combination of foreign suppliers and some domestic suppliers. But the road map to develop technology is pretty extensive. And it's one of those sort of like the last remaining business around in that category with the best technology. And so it was a founder inventor sort of led company for a long time, and we stayed close to it. And eventually, it became an opportunity for us to acquire. And so, it's one of those things where if you would have asked us 7 or 8 years ago, what would have been the best target, we would have told you this. And so we stuck with it, and we're able to sort of find a transaction that worked.

And so I think we're really excited about getting into the category because it's really a very positive extension to us in the mechanical room, particularly in non-res. And so, as it relates to next year, we honestly didn't buy for next year. We bought it because we do think this can be a $100 million business in the next 5 or 6 years with 30% margins. It's already got 50% gross margin, as Jeff pointed out, a nice both MRO and retrofit opportunity. And so the power for this is something that we've coveted for a long time.

We've cultivated this particular business based on the technology that it has relative to anybody in the industry. And we think we're going to treat it and act like this is something we're going to own forever and grow a meaningful share in. And so I think the sketch that we gave you for '26, assume that it's going to grow nicely, and we're going to work the margins. But as Jeff said, part of this is the longer game of driving specification preference, adding innovation, bringing it to and alongside the content we already provide a lot of the customers we serve today. So I think we're thrilled to have gotten in this category, and we think that there's more to do.

Your next question comes from the line of Andrew Krill with Deutsche Bank.

I wanted to ask on price. I think to see realization stay elevated at 5% in the second quarter. So for the full year, I think is it fair that you're trending towards the high end of the 3% to 4% you cited? And could you give us any update on like have you had to put through more price or are close to needing more price midyear? Or have these been more surgical changes with kind of inflation tariffs a little bit more under control this year?

Yes. I think it is sort of in that 3% to 4% range, and it obviously varies by category and competitive set. I mean you can sort of back check that by thinking about $50 million of refunds against the prior year of about $1.7 billion, and you get to right around 3 points of price for the year. So, we haven't really had to put in any additional price throughout '26. I think as we look forward, it looks like sort of a normal pricing year for us as opposed to being elevated. And so it's 3 to 4 points for the year, a point of market growth and the remainder, some of the things that we've talked about this morning. So, nothing out of the ordinary. I think that the new tariff regime that was announced, we had sort of assumed something would replace what was in place. And so no hiccups there. And I think as Dave highlighted, we continue to make profits.

Great. Very helpful. And then circling back to Intellihot on the margin expansion, I think great to see the gross margins are very similar to modestly above Zurn, so no problem there. Just could you just unpack a little bit like the progression of the EBITDA margins getting those higher? Is this some combination of private company elevated cost structure you can bring out and then also leverage your scale purchasing powers? Any more help there? And is it a somewhat linear progression over this time frame up to 30%?

I think the answer is simply yes, to all of the above.

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

I've got a bit of a longer term or maybe more philosophical question for you, Todd. You talked about every year having a 3-year strat plan that has just a handful of things that are the primary focus in each year. Can you talk about what you think those few areas of primary focus will be for 2027?

I think it will be a continued progress on adjacencies, categories that are in and around what we do today in the $100 million to $200 million range where we think over a 3-year period, we can generate $20 million to $30 million of revenue by launching the product, leveraging the channels and relationships we have, pulling it through and then obviously leveraging our sourcing platform. So, those are the types of things that we've been working on. You'll see some of those be announced over the course of the back half of this year and into '27. And so as we go through the fall here, it will probably be a handful of things like that. So expanding our available served market by $100 million to $200 million a year across 3 or 4 different things is the way to think about it, Nathan.

And then maybe one for Dave or Dan. looking backwards a little bit, 660 basis points of margin improvement over the last few years. I wonder if you could give us a little more details on the different buckets that have driven that. I know there's big things like probably positive price cost, mix, obviously, with higher-margin stuff growing faster, productivity. Could you just give us the main contributors, maybe I'm sure you don't want to break it out per basis point kind of thing, but maybe rank order the buckets in order of their contribution to that margin expansion over the last few years.

Sure. I think if you go back to where that graph started, Nathan, I mean, that was at the time of the Elkay merger. And so call it, the first $50 million of profit improvement was really around some of the synergies with Elkay. And so at a very high level, the first $25 million were a lot of SG&A cost-out type activities. The next $25 million were more structural things, so footprint, reducing our overhead, putting through some of the process improvements in the Elkay manufacturing sites. And then even beyond that, I think -- and while all that was going on, you've got the mix factor, you've got the just #CI continuous improvement activities that we're doing on a day in and day out basis. So, I think all those things are combining for what you see in the margins. And then the other thing I'll point out is just we did a nice job with 80/20 along the way. So, reducing some of those low-margin sinks in the beginning. And then we've continued to prune and do 80/20 in the product portfolios along the way, and that's also helped. So reducing some of those low-margin products and focusing on the higher growing, faster-margin products.

We're waiting for another question.

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

I wanted to touch on the Intellihot again here. You kind of framed the hot water heating addressable market as $1.1 billion and tankless at like $200 million today. And yes, so are you targeting that full $1.1 billion water heating market over time? Or is the ambition specifically the tankless segment?

Yes. Thanks. That's a good question. I think as you think about the $1.1 billion, that is commercial water heating that's going to be over the 200,000 BTU threshold. So this is more your large institutional commercial jobs. And then if you think about the tankless portion of it, tankless is a little bit over $200 million today. That organically is going to grow just with the industry trends that are taking place. And then if you look at our commercial engine, we feel that we have an ability to accelerate that and also take our unfair share of the $200 million. So over time, the $1.1 billion is absolutely what we're targeting. It will take time to move that from traditional boiler and tank units to tankless.

Got it. That's very helpful. And kind of touching on incremental margins here, you kind of talked about that being over like around 40%, like way above 30% to 35% long-term kind of framework that you guided to. And I think you guys talked about like revisiting this framework when you guys are ready. So given that you guys have been what is outperforming that guidance for a while, like are you now ready to formally raise that like incremental margin guidance? Or if not, what is the kind of threshold that would like get you to raise that?

Yes, James, I mean, again, I think we've -- when you say formally, I guess, we've always provided that as sort of a guidepost for people to think about. And obviously, with some of the progress we've made over the last several years and many of the things that Dave just touched on with respect to faster-growing, higher-margin supply chain benefits and all that, it's -- at least in the near term, it's at 40%. So I think I would view it as a snapshot today and really sort of moving forward as sort of the same kind of general guideline. I don't totally understand like the formal part of what you're asking us. But yes, I mean, there may be periods where we invest more in new products. But for the present, with the pace that we can see, I think that the 40% is a reasonable way to think about our incremental margins.

Your next question comes from the line of Edward Magi with BNP Paribas.

Yes, starting here with the Intellihot, again, I know we talked about some sizable competitors in the space. So I have to think that given in your prepared remarks on the quality of the asset that this would be something that they might have wanted to have. So, any color on the process and if it was a competitive bidding process, that would be helpful to start.

Well, it really wasn't a process. So again, I think as we've highlighted in the past and with essentially all the transactions we've done over the years and even with legacy companies, we prefer to develop relationships and find the right time. And in this case, this is a -- I think the first contact was somewhere around 2016. And so there was not a process, and it was really a relationship. And frankly, I think they felt like this was the right place and the right home for it. It's a technology leader in a space that is maybe not as progressive as the industry is trending. And so with us, by entering the category with the technology leader as our sort of anchor into this, I think they view that as a great home as well. And so that's how we got to the finish line.

Yes, I can appreciate that. It sounds like an exciting asset coming in. And maybe the follow-up would be on some of the stuff that's come out of the portfolio over the last couple of years. Can we just click into 80/20 a little bit more? How you guys have gone about identifying some of those businesses to walk away from? And then moving forward, is there any more areas you guys have identified specifically where you would expect to move away from in the coming year or 2?

Yes. So, as a precursor to our strategic planning process, we go through a detailed product life cycle management review where we look at all of our products, our categories, our channels and really sort of dive into the competitive dynamics, the outlook and also investments required in things that we know we want to invest in. And so falling out of there, there's usually been a handful of things. Early on, as Dave highlighted, residential sinks sold through big box retail. There's hundreds of competitors. The channels really disrupted with online activity, and it's a big fixed cost investment. And so we made the -- at the moment, the difficult decision to do it, but you can see the benefits long term, not only in the profitability and the growth, but the management time and the resources to reinvest in faster-growing things.

And so as we sit here today, obviously, we're going to go through that review. And of course, there might be things that fall out. I don't think that's going to be anything significant in any particular way, but there is always going to be something that we're looking at saying, should we continue to invest in this at the expense of things that can grow faster. And that's to me, the full circle life cycle of 80/20. It's one thing just to exit it. But the real power of 80/20 is focusing your resources on things that actually grow and can outrun the deficit that you're creating by exiting something. And so as we go through the summer here, we'll go through that review. And do I expect that it will be anything significant? No. Do I think that there likely could be some? Of course.

Your next question comes from the line of Jeff Reive with RBC Capital Markets.

So you talked about growing filtration attachment rates in drinking water, but also shifting the mix towards retrofit and replacement, which is now about 50%. How important is expanding either recurring revenue and MRO exposure as part of the adjacent growth strategy? And is there a long-term mix you're targeting?

I mean within drinking water, we've always focused on growing the installed base of filtered units. And so you see in some of the numbers that I talked about how that filtered installed base has grown. That growth in the filtered installed base has then directly led to a nicer mix in terms of how big the filter business is itself. And so a combination of making the units easier to change filters, doing some things to enhance the attachment rate has all led to that filter portion of drinking water growing even faster.

Jeff, maybe one thing to add to what Dave said. I think if you look at our new construction versus MRO retrofit replace, as you highlight, it is about 50%. And so I don't know that we have a target other than to say it certainly creates a hedge against new construction activity. So I don't know that we have a specific target, but with a massive installed base of not only drinking water, but water safety and control, hygienic and environmental products, all those do undergo a combination of replacement due to usage. And then as buildings and facilities get repurposed, there is a retrofit opportunity. And so a 50-50 mix is a great place to start. You're seeing that sort of play out even with Intellihot and obviously drinking water. So it's a great point to make that, that 50% of our business that is MRO retrofit replace is sort of immune from whatever activity happens in new construction.

Very helpful. And then as a follow-up, just on the organic opportunity to expand in adjacencies, is there a framework for how much annual organic growth you'd like adjacencies to contribute? Should we think of this as 50 bps a year, 100 bps or something more meaningful over time?

I don't know that I would give it to you per year. I think it's going to be one of those things where as we look at these $100 million to $200 million markets and bring things where we can develop a meaningful share, and we're trying to think about it as a $20 million to $30 million opportunity over 3 years. It may not all show up in year 1. It may be more aggressive in year 2. So, I think it's really a function of identifying categories where we can win and build a competitive advantage, develop the products, source them the right way, work through the specifications and then begin to pull it through. And so, the compounding benefit of that is what sort of you're seeing in some of that outgrowth today. And our objective is to continue to do that pretty much in the same way over the coming years.

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

This is David Tarantino on for Jeff. Maybe following up on Intellihot. How should we think about the levers you can pull to grab more of the TAM aside from just the shift to tankless from the broader end market? I guess what are the opportunities to grow spec share? And are there gaps you'd like to fill from a product perspective, either organically or through bolt-ons?

Well, maybe a way to think about it, David, is when you think about some of the regulatory tailwinds, some of the efficiency tailwinds, we think that, that tankless addressable market today is growing in the mid to high single digits relative to the remainder of the category, which is growing 1% to 2% a year. And again, this is all sort of ex price. And so we think we're in a great segment of a very big market that will convert over a long period of time. So we're not anticipating big changes in the size of the served market, but we are -- we do expect that tankless category to grow. And so if you marry that with our ability to leverage the portfolio we have and purification capabilities we have with the full suite of influencers, right, owners, engineers, architects, wholesalers, we think that not only can the spec share go up, but the category itself will grow. And on top of that, our ability to leverage everything else we do with these customers will aid in all of that pull-through.

Jeff, I don't know if you had anything else?

Yes. I think as you asked the question, this is a heavy spec product. And as Todd mentioned, these are projects that we're already working on. As you think about the beginning of the construction cycle, starting with our Waterworks and Flow Systems portfolio. And so we feel that these are engineers that we're already having deep relationships and design discussions with and contractors that are using the breadth of our portfolio. And so we think that with those leverages, we can take our unfair share of that TAM versus Intellihot being a single-line manufacturer and trying to get leverage with not only the rep network, but also the specifiers, contractors and wholesalers.

Okay. Great. That's helpful color. And then maybe looking at the guide for 3Q and 4Q, how should we think about the underlying assumptions here from an end market standpoint? I assume the core growth step down is more moderating price as you lap kind of the tariff increases last year. But is there also some conservatism here, especially in 4Q on the end markets?

I think the way to -- you're absolutely right in that the compounding benefit of the price that was put in place is less in the second half versus the first. We're still seeing good unit volume growth. I wouldn't call out any discernible changes in sort of our end market view. And we've given you a Q3, and we've got a place marker in for Q4, and we'll sort of update what that looks like when we announce Q3 earnings right around Halloween.

That concludes the question-and-answer session. I will now turn the call back over to Bobbi Belstner for closing remarks.

Thanks, everyone, for joining the call today. We appreciate your interest in Zurn Elkay Water Solutions, and we look forward to providing our next update when we announce our third quarter results in October. Have a great day.

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

Good morning, and welcome to the Zurn Elkay Water Solutions Corporation First Quarter 2026 Earnings Results Conference Call with Todd Adams, Chairman and Chief Executive Officer; David Pauli, Chief Financial Officer; and Bobbi Belstner, Vice President and Corporate Controller for Zurn Elkay Water Solutions. A replay of the conference call will be available as a webcast on the company's Investor Relations website. At this time, for opening remarks and introduction, I'll turn the call over to Bobbi Belstner.

Good morning, everyone, and thanks for joining the call today. Before we begin, I'd like to remind everyone that this call contains certain forward-looking statements, which are subject to the safe harbor language outlined in our press release issued yesterday afternoon and in our filings with the SEC. In addition, some comparisons will refer to non-GAAP measures. Our earnings release and SEC filings contain additional information about these non-GAAP measures, why we use them and why we believe they are helpful to investors and contain reconciliations to the corresponding GAAP information.

Consistent with prior quarters, we will speak to certain non-GAAP metrics as we feel they provide a better understanding of our operating results. These measures are not a substitute for GAAP. We encourage you to review the GAAP information in our earnings release and our SEC filings. With that, I'll turn the call over to Todd Adams, Chairman and CEO of Zurn Elkay Water Solutions.

Thanks, Bobbi, and good morning, everyone. I'll start on Page 3. 2026 is off to a decent start as first quarter sales grew 11% organically. EBITDA grew 18% to $116 million, and our margins expanded 160 basis points to 26.8%. In the quarter, we generated $43 million of free cash flow and repurchased $50 million of Zurn Elkay at roughly $47 a share. We're very comfortable with our full year outlook for free cash flow of approximately $335 million and anticipate revisiting that along with the rest of our outlook after Q2.

Just a couple of thoughts from me before I turn it over to Dave. From a market perspective, we generally see the same market conditions we outlined when we provided our outlook in February. The same is very much true for the pricing environment. Next, there's been a lot of announcements and moving parts related to tariffs over the course of the quarter: the Supreme Court ruling on the IEEPA tariffs and subsequent refunds, the implementation of 122 tariffs, changes to the 232 tariff scheme and the opening of new studies on future Section 301 tariffs.

We've also continued to advance our own supply chain footprint initiatives. And what I will say here is that we are very much on track to meet or beat the objectives we set out to achieve at the beginning of the year. As it relates to all these tariff changes and potential changes in our outlook, our view is that assuming some of the known changes to 232 tariffs and projecting some likely net adverse changes stemming from the potential 122 and 301 changes, we are highly confident that without receiving any refunds or implementing any future price increases, the discrete impact of tariffs within 2026, which we said was to be price/cost positive, remains unchanged, which leads me to my final point on our full year outlook.

I think the way to describe the way we think about our outlook is to be both deliberate and conservative. As you can see with our first quarter results and second quarter outlook, we're running ahead of what was likely assumed for the first half of 2026. As I just discussed, we have high confidence that we will continue to manage through the tariff dynamics extraordinarily well.

Second, as of now, there isn't anything I can point to that would make the second half worse than what we had anticipated. So I think it's safe to say our first half outperformance flows through to the year. That's where the deliberate methodology enters into our approach. The reality is that there's 8 months left in a year. And depending on the day, there's simply a lot going on in the world. So rather than try to change a bunch of digital assumptions day by day that frankly will become more clear as the year goes on, we're simply going to update the second half after Q2. So with that, I'll turn it over to Dave.

Thanks, Todd. Please turn to Slide #4. Our first quarter sales totaled $433 million, which represents 11% core and reported growth year-over-year. In the first quarter, we generally saw our end markets perform in line with the guidance we provided 90 days ago. Growth in our nonresidential end markets was partially offset by softness in Residential. We've had solid execution on our growth initiatives, and those initiatives helped drive our sales performance to the higher end of the outlook we provided 90 days ago. In addition, during the first quarter, portions of the U.S. experienced some unusually cold weather. This resulted in some incremental break-fix activity that we think plays out to about 1 point of growth over the first half.

Turning to profitability. Our first quarter adjusted EBITDA was $116 million, and our adjusted EBITDA margin expanded 160 basis points year-over-year to 26.8% in the quarter. This continues a trend of year-over-year margin expansion that we have delivered since the Elkay merger. 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 as well as mix as our higher profit margin products are growing the fastest.

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 quarter with leverage at 0.5x. Our 0.5x leverage is inclusive of the $50 million we deployed to repurchase shares in the quarter. During the quarter, we also upsized and extended our revolver. We transitioned from a $200 million revolver to a $550 million revolver that extends 5 years. This gives us even more liquidity as we move forward. Our balance sheet, leverage, liquidity and cash flow generation are in a great spot as we continue to evaluate our funnel of M&A opportunities. I'll turn the call back to Todd.

Thanks, Dave. And I guess I'll move to Page 6. I think the takeaway here could be plan your work and work your plan, which when you boil it all the way down is the essence of the Zurn Elkay Business System. When you look at some of these attributes of our business, most of these have been cultivated through focused and intentional actions to build a business with a wide competitive moat that is flexible, repeatable and scalable and even when the external environment or circumstances aren't optimal.

Stemming from our strategic planning process all the way through to our strategy deployment process, being disciplined and intentional on playing the game we can win consistently at a high level is our ultimate priority, whether it's our geographic focus, the product categories we're in, the end markets we prioritize or the actions we take on product or market exits or even more importantly, the new product development and adjacencies we're entering. It's all connected.

If you followed us, one slight change that you may notice here is the slight change in our mix towards retrofit/replace, which 5 years ago was 45%. But as we deployed our strategic plan with an emphasis on growing Drinking Water and Filtration, coupled with growth in our Water and Safety Control products and portions of our Hygienic and Environmental business, we're now evenly split, which over time, only makes the business more resilient and in aggregate is margin mix positive for us.

We're really excited about the trajectory and future of Zurn Elkay, and it stems from the culture we've established and the people we have. Throughout this year, we're going to expose everyone to more of our team on these calls, so investors gain a further appreciation of the management depth and passion that exists here and the appreciation for the people who really make all this happen each and every day. Now I'll turn it back to Dave.

Thanks, Todd. I'm on Slide 7. Todd just talked about the focused and intentional decisions that led to the business we have today in Zurn Elkay. Slide 7 helps to illustrate the results in the form of profit these decisions have produced over the last several years.

On a trailing 12-month basis, our adjusted EBITDA margins have improved 630 basis points from Q1 of 2023 to Q1 of 2026. And on a point-to-point basis, our adjusted EBITDA margins are up 730 basis points over the last 13 quarters. That starts with 19.5% margins in Q1 of 2023 compared to this quarter's adjusted EBITDA margins of 26.8%. The foundation of our EBITDA margin improvements all center on our Zurn Elkay Business System, the belief in continuous improvement and the focus on getting just a little bit better each and every day. The margin improvement over the past 3 years is a combination of a number of drivers that I'll walk through.

First, part of the Zurn Elkay Business System is sharing ideas and wins across the organization so that we can replicate successes. We've highlighted our #CI or continuous improvement process in the past. But as a reminder, these are associate-led and submitted ideas that save time, eliminate waste and improve day-to-day processes across the organization. While no single #CI on its own is material, they do become material when we have thousands submitted across the organization each year.

The second item I'd point out is our unit volume growth in the most profitable areas of our business. Water Safety and Control, Flow Systems and Drinking Water have all seen growth over the last several years, while we've exited via 80/20, the lowest margin products within the portfolio.

Third, after delivering on over $50 million of synergies associated with the Elkay merger, we continue to make positive structural changes beyond those identified in the synergy case, consolidating our footprint to reduce overhead, introducing and sustaining the Zurn Elkay Business System lean tools into the Elkay manufacturing facilities and continuing to challenge our strategy around internal manufacturing versus sourcing.

And lastly, our supply chain has been a clear competitive advantage that has allowed us to improve profitability while successfully navigating the tariff environment.

Now to the guidance on Slide 8. For the second quarter of 2026, we are projecting core sales growth to increase 8% to 9% over the prior year, and we anticipate our adjusted EBITDA margin to be in the range of 27% to 27.5%, which is 50 to 100 basis point expansion year-over-year. Within Slide 8, we've included our second quarter outlook assumptions for interest expense, noncash stock comp expense, depreciation and amortization, adjusted tax rate and diluted shares outstanding.

As Todd mentioned earlier, our first quarter actual results and second quarter guidance puts us ahead of our expected first half performance, and our plan is to revisit the second half of 2026 outlook when we announce our Q2 results. One other comment on guidance. Our full year outlook does not take into account any potential tariff refund benefits and assumes that the current tariff structure in place as of today remains in place throughout 2026. We will now open the call up for questions.

[Operator Instructions]

Our first question comes from the line of Bryan Blair with Oppenheimer.

Very solid start to the year. I was hoping you could offer a little more color on Drinking Water trends. Pro Filtration has obviously been in the market for another quarter. Any updates on adoption and the impact on overall platform growth or attachment rate would be very helpful. And with consolidated core growth at 11%, I assume Drinking Water growth was quite robust in the quarter. Are you willing to share top line performance in Q1 or how your team is thinking about Q2?

Sure, Bryan. It's Dave. So drinking water in the quarter performed very well, in line with where we thought it would be going into the quarter. The installed base continues -- the installed base of filtered bottle fillers continues to grow at double digit. The filtration piece of the business continues to grow above double digit. You mentioned Pro Filtration. We've seen really nice adoption of Pro Filtration. That product was developed around feedback that we received from customers, end users, facility managers. And so we've seen really great adoption of that and the filtration attachment rate associated with that is very high, just given some of the technology changes.

So overall, Drinking Water had a really nice first quarter. And we see that Pro Filtration continuing to accelerate as we go. As you know, we have a dominant share of specs, and our team is currently working just to update those specs. So legacy product to Pro Filtration. So in a good spot with Drinking Water.

All good to hear. And I guess a level setting question as a follow-up. You just walked through the drivers of rather impressive EBITDA margin expansion over the last 3 years. And if we set aside Elkay synergies, as kind of onetime structural lift. The rest of it is CI in one form or another. Given the level of profitability that you now have and assuming that mix does not meaningfully shift or continues to positively transition, you've spoken to low 30s, maybe a step up to 35% as normalized incremental margins for the business. Are we at a point now where it would be reasonable to speak to a higher figure going forward?

Yes, Bryan, look, I think Dave mentioned it in his comments, while we had a nice quarter in Drinking Water, I think it's also important to recognize Water Safety and Control and our Drains business is growing just as fast. And so when you think about those 3 categories, the margin profile in each of those is really good. And I think the combination of CI, obviously, the Elkay synergies, all the work we're doing on supply chain helps. But I think there's another thing to think through, which is a lot of the new products that we're introducing come at margins replacing the old products or the new products are even better.

So it's a really nice dynamic where we've got an operational sort of lever that we're continuing to work at through all those things. But then as we introduce and launch new products, those are coming to market at attractive margins. And so I think in time, we may modify that. But for the time being, I think it's a good framework to think through as we invest in some of these new products to bring them to market. But I get your point, and we'll revisit it when we feel like we're ready to.

Our next question comes from the line of Andrew Krill with Deutsche Bank.

I wanted to dig in, I guess, more on the change of OE versus retrofit up to 50-50 split. Just is there any way you can quantify like a target over time where you think this can go? Many other industrials, they can be 2/3, 75% more aftermarket. Like is there any reason you can't get to that over time?

Yes. I think, Andrew, a good portion of our business is still new construction, an important part that actually ultimately feeds the retrofit/replace. So I think I think it's unlikely that we'll get to a 75 retrofit/replace sort of percentage. But I do see in the coming years, that has the opportunity to drift higher. 55%, I think, is a reasonable next waypoint to think about for us. And as we point out, as Filtration grows, as our spec share, as our installed base for all of our products grows, we see that opportunity to grow a little bit higher.

Great. And then on the weather comments with the Northeast, I believe Dave said it should be about 1 point of a good guide for the first half. Can you just break down what this was in the first quarter? I guess is there any chance it was flattish or down? Like any help on how that impacts 1Q versus 2Q would be great?

Yes. Even between the 2 quarters, Andrew, nothing oversized in Q1.

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

I guess I'll ask some of the dumb tariff questions. There's obviously been newly implemented tariffs and you guys are talking about contemplating some additional tariffs after that. Could you -- is there any color you can give us on what you think the incremental gross impact to the business in terms of increased costs is? I think everybody understands that you're very, very good at passing that through to customers. But just any color you can give us on what you think the gross impact is?

Yes. Nathan, there's obviously a lot of to be determined moving parts as 122 likely expires and then the studies from 301 come back and potentially get implemented. What I can say is we're not counting on passing any future price increases through. The combination of all the work we've done on products, substitution materials, obviously, some of our footprint things, we think holds that steady with some, I will say, conservative assumptions.

And I also think it's important to point out that over the last 2 or 3 years, as a function of the work we've done, our largest sourcing comes from the U.S. So out of all the countries that we source from, the U.S. is the largest by a decent margin at this point. So in many ways, we've insulated ourselves from it. But I think our working view is that net-net, it's about the same as we started the year. With some assumptions around 122 rolling off, 301 coming in, that's sort of where we see it today. That's what's embedded in our view.

Okay. Fair enough. I'm going to ask one about capital allocation. It's been quite some time since Zurn acquired Elkay. The balance sheet is in great shape, certainly has plenty of available capacity for M&A. Maybe talk about the maturity of the pipeline, the appetite for more M&A and priorities for capital deployment?

Sure. Yes, as we, I think, point out routinely on these calls, we run a proprietary funnel. So we're not -- we don't participate in auctions in any meaningful way. We continue to do some of that cultivation work. I think, obviously, some of the work we're doing around new products is informing new targets as well. So I would say we're in late stage to mid-stage to early stage on a number of cultivations. We do have an appetite to do those only to the degree that they make sense strategically and then obviously meet the return hurdles that we set out for ourselves.

In terms of capital allocation, we've obviously bought back shares routinely. We're going to continue to do that more when we feel like the intrinsic value relative to what we see is understated or less than what we think is fair value. And obviously, we pay a nice dividend. And so those are going to continue to be the priorities. So no change, but certainly optimistic that over the coming quarters, we're going to get some of these things over the finish line.

Our next question comes from the line of Mike Halloran with Baird.

So first question, just to clarify a comment from earlier. So it doesn't sound like you're expecting incremental pricing, just confirm that one way or another. And then the follow-up is, when you talk to your customer base, what's the sense of fatigue on the pricing side of things? What concerns would you have if you had to go back to the market with price? Or do you still feel pretty good, all else equal? Obviously, you have a value proposition you're pitching and people are pretty aware of the inflation that's out there. So just kind of curious on the puts and takes from the customer base at this point?

Well, Mike, I think when you take a giant step back, in aggregate this year, we're talking about 3 points of price incremental. So it's not like we've gone out with egregious price increases above and beyond what our competitive set has done. We've got different competitors across all of our different product lines. So some people have been more aggressive than us. Some people have been less aggressive than us in certain spots.

So taken as a whole, I think stability would be a great thing. And I think that's sort of what we see in our outlook, which is the things that we're doing put us in a great spot to not sort of have to put these big digital price increases through that we were going through last year. But that being said, we've got to stay diligent because inflation of commodities and freight and obviously, this conflict in the Middle East are all sort of bubbling. And so I think we're going to be smart about it. I don't see any meaningful fatigue, but I think it's something that we're just watching very carefully category by category, region by region. And I think we've done a really nice job of staying close to it and expect to continue to operate the same way.

Okay. Makes sense. And then maybe the follow-up question is just any thoughts on the growth adjacencies you've been talking about and some of the growth initiatives that you're highlighting for -- to have an impact late this year and into next year. Just kind of any thoughts on some deeper color on what those might be or target areas or anything you might be willing to share?

Yes. I mean nothing that we're going to share at this point. Obviously, these are going to be new entrants into categories that competitors have or maybe even some new competitors. So I think we're making great progress there. I think it's really exciting. I suspect that by the time we get to Q3, we'll be in a spot to share some of those. And obviously, as more roll out over Q4 and into the first part of next year, when we're ready, we'll talk about them. But I think very much on track with what we thought as we started the year. But great work by our teams. And I think it's going to be exciting for us moving forward, not just in '26 and not just in '27, but really starting to stack these year in, year out, which will be helpful to our long-term growth rate.

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

I guess I wanted to touch on this growth adjacencies a little bit more here. I just wanted to understand the rationale behind it. Like should we think about these initiatives as additive to your like current long-term mid-single-digit growth outlook or more as a way to kind of sustain that level if like other end markets slow or -- yes?

I think it could be both. Clearly, we're not going to predict what the market conditions are in '27 or '28 at this point. So if they're weaker, this could clearly boost some of that, maybe lower market growth. If the market is what it is, I think it would ultimately end up being additive. So I think it could serve both, James. And it really is something that we've done historically. I think given where we are from a balance sheet perspective, a strategic focus perspective, we see a dual-pronged approach here, right? We're going to enter new categories, develop new products, open up additional available market. And as a function of that, I think it's going to aid in some of our cultivation.

So I think long term, it can be both. It can support what we have in the event of a weaker-than-expected market. And to the degree the market is okay, it should enhance it is sort of the way to think about it.

Great color. And I guess as a follow-up, I just wanted to touch on 1Q outperformance. Like can you talk about the primary kind of drivers of the outperformance since growth came in stronger than expected even accounting for favorable impact from weather. So can you kind of break that by core sales growth into like volume and pricing and potentially mix?

Sure. So if you look at the 11%, 5% price and the rest volume. You mentioned the weather thing. That was about 1 point in the quarter. And then just in terms of the outgrowth, we've talked about it a little bit just in terms of our Water Safety and Control business, our Drains business, our Drinking Water business growing very nicely in the quarter. I think if you look at some of the initiatives that we set out and have talked about last year into this year, looking at areas of the U.S. where there is maybe a little bit more construction activity, over-resourcing those.

So we've seen some nice wins from a regional growth perspective in terms of areas that we've intentionally deployed resources to and focused on. So I think that's helping to deliver some of the overperformance we saw in Q1.

Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

Just had a couple of kind of end market questions. So in the Q, it looks like Commercial bucket kind of accelerated. I don't know if there's anything to parse out there if that captures more of the break fix. And then I know it's small, like 8% Waterworks, but there's been some peer companies with some short-cycle noise. I didn't know if you could just comment on what you're seeing in that business and if you're seeing anything to that extent?

Yes. Again, I think when you look at Commercial, it's a lot of different things. I'm staring at a pipeline chart here from our manufacturers' rep just in New York, right? I mean you've got the CoreWeave data center. You've got the West Point Football Stadium, JFK Airport, the U.S. Open stadium and parking garages on the come. You've got things like Major League Soccer Stadium in New York, the Brooklyn Borough Jail. So I think there's a lot of activity out there, and I think it's representative of being hyper local and finding pockets of growth even in a geography where you may not assume that there's a lot of growth. In terms of Waterworks, nothing abnormal for us in Waterworks at all. So hopefully, that's the color you were looking for.

Our next question comes from the line of Brett Linzey with Mizuho.

Congrats on the quarter. This is Peter Costa, on for Brett. And maybe just one more about end markets. Can you kind of talk through your outlook by end markets? You're talking to flat to slightly positive market in total with Institutional up low singles, Commercial flat and Resi a little bit tougher. Do you have any updates to that given the 1Q outperformance?

No. I'd say if you go back to the guidance framework we gave 90 days ago from a pure end market, we called Institutional low single digits; Waterworks, low single-digit growth; the Commercial market, we said would be flat; and Resi down low single digits. And I think we've generally seen those end markets play out. In Q1, the Commercial market might have been a little bit better than flat. But I'd say from a long term, how we see 2026 play out, no change to that guidance framework we gave initially.

Awesome. And then maybe just could you give us a sense of the margin differential between some of these lower-margin products you're walking away from and then some of the higher unit volume growth areas that you called out like the Safety and Control, the Flow Systems and the Drinking Water?

So in terms of the stuff that we walked away from intentionally, that would have been substantially lower margin. So think back to the Elkay merger when we exited some low-margin noncore residential sinks that were primarily sold through big box. We're largely out of those types of products at this point. The things that are growing faster that have some incremental margin would be think about Filtration within Drinking Water. Think about some of our Water Safety and Control and Drains products that carry a really nice margin that would be ahead of the fleet average.

[Operator Instructions]

Our next question comes from the line of Jeff Reive with RBC.

I appreciate all the color thus far. So if we think about the puts and takes around pausing the full year outlook, what are the key variables you're waiting to see resolved by the time you report 2Q? Is it just tariffs? Is it something else?

Jeff, I honestly don't think it's that deep. I think we had a really nice Q1. We're projecting a nice Q2. I think that certainly, there's going to be more clarity on some of these tariff issues as we get through the summer. But quite honestly, we just are electing like we have in the past to sort of wait and see. I can't point to anything that would say at this point, the market is worse. We're concerned about the tariff issue. So it's really just, I think, being very deliberate about modifying the full year outlook. It's probably not going to foot across in your model. But I think we're sort of really trying to dial in a better view for the full year once we get through the second quarter.

Got it. I only ask because I think when you see a company kind of pause guidance, it's usually a cause for a concern. But obviously, you're doing it from a position of strong 1Q and a better 2Q outlook. Maybe just on visibility into the second half. Can you maybe talk to that? What line of sight do you have to backlog? Just any comments there?

Yes. When you look at contractor backlogs as they sit today as we talk to our third-party reps on activity that is likely to come to fruition in the second half, it's very much consistent with the kind of market growth that Dave talked about. And obviously, some of the outgrowth in terms of regional focus, new product launches, I don't see anything that would derail that at this point. So you're using the word pause. I think we're going to use the word deliberate. But needless to say, I think we're going to end up in a good spot for the year. And we're really just focused on the next 90 days and doing the work to make the second half as good as it can be.

I will now turn the call back over to Bobbi Belstner for closing remarks.

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

This concludes today's conference call. You may now disconnect.

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. 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 filter 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.

Zurnlkay 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. 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 to improve 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, provide 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 plus 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 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.

[Operator Instructions] And at this time, your first question comes from the line of 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. I mean, as we talked about, we went through our strategic planning process. I think we've been even more exhaustive in how we've looked at adjacencies. And so there's a fresh sort of view on the funnel and some of the cultivations that are happening that have been in the works for a while, continue to progress. We have not seen anything transact that we feel like we've missed.

And so I'm optimistic that the combination of continuing to do the cultivation work, I would say, maybe a new fresh look at adjacencies and what that can do both organically, inorganically, but I think will be incrementally helpful. And as you point out, we've got tons of flexibility over the course of the year to repurchase shares, look at the dividend again and ideally get something done from an M&A perspective that fits -- meets our criteria and we can do a lot with. So I think we're optimistic, but I'm not going to predict or project either.

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.

P

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 came out from the EPA, and I know that they did some presentation and educational awareness in November and some tweaks to that plan in December. I'm wondering, is that -- do you view that as an accelerant to the drinking water within the institutional, specifically school market? Or do you see that more as helping sustain the healthy trajectory of attachment and acceptance that you've been seeing 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, I mean, the way to think about it is there's -- it's a relatively new category bottle filling. And there's 6 million of these drinking fountains installed. And so to the degree people are more aware and it's going to help with that. And it's got such a long tail on it. I'm not sure that we actually need the acceleration. I think it's just a steady drumbeat of better products, more awareness, funding at the right times. And then once that installed base continues to grow, the filtration opportunity compounds from there. And so I agree with Dave's comments that I don't know that it accelerates it as much as it just -- it's another down payment on converting this massive installed base out there.

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 do. I think we're trying to continue -- as we've talked about maybe in the remarks, invest back into the business in organic growth. And so I think when you think about our business today, our fastest-growing categories and products are above the fleet average. So I think there's a mix weighting that's going to naturally raise the overall incremental margin over time, along with putting some resources and investment back in to grow more. So we feel like 35% is a baseline that we're very comfortable with. And all things equal, if we execute like I think we will over the next 2 to 3 years, I think that, yes, the number can move higher for sure.

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. I think when we look at it, James, if you go back and some of the information that we shared on our last earnings call, we look at a number of different indices. We specifically highlighted some of the Dodge square foot data. But I think when you look at the guidance that we gave -- the guidance that we gave for 2026 is essentially what we're seeing today. So we're seeing an institutional market that continues to grow, a weaker commercial market.

And then a residential market that at the start of 2025, I think we called flat, but ended up being a little bit tougher of an end market. And so when you look through what we're seeing in terms of our incoming order rates, what we're seeing in terms of project starts through our reps across the country, we have a pretty good insight into the level of construction activity that's happening and are comfortable with the guidance that we gave in 2026, looking a lot like what we just saw 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. I think we've seen good early adoption of Pro Filtration. So that's the product that Todd talked about, the different feature set and that launched this summer. I think when you look at that product, the features and benefits that Todd walked through were a direct ask of the consumer and the maintenance folks that interact with that product every day. And so one of the nice things about that product is as we sell it, the attachment rate becomes very high. So we've done some things with a proprietary head that only our filters work in. And also to make the unit work properly, you have to continue to change the filter on a regular interval.

And so I think Pro Filtration is only going to help us in that effort to get the attachment rate as high as possible. And then just from a filtered gallons perspective, yes, there's some nice growth in terms of actual filtered gallons. And so that stat of us is really how much -- we know how many filters we've sold. We know the gallons of the associated filter. And what you're seeing is the result of that. And so that's the work that our team is doing every day in terms of getting the latest Pro Filtration speced in and then making sure that we pull through the related filtration along with it.

I think it's not a -- we're not going to measure attachment rate every 30 or 90 days. I think with the recent launch of Pro Filtration and the very, very high attachment rate associated with that as that becomes a bigger portion of our overall shipments and as that grows into the installed base, there's without question, it's going to pull the overall attachment rate up. And so I think it's a good question. I think it's something that we're measuring and -- but I don't know that it's a 30- or 90-day sort of thing. Let's get Pro Filtration units into the field over the course of the year. We know the attachment rate on it is exceptionally high. And as that happens over 1, 2 and 3 years and that compounds, I think we see a really good path for filtration.

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

Can you give us price in the fourth quarter and what's embedded in 1Q? And then just on your announced pricing for this year, is that kind of in line with back to normal course? Or does it contemplate a higher annual price increase because of tariffs -- newer tariffs or some of this 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.

And then as you look at kind of these adjacencies and new products, I remember back with Elkay, you were maybe considering entering that market and then you bought Elkay. Like do you see -- and I think, Todd, you mentioned kind of these organic opportunities lead to inorganic opportunities. Maybe just talk about how you see those going together as you look at some of these adjacencies.

Yes. It's a good question, Jeff, and it's really grounded in the way we look at our strategic plan. And so as we're going through our work and looking at competitors and markets and doing the mechs and evaluating who's there and what would it take to compete and all those things, it launches sort of a dual path, right, of what do we want to prioritize and do internally that may lead to cultivation and ultimately an M&A opportunity. And we sort of value those 2 things for a while. And then when there's a decision to go one path or the other, we make it and we live with it. And so that's the process that we've used really for a long period of time. And I think as we've, I would say, expanded our view on what could our served market look like, that only creates, I would say, more optionality for M&A that perhaps maybe we weren't cultivating before. But we can do it organically as well.

So it's a little bit of the same path that led us to Elkay, Jeff, as you point out. And so I think we're excited about it. I think it's -- if we can think about our markets being $1 billion or $1.5 billion or $2 billion bigger, that's a big opportunity for us. And when you think about can we grow, 1% is $17 million, 2% is $34 million. So that's a great opportunity for us over the coming years to enhance our underlying organic growth rate, either organically or through an M&A transaction or some sort of transaction that makes a ton of sense because we've already vetted the category. We know the business, we've cultivated it. And so we're excited about it and optimistic that good things will happen as a result.

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 center. So 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.

Good morning, and welcome to the Zurn Elkay Water Solutions Corporation Third Quarter 2025 Earnings Results Conference Call, with Todd Adams, Chairman and Chief Executive Officer; David Pauli, Chief Financial Officer; and Bryan Wendlandt, Director of FP&A for Zurn Elkay Water Solutions. A replay of the conference call will be available as a webcast on the company's Investor Relations website.

At this time, for opening remarks and introduction, I'll turn the call over to Bryan Wendlandt.

Good morning, everyone, and thanks for joining the call today. Before we begin, I'd like to remind everyone that this call contains certain forward-looking statements, which are subject to the safe harbor language outlined in our press release issued yesterday afternoon and in our filings with the SEC.

In addition, some comparisons will refer to non-GAAP measures. Our earnings release and SEC filings contain additional information about these non-GAAP measures, why we use them and why we believe they're helpful to investors, and contain reconciliations to the corresponding GAAP information. Consistent with prior quarters, we will speak to certain non-GAAP metrics as we feel they provide a better understanding of our operating results. These measures are not a substitute for GAAP. We encourage you to review the GAAP information in our earnings release and in our SEC filings.

With that, I'll turn the call over to Todd Adams, Chairman and CEO of Zurn Elkay Water Solutions.

Thanks, Bryan, and good morning, everyone. I'll get right to it on Page 3.

In aggregate, we had a decent third quarter. Our sales grew 11% organically year-over-year and EBITDA grew 16% to $122 million as margins expanded 120 basis points to 26.8%. We leveraged our free cash flow of $94 million in the quarter to repurchase about 600,000 shares, bringing our year-to-date repurchases to $135 million or about 3.8% of total shares outstanding, and all this while leverage declined to 0.6x.

As you may have seen in the release, we also raised our dividend 22% and our Board has refreshed our share buyback program to $500 million. Dave will highlight it more in his comments, but we also completed our U.S. pension plan termination in the quarter, which is really just a nice thing to have behind us.

This morning, as we've done in prior years, we'll take everyone through all the market data we have on the U.S. nonresidential construction market and dissect it in ways we believe makes the most sense to understand how the macro data flows through to our end markets and ultimately into our business, setting the stage for what we think the market grows over the coming years.

To cut to the chase, we think our markets in 2026 look a lot like they did in 2025. Last year this time, the data showed an acceleration into 2026 that, with some of the uncertainty around tariffs and really the lack of interest rate reductions throughout '25 relative to what was projected a year ago, pushes that acceleration to 2027.

The market outlook being relatively stable over the past few years, we've been much more focused on what we can control, which is leveraging our internal growth initiatives, which are amplified by the competitive advantages we've cultivated around our product portfolio breadth, high levels of specification and our unique go-to-market positioning.

As we discussed last quarter, we feel like we continue to demonstrate that our teams have got a really good handle on the tariff, supply chain and pricing dynamics. And Dave will update you on all the numbers in a bit, but overall, relatively consistent with what we communicated in the second quarter.

All year, our approach to outlook has been to take things a quarter at a time because there's been several scenarios as to how all this change could have played out. But with only 1 quarter to go and basically only 2 months left in 2025, we are again raising our full year estimates for growth, profitability and cash flow.

Now I'll turn it over to Dave, and he'll take you through some more color on the quarter.

Thanks, Todd. Good morning, everyone. Please turn to Slide #4.

Our third quarter sales totaled $455 million as we continue to have solid execution on our growth initiatives. $455 million of sales represents 11% core growth year-over-year. In the third quarter, we generally saw our end markets perform in line with our expectations as the nonresidential market remains positive while the residential market continues to experience softness.

Core growth reflects both a full quarter of impact and higher realization of the tariff-related price increase that we put into the market in April. We also saw about $8 million of incremental demand shipped in the quarter as a result of customers ordering ahead of a discrete pricing action we put in place in mid-September within our water safety and control products. The discrete pricing action was primarily to reflect incremental tariffs on copper-related goods and the updating of country-specific tariff rates.

Turning to profitability. Our second quarter adjusted EBITDA was $122 million and our adjusted EBITDA margin expanded 120 basis points year-over-year to 26.8% in the quarter. This strong margin and year-over-year expansion was driven by volume leverage, productivity initiatives, leveraging our Zurn Elkay Business System and continuous improvement activities across the organization. 26.8% consolidated EBITDA margins are the highest quarterly margins we've had since the Elkay merger.

Year-to-date, our sales and EBITDA have increased $93 million and $39 million, respectively, which represents a 42% drop-through on the year-over-year volume increase. Our year-to-date EBITDA margin improved 120 basis points year-over-year as our core sales grew by 8%.

Please turn to Slide 5, and I'll touch on some leverage and free cash flow highlights. With respect to our net debt leverage, we ended the quarter with leverage at 0.6x, the lowest leverage we've had as a public company. We continue to repurchase shares, and in the quarter, we deployed $25 million to repurchases. That puts our year-to-date repurchases at $135 million.

Free cash flow again finished strong at $94 million in the quarter. 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 while at the same time entering adjacencies through investment and internal development.

Todd mentioned it in his opening remarks, we exited the U.S. pension plan in the quarter. That eliminates an approximately $200 million liability and the related assets, and also eliminates the need for cash payments to support the pension plan on a go-forward basis. So a nice win for the team to remove that and exit the plan in the quarter.

I'll turn the call back over to Todd.

Thanks, David. And I'm back on Page 6. We continue to make solid progress this quarter toward our sustainability goals, advancing initiatives that support long-term value creation really for our customers. You can see some of the highlights here.

Beyond delivering 1.8 billion gallons of safer, cleaner filtered drinking water so far this year through our commercial bottle filling stations, and eliminating the need for 14.6 billion single-use plastic bottles, we're continuing to find new ways to bring our commercial-grade filtration to even more people.

Many people assume their water is safe because it tastes fine or it comes from a trusted municipal source. But the reality is our sense can't detect contaminants like lead, forever chemicals and microplastics. And while the refrigerator or pitcher filters are convenient, most are only certified to improve taste and odor, not remove harmful contaminants.

At Zurn Elkay, we've been tackling these challenges for years, protecting kids in schools, travelers in airports and employees in offices with our commercial-grade filtered bottle filling stations. Now we're bringing that same trusted technology into the home with our Elkay Liv built-in filtered bottle fillers. These sleek modern units complement any home design and deliver filtered water to every room, from home gyms and mud rooms to primary suites.

Our newest Liv EZ models bring convenience anywhere there's a water line. No electricity, no drain needed. Just a wall, a water line and a couple of batteries. We're supporting this launch with a robust marketing effort, including influencer partnerships focused on families, health and DIY audiences, helping more people experience the benefits of cleaner, safer water right at home.

Thanks, Todd. I'm on Slide 7. And similar to the data we've shared in the past, I'll provide an update on the market.

As we look ahead to 2026, it's helpful to revisit some of the key indicators that shape our view of how the market will perform and what that means for our business. On the top of the page are 3 macro indicators that we track: the Dodge Momentum Index, Architectural Billing Index and construction backlogs. I'll talk through each of these.

The Dodge Momentum Index measures the value in dollars of nonresidential building projects in the planning process against a baseline year of 2000. The index is meant to be a leading indicator for all future nonresidential construction spending, and therefore, it's generally used to monitor the future direction of construction spending. Think of the Dodge Momentum Index as a 9 to 12-month preview of what's likely to start. But also recognize that there's a lot of -- there's a lot in there: price, various end markets and geographies.

Next is the ABI, which is a sentiment survey that tracks a cohort of partners of AIA member-owned architectural firms, whether their billing activity for the previous month grew, declined or remained flat. The way to interpret ABI is a score of 50 indicates a balance between positive and negative reports, while a score of 100 indicates all firms reported improvements. A rise in the index above 50 means that more firms reported an increase in demand for design services than reported a decline in demand.

It's important to note that a rise in the index above 50 is not a direct measure of the rise in demand because the survey does not ask firms reporting stronger demand to quantify the level of increase in demand, nor does it provide information on the size of those firms. That being said, higher readings in the ABI generally coincide with growing demand.

Finally, on the right, construction backlog, which measures the amount of work surveyed contractors have in their current backlog. In some ways, it's their lead time to taking on new business. And as you might expect, it's their best estimate, assuming no delays and consistent levels of staffing.

All 3 of these metrics have a level of validity in them on how we think about the future. But as you know, our business is hyper-local, hyper-regional and it all varies by region, vertical. And other than the backlog reporting, there's limited certainty as to what's really going on in the ground level where the projects are actually happening every day.

While the 3 macro indicators we just walked through on the top of the page were third-party data, the bottom section is specific to our business. On the bottom left, you can see how our portfolio of products participates across the full construction cycle, from the start of the job all the way through to finishing front-of-the-wall product 18 or so months later.

Nonresidential construction is a complex ecosystem, coordinating multiple trades, supply chains, permitting and weather impacts. On average, projects take about 18 months from start to finish. And our portfolio is uniquely positioned across that time line. From flow systems early in the build, to water safety and control mid-cycle, and hygienic and environmental solutions and drinking water at the completion.

With an understanding of how our products participate across the construction cycle, the other item to factor in is the lag effect. And this concept is illustrated in the chart on the bottom right. The lag effect shows how Dodge starts ultimately translate into Zurn Elkay sales. In a typical year, roughly 20% of our new construction revenue is tied to projects that started in that same year, while the other 80% reflects work initiated in prior years. I'll talk through this more a bit.

Start with Q1 of 2026. Virtually all of our new construction sales come from starts that happened in 2025 and before. And by the time you get to Q4, current year 2026 starts will have about a 40% contribution to our sales. This lag effect, combined with the breadth of our portfolio, gives us visibility in the demand and confidence in the durability of our growth as we look into 2026.

Moving to Slide 8. We have Dodge starts on a square foot basis, with actual starts data from 2023 and 2024 and then Dodge's projections out to 2028. The Dodge data in this slide and the next slide is the most recent report published by Dodge as of August 2025. We like to look at square footage because it strips out pricing, renovations and alterations, providing a clear view of the market-driven growth that underpins the roughly 55% of our business that comes from new construction.

A couple of things I'll point out with the data. The Dodge data is separated between institutional and commercial end markets. For us, it's the majority of our revenue. The pie charts on the right-hand side shows the 2026 square footage starts by building type. And you can see that within institutional, education dominates the square footage at 40% of the total. And within commercial, warehouses are the largest building type at roughly 50% of the square feet starts.

And the last item is just a caution, that focusing only on the headline Dodge starts growth for these categories can be misleading since the mix of education and health care within institutional, and warehouse within commercial, affects growth differently than how these segments are weighted within our own portfolio.

Turn to Page 9. This is the same Dodge data in square foot terms now further broken down by our key verticals. As we highlighted last year, when reviewing the Dodge data, the resilience of our business over the past 20 years reflects in part our significant overweighting to the strong, stable segments within nonresidential construction.

On the top left, the graph shows the education and health care vertical starts information for the same time period as the page before. These 2 verticals represent 60% of the entire institutional index within Dodge and 80% of our exposure to the institutional nonresidential construction market. Simply said, we're materially over-indexed to the strong, stable parts of the institutional nonresidential construction market.

On the bottom left, this graph is for office, retail and hospitality verticals, again, same periods as the page before. With the conclusion being that these verticals represent only 30% of the overall commercial starts within Dodge, yet represents 75% of our exposure.

When we focus on the building types that are critical to our sales, we see that both health care and education and retail office and hotel starts are projected to continue to increase in terms of square footage each year, with growth rates generally accelerating in the out years. While the starts data has evolved this year as events like tariffs have come into play and the projections around interest rates have continued to change, the level of construction starts remain strong.

Ultimately, the Dodge data supports that our pure end market growth in 2026 should look a lot like what we just experienced in 2025, a low market growth environment. As you know though, beyond end market, we have other factors when we consider our outlook: growth within drinking water, our other key initiatives as well as price. We've shared this stat in the past, but as of this quarter, we have had year-over-year quarterly growth 55 out of the last 59 quarters. That's a 15-year track record of consistent growth.

I'll turn the call back over to Todd.

Okay. Last one for me is on Page 10. And hopefully, most of you have seen this page before. But if not, it's been our simple and, we believe, effective way to depict how we think about and manage our business, leverage our operating philosophy and ultimately how we measure ourselves. And honestly, it's more than just a chart; it's exactly how we operate the company day in, day out. And even more importantly, inside the company, everyone can see how and where their impact is expected, creating great accountability and alignment throughout the organization.

Beginning on the left, it starts with a relentless focus on the game we want to play. The choices here require discipline, and we've been very intentional and, I'll say, picky about getting this piece right. Because it's easy to drift and convince yourself that it's close enough to make sense, but having this filter, if you will, provides perfect clarity and avoids distractions or any strategic drift.

It guides how we drive our strategy, beginning with our end markets, what we look for in terms of what geographies, competitive dynamics and characteristics, approach around our portfolio, and most importantly, our relentless focus on being a premier pure-play water business in North America.

In the middle, we highlight that the glue to all of this is the Zurn Elkay Business System. It's our common language and deep culture of continuous improvement. It drives the manner in which we operate every day, everywhere and defines the capabilities we can leverage or, in some cases, need to build, while aligning all of our resources to drive organic growth, profitability and free cash flow.

Finally, on the right, measuring our performance across all of our stakeholders: customers, shareholders, associates, and the impact we can have on a much broader scale through sustainability. At the end of the day, if we get all these facets within our business model, I'll say, right, or close to right, we end up building sustainable, competitive advantages, which we feel over time drive superior outcomes for all stakeholders.

As we sit here near the end of 2025 and begin thinking about 2026, one thing I would call out or emphasize is that over the coming years, we intend to further sharpen our focus capabilities and resource investment on driving even more organic growth into adjacent categories.

We feel more confident than ever that we're in a position to exploit our competitive advantage around driving specification, establishing robust supply chains and leveraging best-in-class go-to-market capabilities into adjacent markets with new, innovative products that we have a long track record of introducing into our core markets, which has led to the kind of organic growth record that Dave just talked about.

So more to come on that in the coming quarters and years, but now I'll turn it back to Dave for the outlook.

For the fourth quarter of 2025, we are projecting year-over-year core sales growth to be in the high single digits and we anticipate our adjusted EBITDA margin -- or our adjusted EBITDA to be between $99 million and $102 million. As a result, we are again raising our full year outlook for core sales growth, adjusted EBITDA and free cash flow.

We now see core sales growth of approximately 8% for the full year, adjusted EBITDA in the range of $437 million to $440 million and free cash flow greater than $300 million. We've included our fourth quarter and full year outlook assumptions for interest expense, noncash stock compensation expense, depreciation and amortization, adjusted tax rate and diluted shares outstanding.

I also wanted to provide an update on total tariff costs for the year. Last quarter we expected our tariff costs before any offsetting price for 2025 to be between $35 million and $45 million. As country-specific tariff rates were updated and new tariffs on copper came into play during the third quarter, we now believe our tariff cost impact on 2025 will be modestly higher and be approximately $50 million for the year. While the environment around tariffs continue to be a bit of a moving target, our team is confident that we can remain price/cost positive in the short and long term.

Thanks, everyone. We'll now open the call up for questions.

[Operator Instructions] Your first question comes from the line of Bryan Blair with Oppenheimer.

Another very solid quarter. The Q3 market updates and outlook and framing of ZWS participation across the build cycle is helpful. With that in mind, has there been any meaningful divergence in the growth rates across legacy Zurn product categories over Q3 or into Q4? And then given the run rate market reads and the lag effect detail on the new construction side, can you offer any finer points on how your team is thinking about momentum into the first half of 2026?

Yes, Bryan. I mean first of all, I think we'll talk about '26 in '26. But when you look at many of our -- almost all of our core categories are experiencing solid unit growth on top of a little bit of market, on top of a little bit of price. And so I wouldn't say that there's been any significant change from maybe the second quarter. And I don't see any reason why that momentum changes as we head into the fourth quarter.

Okay. Understood. I caught a bit of a play in words with the filter afforded by the Zurn Elkay Business System. With that said, maybe you can offer a little if there's an update on the reception of Elkay Pro Filtration, whether there'd been any surprises positive or otherwise in the early going? And then it would be great to hear more about the market opportunity with the Liv EZ line, and how impactful that launch might be to growth going forward?

Sure. I think as we highlighted last quarter, the introduction of the Pro Filtration was really significant in terms of taking a lot of the market feedback around ease of installation, the incremental filter capacity, along with the pre-sediment filters and a lot of those things. And so we've seen a really strong uptake right away.

We expect that to continue. I mean if you can change it in 30 seconds or less and you can change it essentially once a year, I think these are things that were right at the heart of the feedback that we got as we were developing the product. And so really good -- I think a really good, solid start, but it's only a start.

With respect to the Liv unit, we've had a, I would say, a more expansive Liv unit with a drain that required, I would say, higher levels of installation capability. This product was developed really to make it easy and do-it-yourself. And we're excited about it.

I think it's just good exposure to begin to tap into a market that is not big. I mean this is not something that everyone is going to put in their home for a whole bunch of reasons. But we do think it's a nice extension of what we're doing, and it affords people the opportunity to gain the benefits that they get from using these filters when they're at school, when they're in the office, when they're in the airports, et cetera, you can get that same kind of quality water at home.

And so I expect it to grow nicely, but I don't know that we're counting on this to be sort of a pillar of what our commercial drinking water offering is. It's something that we're excited about and I think the uptake on it will be pretty nice.

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

This is Adam Farley on for Nathan. My first question is going to be around growth, and specifically volume expectations. So it sounds like there's a little bit of volume may be pulled forward into the third quarter. But you're guiding strong high single digits for the fourth quarter. So how should I think about volume in the back half?

Well, Dave, maybe you can clarify, but we saw good volume growth absent even this modest pull-forward in Q3. And we expect sort of the same as we go into Q4.

I will tell you that I think that some of the pull-forward is essentially offset by, I would say, a little bit of incremental weakness in the residential market. And so when you look at it all the way through, I think the growth in Q3 is relatively high quality. And I think the way we're guiding Q4 is equal to that kind of momentum that we saw in really Q3 and for the second half.

Yes. The only thing I'd add, Adam, is in the quarter we had a price increase late September, and so we saw customers order in advance of that. And so about $8 million was pulled from Q4 into Q3. If you look at where we've -- if you eliminate that from Q3 and look at where we've guided Q4 to, it's about the same. The unit volumes continue to grow nicely.

Yes. We don't communicate order rates. But if you go to the first 9 months of the year, the order rates in aggregate are a touch above 1. And I think we're sort of guiding to book-to-bill of about 1 in Q4. So nothing crazy. A little bit of choppiness from Q1 to Q2, Q2 to Q3, but I think when you get to the Q4 numbers, it sort of plains out and we're delivering to real live demand.

That's great to hear. Thanks for that additional detail. My second question is going to be around capital allocation. So increased the dividend, increased the share repurchase authorization. So what are the priorities going forward? Has anything changed? Should we maybe expect a little more share repurchase going forward? Any color there?

Yes. As we've done for a long time, we obviously generate significant amount of free cash flow. If you go way back, the objective initially was to reduce our leverage to a very comfortable zone, continue to invest in our core business, cultivate proprietary M&A opportunities, establish a dividend and then look at the value of our stock relative to what we think the intrinsic value of the company is. None of those things have changed.

And so I think that we continue to generate significant amount of free cash flow. Our dividend yield, we've tried to leverage that cash flow to keep the dividend yield right around 1. We're in the process of looking at the next 3 years and determining what we think we can do and how that translates to where the current stock price is.

I think we will be sort of steady repurchasers. And obviously, this gives us just incremental flexibility to the extent there's a larger dislocation for whatever the reason. So I don't think we're signaling anything new, just that over the last 3 years we've generated a ton of cash, we've increased the dividend, we bought back some shares and cultivated M&A. And I think that's what you should expect going forward.

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

This is Pez on for Mike. Maybe following up on Adam's question here, Todd. Maybe if you could provide a little bit more color on the M&A funnel. How has it changed over the last 12 months in terms of actionability, the pricing expectations? And then maybe if you would comment a little bit on the mix of hygienic and environmental versus drinking water. If we could just get a little bit more color on what you're seeing in the funnel and how that's evolved over the last 12 months.

Yes. I mean the funnel hasn't changed a bunch near the bottom. I think near the top of the funnel, some incremental things have come in, and we continue to cultivate those things.

As far as valuations and actionability, it sort of -- it depends, right, depending on the fit, depending on where people are thinking. So I don't know that you're ever going to get us to talk about valuation because we look at M&A through the lens of what can we -- what kind of returns on invested capital can we generate at a particular value and the synergies we bring to the party. So I don't think much has changed in aggregate. There's been a handful of things that are in an auction process. Some modestly interesting, others not at all.

So we continue to do the work, and I wouldn't characterize our funnel as unique to just drinking water. I think our flow systems funnel, I think our valving funnel, all those are equally important. And so it's broad. Not much has changed in the middle to the bottom. I would only say that the top of the funnel has gotten modestly larger really over the course of the last 12 months.

Got it. That's super helpful. And then maybe just on a more philosophical question, obviously, moving into residential drinking water with the Liv EZ product. Maybe could you tell us a little bit about how you think about your aspirations for drinking water on the residential application?

Is there broader aspirations to get into residential drinking water? And is that something that can be developed internally? Is there something externally that might be interesting? Maybe just a little bit of thoughts on how you think about the opportunity within residential drinking water beyond maybe the Liv EZ product.

Yes. I wouldn't characterize our appetite to go into residential filtration as high. I think this is more of an extension of what we're already doing to a relatively small market that we have access to. So the technology -- it's an opportunity for us to try some design work, try some technology with speed, and I don't think you're going to see us wade into residential filtration in a meaningful way. I think this is more of an extension from what we're doing on the commercial and institutional side to a relatively small market that gives us the opportunity to test some things and learn.

Your next question comes from the line of Andrew Buscaglia with BNP Paribas.

This is Ed on for Andrew. Another very strong margin quarter with high incrementals. Just wondering if you could speak to the consistent strong margin results and how to think where we can go from here off of these record levels?

Yes. I mean I would say we've had consistent margin expansion. If you go back to when we merged with Elkay and just look at the quarterly progression each year, we've seen nice margin expansion. So started with delivering on the synergies, leveraging our Zurn Elkay Business System, the #CI improvements. So I think we're confident that the level that you're seeing is a new baseline in terms of where Zurn Elkay margins can be. I would just think about a more long-term view as 30% to 35% incrementals on volume.

That's helpful. And then just a follow-up here. You managed the tariff environment very well on the top and bottom line. Can you speak to the Zurn Elkay Business System and remind us why you would consider yourselves perhaps relatively -- in a relatively stronger position to navigate the tariff environment versus competitors? And yes, I'll leave it there.

Yes. I won't really speak to comparisons because I wouldn't want people speaking about us. I think what we did going on 5 years ago is think through the risks to our business and how we protect our service levels over a long period of time and developed a plan to primarily move our manufacturing supply chain partners out of China to other regions, including the U.S. And so over 50% of our COGS comes from the U.S. today, and by the end of next year, only about 2% to 3% will come from China.

And so I think it speaks to that front end of what are we trying to do, what game are we trying to play, getting in front of it, doing the hard, long work to position ourselves. And as it turns out, no one, including us, would have predicted the kind of tariff environment that we saw beginning in April, but by starting well in advance, doing the long, hard work, I think it's positioned us really well, not only this year, but really for the long term.

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

This is David Tarantino on for Jeff. Maybe could you give us what price versus volume was in the quarter? And then maybe could you give us what you think the carryover pricing into next year will be based on the increases you've already taken to date? I think you highlighted another increase in 3Q. So do you think this supports another year of above-average price realization in 2026?

Yes. So I think, David, to start, price realization in the quarter, we saw about 5 points of price in the quarter. I think we'll wait to provide 2026 price till we provide guidance. But I think the way to think about it is we've been deliberate with the pricing actions and how that has followed our cost. And so as we've seen incremental tariff costs, we put the right amount of price to be price/cost positive into the market.

And so as we think about price next year, what I will say is think about it in terms of last year -- or this year, Q1 into Q2 had very little price and then you start to get to a run rate price here in Q3 and Q4. So more price in the first half than in the second half going into next year. And then we'll evaluate whether or not a 2026 price increase is necessary as we move forward here.

Okay. Great. And then maybe just to put a finer point on the 2026 commentary around the end market. It seems like this points to market growth in the low single-digit range. So any more color there would be helpful. And then how should we think about the outgrowth levers into next year between the key product lines both in and outside of drinking water?

Yes. So our read of the Dodge data that we presented is really, from a pure market perspective, 2025 and 2026 looks a lot alike. And so that's a low-growth environment.

If you look at where we think some of the levers are going on a forward basis, I would think about things like we've continued to see outperformance in drinking water. We've continued to see some of the other sales initiatives, whether that's in product categories like our water safety and control have outperformance, the new products that we've talked about, adjacent markets. And so there's a number of things as we look forward that we feel like we have the opportunity to outgrow the market.

And so when we think about growth, it's market, price and then our initiatives. And if you put those together, that's how we think about our ability to grow.

Your next question comes from the line of Brett Linzey with Mizuho.

This is Brett Linzey on for Brett Linzey. Just wanted to come back to the Filter First and really wondering if you had a post-mortem assessment on year 1 of that program specific to Michigan. Are you able to quantify the contribution from those installments thus far? And any color on some of the share capture as part of that program?

Yes. I would say we've done a really nice job in Michigan. There's about 1.5 million students in Michigan, and the law requires 1 bottle filler per 100 occupants. And so you can do some math on that, Brett, just to see how much the opportunity is. But I would say our team has done a nice job of capturing what we expected in terms of the Michigan opportunity, and it's still ongoing.

And so this was the first year that schools actually were able to access the money from the state. The state set aside $50 million to accomplish Filter First, and it will continue into next year. And so while we saw a lot of schools comply with the law this year, there's still a series of schools that need to comply next year.

I'd say also on the Filter First front, while not a Filter First fill, we did see New Jersey enact some legislation and release some funding that will help accomplish the same thing: allow schools to purchase filtered bottle fillers to eliminate lead and other harmful contaminants for students. So we spent some time in New Jersey over the last 90 days helping schools work through what their drinking water plans are and really just helping keep students safe in New Jersey and Michigan.

Okay. Great. And then just back to Slide #8 and specific to the project cycle that you laid out, you illustrated the flow systems tends to lead. I guess has there been any discernable increase or inflection in those categories or that product segmentation that maybe informs you some of these areas like commercial are beginning to show some improvement?

Taken as a whole, our flow systems business has grown at or above the fleet average the entire year. So I think that portends I think the kind of market that we're talking about, which is relatively stable to low growth, at least for the near term, with the opportunity to accelerate moving forward. So I think from a leading indicator perspective, our flow system business has done well really over the course of the last 24 months.

So I think we're monitoring all these things, but recognizing that we're sort of in a unique environment, to say the least. But we do find that that leading indicator is relatively encouraging for us.

Congrats on the quarter.

That concludes our question-and-answer session. I will now turn the call back over to Bryan Wendlandt for closing remarks.

Thanks, everyone, for joining us on the call today. We appreciate your interest in Zurn Elkay Water Solutions. And we look forward to providing our next update when we announce our fourth quarter results in early February. Have a good day.

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