Zurn Elkay Water Solutions Corporation

Good morning and welcome to the Zurn LK Water Solutions Corporation first quarter 2026 earnings results conference call with Ted Adams, Chairman and Chief Executive Officer, David Pauly, Chief Financial Officer, and Bobby Biltner, Vice President and Corporate Controller for Zurn LK 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 Bobbie Bozner.

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 LK Water Solutions.

Thanks, Bobbie, and good morning, everyone. I'll start on page three. 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 we purchased $50 million of Zern LK 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 thoughts from me before I turn it over to Dave. From a market perspective, we generally see the same market conditions we outlined in 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 in moving parts related to tariffs over the course of the quarter. The Supreme Court ruling on the IEPA 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 eight 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 number four. 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 non-residential 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 a 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 LK merger. The strong margin and year-over-year expansion was driven by the benefits of our productivity initiatives leveraging our Zurn LK 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 five, 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 0.5 times. Our 0.5 times 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 five 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 six. 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 LK business system. When you look at some of these attributes of our business, most of these have been cultivated through focus 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 adjacent things 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 five 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 LK, 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 seven. Todd just talked about the focused and intentional decisions that led to the business we have today in Zurn LK. 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. 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 ZernLK 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 three years is a combination of a number of drivers that I'll walk through. First, part of the Zurn LK business system is sharing ideas and wins across the organization so that we can replicate successes. We've highlighted our hashtag CI for 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 hashtag 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 LK Mercury, 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 LK Business System lean tools into the LK 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, non-cash stock comp expense, depreciation and amortization, adjusted tax rate, and deleted 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'll now open the call up for questions.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We request to limit yourselves to one question and one follow-up. We will pause for just a moment to compile the Q&A roster. Our first question comes from the line of Brian Blair with Oppenheimer. Your line is open.

Thank you. Good morning, everyone. Very celebrate for the year. I was hoping you could offer a little more color on drinking water trends. Profiltration has obviously been in the market for another quarter. Any updates on adoption and the impact on overall platform growth or detachment 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 with Q1 or how your team's thinking about Q2?

Sure, Brian. Morning, it's Dave. Drinking water in the quarter performed very well in line with where we thought it would be going into the quarter. 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 profiltration. We've seen really nice adoption of profiltration. That product was developed around feedback that we received from customers and 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 profiltration 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 profiltration. 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 three years, and If we set aside LK synergies as kind of one-time 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 mixed 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 businesses. Are we at a point now where it would be reasonable to speak to a higher figure going forward?

Yeah, Brian, 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 in our drains business is growing just as fast. And so when you think about those three categories, the margin profile in each of those categories, is really good. And I think the combination of CI, obviously the LK 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, you know, it's a really nice dynamic where You know, we've got an operational, you know, 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, you know, at attractive margins. And so I think in time, you know, we may modify that. But for the time being, I think it's a good framework to think through as we, you know, invest in some of these new products to bring them to market. But I get your point, and, you know, we'll revisit it when we feel like we're ready to.

Our next question comes from the line of Andrew Creel with Deutsche Bank. Your line is open.

Hi, thanks. Good morning, everyone. Wanted to dig in, I guess, more on the change of OE versus retrofit, you know, up to 50-50 split. Is there any way you can quantify like a target over time where you think this can go? You know, many other industrials, you know, they can be two-thirds, 75% more aftermarket. Like, is there any reason you can't get to that over time?

Thanks. Yeah, I think, Andrew, you know, a good portion of our business is still new construction and an important part that actually ultimately feeds, you know, the retrofit in place. 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. 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, thank you. And then on the weather comments with the Northeast, I believe Dave said it should be about a point of a good guy for the first half. Can you just break down what this was in the first quarter? Is there any chance it was, you know, flattish or down? Like any help on how that impacts 1Q versus 2Q would be great. Thanks.

Yeah, even between the two quarters, Andrew, nothing oversized in Q1.

Our next question comes from the line of Nathan Jones with Stiefel. Your line is open.

Good morning, everyone. Morning. 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. 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?

Yeah, 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. A 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 two or three 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. There's 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 Zern acquired LK. The balance sheet's 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. And thanks for taking the questions.

Sure. Yeah, as we, I think, point out, you know, routinely on these calls, you know, 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 priority. 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 Michael Lauren with Bayer. Your line is open.

Good morning, everyone. So first question, just clarify your 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 in 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 three 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 you know some people have been more aggressive than us some people have been less aggressive than us in certain spots so you know taken as a whole I think stability would be a great thing and I think that's sort of what we see in our our outlook which is you know the things that we're doing you know, put us in a great spot to not sort of have to put these big digital price increases through that we're going through last year. But that being said, you know, we've got to stay diligent because inflation, you know, of commodities and freight and obviously this conflict in the Middle East are all, you know, sort of bubbling. And so I think we're going to be smart about it. I don't see any meaningful fatigue. But, you know, 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.

That 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 to have an impact late this year and into next year? Just kind of any thoughts on, you know, some deeper color and what those might be or target areas or anything you might be willing to share.

Yeah, I mean, nothing that we're going to share at this point. Obviously, these are going to be, you know, new entrants in the categories that, you know, competitors have or maybe even some new competitors. So, you know, 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. Obviously, as more rollout over Q4 into the first part of next year, when we're ready, we'll talk about it, but I think very much on track with what we thought as we started the year. Great work by our teams. 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 Cole with Jeffries. Your line is open.

Good morning. Thanks for taking questions here. I guess I want to touch on this growth adjacency 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 missing growth outlook or more as a way to kind of sustain that level if like other markets slow or yeah.

I think it could be both. You know, clearly, you know, we're not going to predict what the market conditions are in 27 or 28 at this point. So, you know, if they're weaker, this could clearly, you know, 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. We're going to enter new categories, develop new products, open up additional available market. And as a function of that, you know, 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's okay, it should enhance it is sort of the way to think about it.

Oh, 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 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 a point in the quarter. And then just in terms of the outgrowth, you know, 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 over-performance we saw in Q1.

Our next question comes from the line of Jeff Hammond with KeyBank Capital Markets. Your line is open.

Hey, good morning guys. Morning. Just had a couple, you know, kind of end market questions. So in the queue, it looks like commercial bucket kind of accelerated. I didn'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 you know, there's been some peer companies with some short cycle noise. 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. Thanks.

Yeah, you know, again, I think when you look at commercial, it's a lot of different things. You know, I'm staring at a pipeline chart here from our manufacturer's rep just in New York, right? I mean, you've got the Corweave Data Center. You've got the West Point Football Stadium, JFK Airport, you know, the U.S. Open Stadium. 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, you know, 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.

Yeah, perfect. Thanks, Todd.

Our next question comes from the line of Brett Lindsay with Newzoo. Your line is open.

Hey, good morning, guys, and congrats on the quarter. This is Peter Casa. I'm 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 the 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 those 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. Thanks. 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 in the drinking water?

So in terms of the stuff that we walked away from intentionally, that would have been substantially lower margins. So think back to the LK merger when we exited some low margin, non-core 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.

Before going to the next question, again, if you would like to ask a question, please press star, then the number one on your telephone keypad. Our next question comes from the line of Jeff Reeves with RBC. Your line is open.

Hi, good morning. 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. You know, 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 concern, but obviously, you know, 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, just backlog, like just any comments there?

Yeah, when you look at, you know, 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 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 Bobbie Bilsmer for closing remarks.

Thanks, everyone, for joining us on the call today. We appreciate your interest in Zern Alkay 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.