Zurn Elkay Water Solutions (NYSE:ZWS) Q4 2025 Earnings call February 04, 2026 08:30 AM ET Company ParticipantsDavid Pauli - CFOJames Coe - Equity Research AssociateTodd Adams - Chairman and CEOConference Call ParticipantsAdam Farley - Associate AnalystBen Pezan - Research AnalystBrett Linzey - Equity Research AnalystBryan Blair - Managing Director and Senior AnalystJeff Hammond - Managing Director and Equity Research AnalystOperatorGood morning and welcome to the Zurn Elkay Water Solutions Corporation fourt ...

Financial Data and Key Metrics Changes - In Q4 2025, sales grew 10% organically year-over-year, with EBITDA increasing 14% to $104 million and margins expanding 100 basis points to 25.6% [3][9] - Free cash flow for the quarter was $83 million, totaling $317 million for the year, a 17% increase over 2024 [3][10] - The company repurchased about 3% of its outstanding shares for $160 million and paid $64 million in dividends, while leverage declined to 0.4 times [3][10] Business Line Data and Key Metrics Changes - Q4 sales totaled $407 million, reflecting 10% core and reported growth year-over-year, with non-residential end markets outpacing softness in residential and commercial segments [8] - Adjusted EBITDA for Q4 was $104 million, with a margin of 25.6%, driven by productivity initiatives and continuous improvement activities [9] - For the full year, adjusted EBITDA increased to $129 million, with a 40% drop-through on year-over-year volume increase [9] Market Data and Key Metrics Changes - The institutional and waterworks end markets are expected to grow at low single digits, while the commercial market is projected to be flat and the residential market remains challenging [18] - The company anticipates core sales growth of 7%-8% in Q1 2026, with incremental adjusted EBITDA margins of approximately 35% [19] Company Strategy and Development Direction - The company completed its annual three-year strategic planning process and is focused on leveraging competitive advantages to enhance organic growth opportunities in adjacencies and underserved verticals [5] - The strategic planning process evaluates all aspects of the business, including markets, competition, and product offerings, to align organizational priorities for the next few years [5] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in executing a positive dollar price-cost impact from tariffs in 2026, while monitoring the evolving tariff environment [19] - The company is optimistic about its ability to cultivate M&A opportunities and invest in organic growth, with a focus on adjacencies identified during the strategic planning process [30][64] Other Important Information - The company launched ProFiltration, enhancing water quality and sustainability, and expanded its filtration portfolio with new products [11][12] - Sustainability efforts included significant philanthropic giving and recognition from various sustainability ratings [14] Q&A Session Summary Question: Core sales outlook for 2026 - Management indicated a strong start to 2026, projecting core sales growth of 7%-8% for Q1, with potential for exceeding annual expectations [26][27] Question: Deal environment and M&A opportunities - Management noted a fresh view on adjacencies and ongoing cultivation of M&A opportunities, expressing optimism about potential transactions [28][30] Question: Details on adjacencies and verticals identified - Management described adjacencies as North American-based, focusing on water and plumbing, with plans to leverage existing products into new verticals [33][34] Question: Impact of recent metal price increases on pricing strategy - Management acknowledged monitoring metal prices and indicated a judicious approach to any incremental price increases [36] Question: Drinking water business and EPA regulations - Management views recent EPA regulations as sustaining the healthy trajectory of the drinking water market rather than accelerating it [40][42] Question: Incremental margin guidance for 2026 - Management expressed confidence in maintaining a baseline incremental margin of 35%, with potential for improvement over time [44][45] Question: Construction industry indicators and project conversion - Management is comfortable with the guidance for 2026, reflecting current market conditions and incoming order rates [48][49] Question: Filter attachment rates and ProFiltration - Management reported good early adoption of ProFiltration, expecting high attachment rates to drive future sales [50][53] Question: Pricing in Q4 and 2026 outlook - Management indicated Q4 pricing was about 5 points, with expectations for higher pricing in early 2026 [60]