Good morning and welcome to the Zurn Elkay Water Solutions Corporation Fourth Quarter 2024 Earnings Results Conference Call with Todd Adams, Chairman and Chief Executive Officer; David Pauli, Chief Financial Officer, and Bryan Wendlandt, Director of FB&A 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 Bryan Wendlandt.

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 that are subject to the Safe Harbor language contained in the press release that we issued yesterday afternoon, as well as 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 certain reconciliations of 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 in our SEC filings. With that, I will turn the call over to Todd Adams, Chairman and CEO of Zurn Elkay Water Solutions.

Thanks Bryan, and good morning everyone, and I appreciate everyone who is joining us this morning. I’ll start right on Page 3. The fourth quarter, again, ended a little bit better than what we had guided to basically across the board. We leveraged fourth quarter core growth of 4% into 8% adjusted EBITDA growth, which drove margins to 24.6%, up about 100 basis points year-over-year. For the year, we delivered 4% organic growth amidst a market that, in aggregate, was sort of flattish, and EBITDA grew about 15% to $390 million for the total year. Margins for the year ended at 24.9%, up 270 basis points. In absolute dollar terms, we leveraged our $36 million of sales growth into $50 million of EBITDA growth year-over-year. Our free cash flow in the quarter was $55 million, bringing the full year to $272 million. In the quarter we deployed $20 million to repurchase 533,000 shares, bringing the full-year repurchases to $150 million at an average price of just under $32. We also used $20 million in the fourth quarter to top off our pension plan, and we'll be exiting that over the course of 2025. Dave will spin through our outlook later in the call, but taken as a whole, I think we feel good about the trajectory of our end markets. We feel great about how we're executing, while still having plenty of opportunities and things to improve upon in the coming year, and finally confident that we have the ability to navigate through some of the potential uncertainties that will invariably arise throughout 2025 by leveraging the Zurn Elkay business system. I'll turn it over to Dave to take you through some more color on the quarter.

Thanks, Todd. Please turn to slide number four. Our fourth quarter sales totaled $371 million, which represents 4% core and reported growth year-over-year. Continuing what we've seen throughout 2024, mid-single digit core sales growth in our non-residential end markets were partially offset by softness in residential and pockets of the commercial segment within non-residential. Solid execution on our growth initiatives drove our sales performance to the higher end of the outlook we provided 90 days ago, as the end markets largely performed as anticipated. Turning to profitability, our fourth quarter adjusted EBITDA was $91 million, and our adjusted EBITDA margin expanded 100 basis points year-over-year to 24.6% in the quarter. 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 executing on the final quarters of Elkay-related synergies. Fourth quarter year-over-year margin expansion continued on a trend we saw all year of strong year-over-year margin expansion. For calendar year 2024, we saw year-over-year adjusted EBITDA margins improve by 270 basis points, as our margins ended at 24.9%. 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 below one at 0.8x. 0.8x leverage is inclusive of the $20 million we deployed to repurchase shares in the quarter. On a year-to-date basis, we deployed $150 million to share repurchases and $57 million to dividends. Given the balance sheet position and our strong free cash flow generation, we have a lot of capital allocation optionality going forward. I'll turn the call back over to Todd.

Thanks Dave, and I'm back on Page 6. Throughout the year we continued to advance our sustainability strategy, and more importantly, our impact. And we've set a clear path to advancing sustainability within our own operations and achieving measurable progress towards our goals as you can see here. In 2024, our relentless focus on continuous improvement and solving complex water issues drove tangible results. At the same time, we strengthened communities through volunteerism and philanthropy, including product donations in communities facing high levels of lead in their drinking water, most recently places like Syracuse, New York. We advocated for filter-first legislation in Pennsylvania, Minnesota, Wisconsin, Massachusetts, and New Jersey, and we reinforced our mission to create a safer, healthier, more sustainable planet. Whether it's optimizing our products to further reduce water usage, enhancing our filters to remove new types of contaminants or helping eliminate single-use plastic bottles, our products enable our customers to efficiently and effectively improve their own sustainability profile. I'm now on Page 7. I think a lot of our past success and confidence moving forward stems from a very clear understanding of the game we want to play, from our board on down through all of our 2,400 associates, our third-party reps, and our supplier partners, as well as a relentless focus on measuring our outcomes against world-class measures of performance versus our direct industry. For us, it's all about building a sustainable, competitive advantage in the game we're choosing to play. So in many ways, this is our strategy on a single page. Starting on the left, starting with being a pure-play water business with carefully chosen targeted attributes around which end markets, geographies and verticals that we believe will drive superior performance over time. We're discriminating on how and where we want to spend our…

Thanks, Todd. I'm on Slide 11 with our 2025 outlook. With respect to the full year and based on the assumptions I'll touch on shortly, we expect to generate core sales growth similar to what we delivered in 2024, deliver adjusted EBITDA of $405 million to $420 million, and generate approximately $290 million of free cash flow in 2025. 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 2024. As a low single-digit decline in our commercial end markets will be partially offset by low single-digit growth in our institutional and waterworks end markets and flattish conditions in our residential end markets. We anticipate capturing approximately a point-of-price realization during the year and for our strategic growth initiatives to generate positive core growth over the prior year. One of the uncertainties that Todd mentioned that will impact 2025 that we are actively monitoring is the tariff environment. As a business, we navigated the initial tariffs that were put in place several years ago very well. While we successfully managed the day-to-day impact of those first tariffs, we also implemented a multi-year strategy to significantly reduce our exposure to China that we are now seeing the benefits of. As a result of those efforts, we will have less than 10% exposure to materials from China by the end of 2026. For the first quarter of 2025, we are projecting core sales growth to increase in the low single-digits over the prior year, and we anticipate our adjusted EBITDA margin to be in the range of 24.5% to 25% for the quarter, which is 40 to 90 basis point margin expansion over the prior…

Thank you. Ladies and gentlemen, we will now begin our question-and-answer session. [Operator Instructions] Your first question comes from the line of Bryan Blair with Oppenheimer. Please go ahead.

Thank you. Morning guys. Nice finish to the year.

Morning.

Morning, Bryan.

So, we know your full year outlook by end market ‘25 kind of shakes out similarly to ‘24, all of which seems reasonable given that the tea leaves as we now see them. Maybe offer a little more color on everything you've got – first, second half dynamics across institutional waterworks, resing, and commercial exposures.

Yeah, I'd say Bryan, if you go back to some of the Dodge Starts data that we shared in Q3, you saw that Dodge is predicting a decent increase in starts from ‘24 to ‘25. So I think if, if those starts happen and the starts obviously have to happen, I think we could see the institutional where we're heaviest in healthcare and education. I think you could see that start to accelerate in the second half. And I think you see, you could potentially see something similar, but maybe not the same magnitude in commercial. But I think the first half looks a lot like the quarters that we just turned in, in 2024.

Understood. That makes sense. And Dave, you've emphasized capital deployment optionality a couple of times in the prepared remarks. And I think that's undeniable at this point given your balance position. Maybe offer a little color on your M&A funnel and your team's confidence in getting a deal or two across the finish line this year. Understanding that's not entirely in your control, but speak to any momentum, just the general backdrop, actionability, etc.

Sure. I mean, we're working really hard on a handful of things that we think are really smart and make a ton of sense for us. And as you pointed out, timing is not always perfectly in our control, but we're not missing anything. There's some things that are advancing. And as you also point out, we've got, I think plenty of balance sheet optionality to go alongside with that. So I think we're going to continue to be very disciplined around where we choose to spend our time and who we choose to spend our time with. And I won't speak to the confidence in terms of the timing this year or not, but I can tell you, we think we're working well with a handful of things that we think are really smart and make a lot of sense for us.

I appreciate the color. Thanks again.

Your next question comes from the line of Nathan Jones with Stifel. Please go ahead.

Good morning. This is Adam Farley on for Nathan. I wanted to start on expectations for tariffs. Were any incremental tariff impacts contemplated in the guidance range?

Yeah. So Adam, we haven't contemplated the tariffs. I think the environment is just changing so rapidly. What I will tell you is, when the first round of tariffs were put in several years ago, I think our team navigated it very well. I think we have the ability to navigate whatever tariffs ultimately come in place, we'll navigate through very well. We have the ability to implement price increases, and we'll react to it accordingly. I think the other thing to keep in mind is, our exposure to China, as I mentioned in some of the prepared remarks, has come down considerably. That exposure to China and potential tariffs to China will continue to come down throughout 2025 and 2026. So we feel good about where we are in terms of tariffs, and we'll continue to watch the news like everybody else and react to the latest changes.

Maybe just to follow on a little bit to what Dave said, don't read the fact that we haven't included any impact into guidance. [Audio Gap] I'd say laser-focused price increases where we actually need to. I think we've done an amazing job of being prepared to do that at our choosing, based on the competitive dynamics, the market dynamics, the timing dynamics. But as Dave, I think, clearly pointed out, the top line that we're talking about wouldn't have price increases above and beyond what we've already put in place, nor the tariff impact, nor frankly inventory decisions. So taken as a whole, I think we are poised and ready to do things that make sense for our business, but in every scenario I think we're really well-prepared to navigate that.

Understood. That's really helpful. I was just thinking that kind of at a higher level, interest rates have stayed relatively elevated. If interest rates stay higher for longer, do you believe that might impact your overall growth rate over the medium to long term?

Yeah Adam, I don't know. I mean, it's a sort of a very difficult to answer hypothetical, right? And I go back to the vast majority of our business, whether that be the institutional part of it, through education and healthcare or the retrofit replaces, it's largely not interest rate sensitive. So I don't think it helps, but I don't know that I could quantify you how much it hurts. And I think we're sort of focused on the realities of where interest rates are, and then what can we do to drive above market growth beyond that, as you saw in those four pillars of things that we're working on. So nice question to ask, but I'm not sure how to answer it and I think we're focused on what we can do.

Okay. Thank you for taking my questions.

Yeah.

Your next question comes from the line of Jeffrey Hammond with KeyBanc. Please go ahead.

Hey, good morning guys.

Morning.

Just on the vertical growth assumptions, one, I'm just wondering if anything has meaningfully changed in how you're thinking about those versus 90 days ago, just given election certainty, kind of the prior rate question, any noise. And then last quarter you did a great job of breaking out kind of where you play versus kind of the Dodge data. And so I just want to clarify, when you talk about institutional being up low single digits, are you talking about that within the context of your markets or within the broader context of Dodge?

Yeah, I mean, I'll let Dave build on what I'm saying, but we just refreshed all of that internally in the last couple of weeks and fundamentally the numbers are all on the same trajectory. They wiggle some up, some down relative to the update that we provided at the end of the quarter, but I would say, it’s very much intact. When we're talking about what Dave guided to from an end market perspective for institutional, that's very much the aggregate impact of starts that had occurred, the lead lag and everything else included. So it's, I would say it's not a number that is discreetly identifiable based on that lead lag model that we turned in last year. So I think what we think, and what Dodge thinks, is that it starts begin to improve in the back half of 2025, which based on the way our products get used over the course of a build cycle would portend better growth into 2026. So if that makes sense, we're living with sort of the starts throughout largely ‘23 in the very first part of ‘24 to drive that growth that we're talking about today in institutional.

Okay, and then just on tariffs, you mentioned kind of getting to less than 10% exposure to China by the end of ‘26. Can you just kind of level set us on where were you at peak, where are you today? And then as we get clarity in the near term, on tariffs, whether it be China or elsewhere, what are maybe some of the things that you would do on a near term basis to react other than price?

Well again, I think that at its peak [Audio Gap] the supply chain moves that we've made over the course of the last five or six years have allowed us to be flexible, so that we can move from China to Southeast Asia or China to North America, or in the event that there is or is not a tariff in Mexico, we can move volume from distant places. So I would say we're in the continuum of being able to migrate our supply base to where it offers us the overall best cost. And so we're certainly less than 50, we're certainly less than 40 at this point. But I think this – to think that it's a digital action that we're thinking about is the wrong way to think about it. We've created flexibility in a bunch of regions to allow us to flex where we're acquiring products from, and that includes the U.S. And so, I think Dave's signaling something. What are we in China now, less than 25?

Yeah, we're around 25.

So, who knows what happens? I mean, we saw tariffs start on Sunday and by lunchtime on Monday that it had changed for Mexico, and by five, it had changed to Canada. So I think if we were responding to those kinds of signals, it would be a challenge. But I think we're taking a very measured approach as we have for the last six or seven years, to sort of create an enormous amount of flexibility in our overall supply chain, to position us to serve the market at the best cost.

Okay. I appreciate it.

As there are no further questions at this time, that concludes the Q&A session. I would now like to turn the call over to Bryan Wendlandt for closing remarks.

Thanks, everyone, for joining 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 first quarter results in April. Have a good day.

That concludes today's call. Thank you for your participation. You may now disconnect.