Zurn Elkay Water Solutions Cor Q1 Earnings Call Highlights

Key Points

• Strong Q1 operating performance: Core sales rose 11% organically, adjusted EBITDA increased 18% to $116 million with margins expanding 160 bps to 26.8%, and the company generated $43 million of free cash flow while repurchasing $50 million of stock.
• Tariff and pricing stance maintained: Management remains confident the 2026 tariff backdrop is “price cost positive,” assumes no tariff refunds in its outlook, and plans roughly 3 points of incremental price for the year while monitoring input-cost risk.
• Healthy liquidity and cautious-but-positive outlook: Net leverage is about 0.5x after the buyback, the revolver was upsized to $550 million to support M&A, and Q2 guidance targets core sales growth of 8–9% with an adjusted EBITDA margin of 27–27.5%, with any full-year updates to follow Q2 results.

Zurn Elkay Water Solutions Cor NYSE: ZWS opened fiscal 2026 with double-digit organic growth and expanding profitability, as executives pointed to solid execution on internal initiatives, favorable product mix, and continued confidence in the company’s ability to manage a changing tariff landscape.

First-quarter results: organic growth, margin expansion, and cash generation

Chairman and CEO Todd Adams said “2026 is off to a decent start” as first-quarter sales grew 11% organically. CFO Dave Pauli reported first-quarter sales of $433 million, representing 11% “core and reported growth year-over-year.”

Profitability improved alongside sales. Adams said EBITDA rose 18% to $116 million, while margins expanded 160 basis points to 26.8%. Pauli attributed the year-over-year margin expansion to productivity initiatives, use of the company’s Zurn Elkay Business System, continuous improvement efforts, and favorable mix “as our higher profit margin products are growing the fastest.”

On cash and capital allocation, Adams said the company generated $43 million of free cash flow in the quarter and repurchased $50 million of stock at “roughly $47 a share.” He added management remains “very comfortable” with its full-year free cash flow outlook of approximately $335 million and expects to revisit the broader outlook after second-quarter results.

End-market performance and drivers of sales outperformance

Pauli said end markets generally performed in line with the guidance the company provided 90 days earlier, with growth in non-residential markets “partially offset by softness in residential.” He also noted unusually cold weather in parts of the U.S. drove incremental “break fix activity” that he estimated to be “about a point of growth over the first half.” In response to a follow-up question, Pauli added there was “nothing oversized in Q1” when discussing the quarter-to-quarter weather impact.

In the Q&A, Pauli broke down the 11% core sales growth as “5% price and the rest volume,” again noting the weather effect was “about a point in the quarter.” He said performance also reflected strength in Water Safety & Control, the drains business, and Drinking Water, along with regional initiatives that concentrated resources in areas with more construction activity, which he said produced “some nice wins from a regional growth perspective.”

Discussing commercial activity, Adams highlighted what he described as continued project-level momentum in certain geographies, citing examples from New York including data centers, airports, and stadium-related projects. On waterworks, he told analysts there was “nothing abnormal for us in waterworks at all.”

When asked whether the first-quarter outperformance changed management’s market view, Pauli said there was no change to the company’s end-market framework from 90 days earlier: institutional low single-digit growth, waterworks low single-digit growth, commercial flat, and residential down low single digits. He noted commercial “might’ve been a little bit better than flat” in the first quarter, but reiterated no change to the overall 2026 view.

Tariffs and pricing: “price cost positive” outlook maintained

Management spent part of the call addressing tariff developments and the company’s pricing posture. Adams referenced several moving parts during the quarter, including a Supreme Court ruling on IEEPA tariffs and refunds, the implementation of “122 tariffs,” changes to “232” tariffs, and new studies related to potential future Section 301 tariffs.

Despite the shifting environment, Adams said the company’s internal supply chain footprint initiatives were “very much on track” to meet or beat objectives set at the start of the year. He added that, assuming known changes to 232 and “likely net adverse changes” from potential 122 and 301 actions, management remained “highly confident” that without refunds or future price increases, the 2026 discrete impact of tariffs—previously expected to be “price cost positive”—“remains unchanged.”

Pauli reinforced that the company’s full-year outlook does not include any potential tariff refunds and assumes the tariff structure in place “as of today remains in place throughout 2026.”

On pricing, Adams said the company’s outlook includes roughly “3 points of price incremental” for the year and emphasized that it has not pushed “egregious price increases.” He said “stability would be a great thing,” while adding the company is monitoring input costs such as commodities and freight, as well as broader global uncertainty, “category-by-category, region-by-region.”

Business mix, margin structure, and operational system

Adams described the company’s operating philosophy as “plan your work and work your plan,” which he called the essence of the Zurn Elkay Business System. He said the business has been shaped through “focus and intentional actions” to build a model that is “flexible, repeatable, and scalable.”

One mix shift highlighted by Adams was a move toward a more balanced split between retrofit/replace and original equipment/new construction. He said retrofit/replace represented 45% of the business five years ago and is now “evenly split,” reflecting emphasis on growing Drinking Water and Filtration, Water Safety and Control products, and parts of the Hygienic and Environmental business. Adams said the mix shift makes the business “more resilient” and is “margin mix positive.”

Pauli quantified longer-term progress on profitability, saying adjusted EBITDA margins improved 630 basis points on a trailing 12-month basis from Q1 2023 to Q1 2026 and were up 730 basis points on a point-to-point basis over the last 13 quarters (from 19.5% in Q1 2023 to 26.8% in Q1 2026). He cited several drivers:

• Associate-led continuous improvement ideas (#CI) submitted across the organization
• Unit volume growth in higher-margin areas such as Water Safety & Control, Flow Systems, and Drinking Water, alongside portfolio exits of lower-margin products
• Structural changes beyond the more than $50 million of Elkay merger synergies, including footprint consolidation and Lean tools implemented in Elkay facilities
• Supply chain actions that Pauli said have been a competitive advantage in navigating tariffs

In response to a question about aftermarket mix potential, Adams said it is “unlikely” the company reaches a 75% retrofit/replace mix because new construction remains important and ultimately “feeds the retrofit replace.” However, he said retrofit/replace could “drift higher,” pointing to 55% as a “reasonable next waypoint.”

Balance sheet, liquidity, and capital deployment priorities

Pauli said the company ended the quarter with net leverage of 0.5x, inclusive of the $50 million in share repurchases. He also said Zurn Elkay “upsized and extended” its revolving credit facility, moving from a $200 million revolver to a $550 million revolver with a five-year term, which he said increases liquidity as the company evaluates M&A opportunities.

On M&A, Adams said the company runs a “proprietary funnel” and does not participate in auctions “in any meaningful way.” He described various opportunities at different stages—“late stage to mid-stage to early stage”—and said the company has an appetite for deals that make strategic sense and meet return hurdles. He added share repurchases will continue when management believes the stock trades below intrinsic value, and said the dividend remains a priority.

Second-quarter outlook and timing of full-year updates

For the second quarter of 2026, Pauli guided to core sales growth of 8% to 9% year-over-year and an adjusted EBITDA margin of 27% to 27.5%, representing 50 to 100 basis points of expansion versus the prior year.

Adams said the company is “running ahead” of what was likely assumed for the first half of 2026, and described management’s approach to the full-year outlook as “deliberate and conservative.” He said there was “nothing” currently suggesting the second half will be worse than expected, and added that it is “safe to say our first half outperformance flows through to the year.” Still, he said the company plans to update second-half assumptions after second-quarter results rather than adjust guidance frequently amid evolving conditions.

In response to a question about the decision to wait until Q2 to revisit the outlook, Adams said it was not driven by a specific concern, adding, “I can’t point to anything that would say, at this point the market is worse, we’re concerned about the tariff issue.” He cited contractor backlogs and third-party reps’ views as consistent with the company’s market growth assumptions.

The company said it plans to provide its next update with second-quarter results in late July.

About Zurn Elkay Water Solutions Cor NYSE: ZWS

Zurn Elkay Water Solutions Corp, trading on the NYSE under the ticker ZWS, is a global provider of water delivery and plumbing products. The company was established in October 2022 through a spin-off from Rexnord Corp, creating a standalone business focused on designing, manufacturing and marketing water system components for residential, commercial and industrial customers.

Through its Zurn segment, the company offers solutions for water delivery, drainage and waste evacuation. Product lines include valves, hydrants, backflow prevention devices, piping systems, fittings and commercial waste stations.

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