Asking if the company's impressive margin expansion and current profitability warrant a higher normalized incremental margin target than the previously stated low 30s/35%.

While acknowledging strong performance and margin drivers, Todd Adams noted that new products are also contributing attractive margins. He stated that the current framework is appropriate for now but they may revisit it when ready, implying potential for higher targets in the future. “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. But I get your point, and we'll revisit it when we feel like we're ready to.”

Inquiring about the long-term potential for the retrofit/replace mix to increase beyond the current 50%, similar to other industrials with higher aftermarket percentages.

Todd Adams believes it's unlikely to reach 75% due to the importance of new construction feeding retrofit. However, he sees an opportunity for the mix to drift higher, with 55% being a reasonable next waypoint, driven by growth in filtration and the expanding installed base. “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 way point to think about for us.”

Seeking quantification of the gross cost impact from newly implemented and potential additional tariffs, acknowledging the company's ability to pass costs through.

Todd Adams stated they are not counting on future price increases due to product substitution, materials work, and footprint initiatives. He noted that the U.S. is their largest sourcing country, insulating them. The net impact is expected to be similar to the start of the year, assuming 122 tariffs roll off and 301 tariffs come in. “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 hold that steady with some, I will say, conservative assumptions.”

ZWS

Zurn Elkay Water Solutions (ZWS) Q1 FY26 earnings call: guidance and Q&A

Earnings call· Mar 2026 (Q1 FY26)· Industrials· Apr 22, 2026

Source: earnings call transcript

Executive summary

Zurn Elkay Water Solutions Q1 FY26 — Strong Sales Growth and Margin Expansion

Zurn Elkay Water Solutions delivered a strong first quarter, driven by robust organic sales growth and significant adjusted EBITDA margin expansion, continuing a multi-year trend. The company is effectively navigating a complex tariff environment and remains confident in its full-year outlook, planning to provide an update after Q2. Strategic focus on high-margin products and continuous improvement initiatives are enhancing resilience and profitability.

Highlights

First quarter sales grew 11% organically.
Adjusted EBITDA grew 18% to $116 million.
Adjusted EBITDA margins expanded 160 basis points to 26.8%.
Generated $43 million of free cash flow.
Repurchased $50 million of Zurn Elkay shares at roughly $47 a share.

Concerns

Softness in residential end markets partially offset growth in nonresidential.
Uncertainty around tariff changes (122, 232, 301) creates potential for net adverse changes, though management is confident in mitigation.

Guidance & targets

Category	Target	Timeline	Confidence
Full-year free cash flow	approximately $335 million high materiality	FY26 · 2026	High
Q2 FY26 core sales growth	8% to 9% medium materiality	Q2 · 2026	High
Q2 FY26 adjusted EBITDA margin	27% to 27.5% medium materiality	Q2 · 2026	High
Full-year 2026 outlook	first half outperformance flows through to the year high materiality	FY26 · 2026	High
Full-year 2026 tariff impact assumption	assumes that the current tariff structure in place as of today remains in place throughout 2026 medium materiality	FY26 · 2026	High

Product announcements

Product	Type	Timeline	Details
Pro Filtration	update	—

Risks & headwinds

Tariff changes and uncertainty 2026

potential net adverse changes stemming from 122 and 301 tariffs

Mitigation:Highly confident in managing through tariff dynamics; discrete impact of tariffs within 2026 expected to remain price/cost positive without future price increases or refunds, due to product substitution, materials work, and supply chain footprint initiatives. U.S. is the largest sourcing country.

Softness in residential end markets Q1 FY26

partially offset growth in nonresidential

Mitigation:Focus on growth initiatives and nonresidential markets; strategic shift towards retrofit/replace and higher-margin products.

Global market uncertainty remaining 8 months of 2026

a lot going on in the world

Mitigation:Deliberate and conservative approach to full-year outlook, waiting until Q2 results to provide a comprehensive update, rather than making day-by-day changes.

What to watch in Q2 FY26

Full-year outlook update

After Q2 FY26 results (late July)

Current running ahead of what was likely assumed for the first half of 2026

Target Updated full-year guidance for revenue, EBITDA, FCF

Why it matters

Management indicated first-half outperformance flows through to the year, implying a potential raise to the full-year outlook, which will be formally updated.

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.

Find out whether ZWS delivers this. Inve re-checks your case every morning.

Q&A highlights

Seeking color on drinking water segment performance, especially Pro Filtration, and its contribution to overall growth and attachment rates.

Drinking Water performed very well in Q1, with double-digit growth in the installed base of filtered bottle fillers and filtration. Pro Filtration has seen strong adoption due to customer feedback-driven development, resulting in high attachment rates. The team is actively updating specs from legacy products to Pro Filtration.

“So Drinking Water in the quarter performed very well, in line with where we thought it would be going into the quarter. The installed base continues -- 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.”

asked by Bryan Blair · answered by David Pauli

2 min read 6 chapters

Detailed narrative

Strong Q1 Performance and Outlook

Zurn Elkay reported 11% organic sales growth and 18% adjusted EBITDA growth to $116 million, with margins expanding 160 basis points to 26.8%. The company's Q1 results and Q2 guidance (8-9% core sales growth, 27-27.5% adjusted EBITDA margin) are ahead of initial expectations for the first half of 2026.

Management indicated this outperformance will flow through to the full year, with a formal update planned after Q2 results.

Tariff Environment Management

The company is actively managing a complex tariff landscape, including Supreme Court rulings, 122/232 tariff changes, and new 301 tariff studies. Management expressed high confidence that the discrete impact of tariffs in 2026 will remain price/cost positive, even without future price increases or tariff refunds.

This confidence stems from supply chain footprint initiatives, product substitution, and the fact that the U.S. is now their largest sourcing country.

Strategic Mix Shift and Resilience

Zurn Elkay has intentionally shifted its product mix, with retrofit/replace now evenly split at 50% (up from 45% five years ago) due to growth in drinking water, filtration, and water/safety control products. This shift is expected to enhance business resilience and contribute positively to margin mix over time. The company targets a further increase to 55% retrofit/replace in the coming years.

EBITDA Margin Expansion Drivers

Over the last 13 quarters, adjusted EBITDA margins have improved 730 basis points, reaching 26.8% in Q1 FY26 from 19.5% in Q1 2023. This expansion is attributed to the Zurn Elkay Business System, continuous improvement initiatives (#CI), unit volume growth in profitable areas (Water Safety and Control, Flow Systems, Drinking Water), structural changes post-Elkay merger, and a competitive supply chain.

Capital Allocation and M&A Strategy

The company ended the quarter with a net debt leverage of 0.5x, inclusive of $50 million in share repurchases. The revolver was upsized to $550 million, enhancing liquidity. Management maintains a disciplined M&A funnel, cultivating targets rather than participating in auctions, and focusing on strategic fit and return hurdles. Capital allocation priorities remain share buybacks (when intrinsic value is understated) and dividends.

New Product Development and Growth Adjacencies

Zurn Elkay is making great progress on new product introductions and entering growth adjacencies, which are expected to open additional available market. These initiatives are anticipated to be additive to long-term growth rates and provide resilience against potential market slowdowns. More details on these developments are expected to be shared by Q3 and into Q4 and early next year.

Summary of the company's earnings call; see how call summaries are prepared. Not investment advice.