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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, Dave 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 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. 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. Rather than try to change a bunch of decimal 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. 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 non-residential end markets was partially offset by softness in residential. We've had solid execution on our growth initiatives, and those initiatives help 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 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 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 0.5x. 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 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. 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 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%. As we've deployed our strategic plan with an emphasis on growing Drinking Water and Filtration, coupled with growth in our Water Safety and 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 seven. Todd just talked about the focused and intentional decisions that led to the business we have today in Zurn Elkay. Slide seven 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 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 three 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, our Continuous Improvement process, in the past. 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 & 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. 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 eight. For the second quarter of 2026, we are projecting core sales growth to increase 8%-9% over the prior year, and we anticipate our adjusted EBITDA margin to be in the range of 27%-27.5%, which is 50-100 basis points expansion year-over-year.

Within slide eight, we've included our second quarter outlook assumptions for interest expense, non-cash 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'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 Bryan Blair with Oppenheimer. Your line is open.

Thank you. Morning, everyone. Very solid start to the year.

Morning.

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 detachment rate would be very helpful.

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 are your teams thinking about Q2?

Sure, Bryan. 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 Pro Filtration. We've seen really nice adoption of Pro Filtration. That product was developed around feedback that we received from customers and users, facility managers, and 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. 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.

Legacy product to Pro Filtration. In a good spot with Drinking Water.

All good to hear. 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 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 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?

Yeah, 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 & Control in our drains business is growing just as fast. When you think about those three categories, the margin profile in each of those is really good. I think the combination of CI, obviously the Elkay synergies, all the work we're doing on supply chain helps. 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. 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.

As we introduce and launch new products, those are coming to market at attractive margins. 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. 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. Your line is open.

Hi. Thanks. Good morning, everyone. 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 two-thirds, 75% more aftermarket. Is there any reason you can't get to that over time? Thanks.

Yeah, I think, Andrew, a good portion of our business is still new construction, an important part that actually ultimately feeds the retrofit replace. I think it's unlikely that we'll get to a 75% retrofit replace sort of percentage. 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. Then on the weather comments with the Northeast, I believe Dave said it should be about a point of headwind for the first half. Can you just break down what this was in the first quarter? Is there any chance it was flattish or down? Any help on how that impacts 1Q, first 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 Stifel. Your line is open.

Good morning, everyone.

Morning.

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 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. 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. In many ways, we've insulated ourselves from it.

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'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. Thanks for taking the questions.

Sure. Yeah, as we, I think, point out routinely on these calls, we run a proprietary funnel. 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. 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.

Obviously, we pay a nice dividend. Those are going to continue to be the priority. No change. 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. Your line is open.

Good morning, everyone.

Morning.

First question, just to clarify your comments from earlier. It doesn't sound like you're expecting incremental pricing. Just confirm that one way or another. 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. 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. 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. Some people have been more aggressive than us, some people have been less aggressive than us in certain spots. Taken as a whole, I think stability would be a great thing. 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 were going through last year.

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. I think we're going to be smart about it. I don't see any meaningful fatigue. I think it's something that we're just watching very carefully category-by-category, region-by-region. I think we've done a really nice job of staying close to it and expect to continue to operate the same way.

Yeah, makes sense. 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 some deeper color on what those might be or target areas or anything you might be willing to share?

Yeah. Nothing that we're going to share at this point. Obviously, these are going to be new entrants in the categories that competitors have or maybe even some new competitors. 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 roll out over Q4 into the first part of next year, when we're ready, we'll talk about them. I think very much on track with what we thought as we started the year. Great work by our teams, and I think it's going to be exciting for us moving forward. Not just in 2026 and not just in 2027, 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 Jefferies. Your line is open.

Good morning. Thanks for taking questions here. I guess I want to touch on this growth rate adjacency a little bit more here. I just wanted to understand the rationale behind it. Should we think about these initiatives as additive to your current long-term mid-single-digit growth outlook, or more as a way to kind of sustain that level if other end markets slow?

I think it could be both. Clearly, we're not going to predict what the market conditions are in 2027 or 2028 at this point. 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. I think it could serve both, James. 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 addressable market, and as a function of that, I think it's going to aid in some of our cultivation. 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. It's sort of the way to think about it.

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

Sure. 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. Just in terms of the outgrowth, we've talked about it a little bit just in terms of our Water Safety & 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. 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. 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 KeyBanc Capital Markets. Your line is open.

Hey, good morning, guys.

Morning.

Morning, Jeff.

Just had a couple kind of end market questions. In the Q, 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. I know it's small, like 8% water works, but 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. 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 manufacturer's rep and 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 hyperlocal 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 Linzey with Mizuho. Your line is open.

Hey, good morning, guys, and congrats on the quarter. This is Peter Costa in for Brett. 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 low single digits, 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-digit, waterworks, low single-digit growth. The commercial market we said would be flat and resi down low single-digits. I think we've generally seen those end markets play out. In Q1, the commercial market might've 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. 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 Water Safety & Control, the Flow Systems, and the Drinking Water?

In terms of the stuff that we walked away from intentionally, that would've been substantially lower margin. Think back to the Elkay 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 & 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 Reive with RBC. Your line is open.

Hi, good morning. I appreciate all the color thus far. 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 Q2? Is it just tariffs? Is it something else?

Yeah, 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. 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. 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. 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're doing it from a position of strong Q1 and a better Q2 outlook. Maybe just on visibility into the second half. Can you maybe talk to that? What line of sight do you have? Just backlog, just any comments there.

Yeah. 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. 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. You're using the word pause, I think we're going to use the word deliberate. Needless to say, I think we're going to end up in a good spot for the year. 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.