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…

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…

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.