ZWS - NYSE

Good morning, and welcome to the

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're 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 in our SEC filings. With that, I'll turn the call over to Todd Adams, Chairman and CEO of

Thanks, Bryan, and good morning, everyone. I'll get right to it on Page 3. In aggregate, we had a decent third quarter. Our sales grew 11% organically year-over-year and EBITDA grew 16% to $122 million as margins expanded 120 basis points to 26.8%. We leveraged our free cash flow of $94 million in the quarter to repurchase about 600,000 shares, bringing our year-to-date repurchases to $135 million or about 3.8% of total shares outstanding, and all this while leverage declined to 0.6x. As you may have seen in the release, we also raised our dividend 22% and our Board has refreshed our share buyback program to $500 million. Dave will highlight it more in his comments, but we also completed our U.S. pension plan termination in the quarter, which is really just a nice thing to have behind us. This morning, as we've done in prior years, we'll take everyone through all the market data we have on the U.S. nonresidential construction market and dissect it in ways we believe makes the most sense to understand how the macro data flows through to our end markets and ultimately into our business, setting the stage for what we think the market grows over the coming years. To cut to the chase, we think our markets in 2026 look a lot like they did in 2025. Last year this time, the data showed an acceleration into 2026 that, with some of the uncertainty around tariffs and really the lack of interest rate reductions throughout '25 relative to what was projected a year ago, pushes that acceleration to 2027. The market outlook being relatively stable over the past few years, we've been much more focused on what we can control, which is leveraging our internal growth initiatives, which are amplified by the competitive advantages we've cultivated around our product portfolio breadth, high levels of specification and our unique go-to-market positioning. As we discussed last quarter, we feel like we continue to demonstrate that our teams have got a really good handle on the tariff, supply chain and pricing dynamics. And Dave will update you on all the numbers in a bit, but overall, relatively consistent with what we communicated in the second quarter. All year, our approach to outlook has been to take things a quarter at a time because there's been several scenarios as to how all this change could have played out. But with only 1 quarter to go and basically only 2 months left in 2025, we are again raising our full year estimates for growth, profitability and cash flow. Now I'll turn it over to Dave, and he'll take you through some more color on the quarter.

Thanks, Todd. Good morning, everyone. Please turn to Slide #4. Our third quarter sales totaled $455 million as we continue to have solid execution on our growth initiatives. $455 million of sales represents 11% core growth year-over-year. In the third quarter, we generally saw our end markets perform in line with our expectations as the nonresidential market remains positive while the residential market continues to experience softness. Core growth reflects both a full quarter of impact and higher realization of the tariff-related price increase that we put into the market in April. We also saw about $8 million of incremental demand shipped in the quarter as a result of customers ordering ahead of a discrete pricing action we put in place in mid-September within our water safety and control products. The discrete pricing action was primarily to reflect incremental tariffs on copper-related goods and the updating of country-specific tariff rates. Turning to profitability. Our second quarter adjusted EBITDA was $122 million and our adjusted EBITDA margin expanded 120 basis points year-over-year to 26.8% in the quarter. This strong margin and year-over-year expansion was driven by volume leverage, productivity initiatives, leveraging our

Thanks, David. And I'm back on Page 6. We continue to make solid progress this quarter toward our sustainability goals, advancing initiatives that support long-term value creation really for our customers. You can see some of the highlights here. Beyond delivering 1.8 billion gallons of safer, cleaner filtered drinking water so far this year through our commercial bottle filling stations, and eliminating the need for 14.6 billion single-use plastic bottles, we're continuing to find new ways to bring our commercial-grade filtration to even more people. Many people assume their water is safe because it tastes fine or it comes from a trusted municipal source. But the reality is our sense can't detect contaminants like lead, forever chemicals and microplastics. And while the refrigerator or pitcher filters are convenient, most are only certified to improve taste and odor, not remove harmful contaminants. At

Thanks, Todd. I'm on Slide 7. And similar to the data we've shared in the past, I'll provide an update on the market. As we look ahead to 2026, it's helpful to revisit some of the key indicators that shape our view of how the market will perform and what that means for our business. On the top of the page are 3 macro indicators that we track: the Dodge Momentum Index, Architectural Billing Index and construction backlogs. I'll talk through each of these. The Dodge Momentum Index measures the value in dollars of nonresidential building projects in the planning process against a baseline year of 2000. The index is meant to be a leading indicator for all future nonresidential construction spending, and therefore, it's generally used to monitor the future direction of construction spending. Think of the Dodge Momentum Index as a 9 to 12-month preview of what's likely to start. But also recognize that there's a lot of -- there's a lot in there: price, various end markets and geographies. Next is the ABI, which is a sentiment survey that tracks a cohort of partners of AIA member-owned architectural firms, whether their billing activity for the previous month grew, declined or remained flat. The way to interpret ABI is a score of 50 indicates a balance between positive and negative reports, while a score of 100 indicates all firms reported improvements. A rise in the index above 50 means that more firms reported an increase in demand for design services than reported a decline in demand. It's important to note that a rise in the index above 50 is not a direct measure of the rise in demand because the survey does not ask firms reporting stronger demand to quantify the level of increase in demand, nor does it provide information on the size of those firms. That being said, higher readings in the ABI generally coincide with growing demand. Finally, on the right, construction backlog, which measures the amount of work surveyed contractors have in their current backlog. In some ways, it's their lead time to taking on new business. And as you might expect, it's their best estimate, assuming no delays and consistent levels of staffing. All 3 of these metrics have a level of validity in them on how we think about the future. But as you know, our business is hyper-local, hyper-regional and it all varies by region, vertical. And other than the backlog reporting, there's limited certainty as to what's really going on in the ground level where the projects are actually happening every day. While the 3 macro indicators we just walked through on the top of the page were third-party data, the bottom section is specific to our business. On the bottom left, you can see how our portfolio of products participates across the full construction cycle, from the start of the job all the way through to finishing front-of-the-wall product 18 or so months later. Nonresidential construction is a complex ecosystem, coordinating multiple trades, supply chains, permitting and weather impacts. On average, projects take about 18 months from start to finish. And our portfolio is uniquely positioned across that time line. From flow systems early in the build, to water safety and control mid-cycle, and hygienic and environmental solutions and drinking water at the completion. With an understanding of how our products participate across the construction cycle, the other item to factor in is the lag effect. And this concept is illustrated in the chart on the bottom right. The lag effect shows how Dodge starts ultimately translate into

Okay. Last one for me is on Page 10. And hopefully, most of you have seen this page before. But if not, it's been our simple and, we believe, effective way to depict how we think about and manage our business, leverage our operating philosophy and ultimately how we measure ourselves. And honestly, it's more than just a chart; it's exactly how we operate the company day in, day out. And even more importantly, inside the company, everyone can see how and where their impact is expected, creating great accountability and alignment throughout the organization. Beginning on the left, it starts with a relentless focus on the game we want to play. The choices here require discipline, and we've been very intentional and, I'll say, picky about getting this piece right. Because it's easy to drift and convince yourself that it's close enough to make sense, but having this filter, if you will, provides perfect clarity and avoids distractions or any strategic drift. It guides how we drive our strategy, beginning with our end markets, what we look for in terms of what geographies, competitive dynamics and characteristics, approach around our portfolio, and most importantly, our relentless focus on being a premier pure-play water business in North America. In the middle, we highlight that the glue to all of this is the

For the fourth quarter of 2025, we are projecting year-over-year core sales growth to be in the high single digits and we anticipate our adjusted EBITDA margin -- or our adjusted EBITDA to be between $99 million and $102 million. As a result, we are again raising our full year outlook for core sales growth, adjusted EBITDA and free cash flow. We now see core sales growth of approximately 8% for the full year, adjusted EBITDA in the range of $437 million to $440 million and free cash flow greater than $300 million. We've included our fourth quarter and full year outlook assumptions for interest expense, noncash stock compensation expense, depreciation and amortization, adjusted tax rate and diluted shares outstanding. I also wanted to provide an update on total tariff costs for the year. Last quarter we expected our tariff costs before any offsetting price for 2025 to be between $35 million and $45 million. As country-specific tariff rates were updated and new tariffs on copper came into play during the third quarter, we now believe our tariff cost impact on 2025 will be modestly higher and be approximately $50 million for the year. While the environment around tariffs continue to be a bit of a moving target, our team is confident that we can remain price/cost positive in the short and long term. Thanks, everyone. We'll now open the call up for questions.

[Operator Instructions] Your first question comes from the line of Bryan Blair with Oppenheimer.

Another very solid quarter. The Q3 market updates and outlook and framing of

Yes, Bryan. I mean first of all, I think we'll talk about '26 in '26. But when you look at many of our -- almost all of our core categories are experiencing solid unit growth on top of a little bit of market, on top of a little bit of price. And so I wouldn't say that there's been any significant change from maybe the second quarter. And I don't see any reason why that momentum changes as we head into the fourth quarter.

Okay. Understood. I caught a bit of a play in words with the filter afforded by the

Sure. I think as we highlighted last quarter, the introduction of the Pro Filtration was really significant in terms of taking a lot of the market feedback around ease of installation, the incremental filter capacity, along with the pre-sediment filters and a lot of those things. And so we've seen a really strong uptake right away. We expect that to continue. I mean if you can change it in 30 seconds or less and you can change it essentially once a year, I think these are things that were right at the heart of the feedback that we got as we were developing the product. And so really good -- I think a really good, solid start, but it's only a start. With respect to the Liv unit, we've had a, I would say, a more expansive Liv unit with a drain that required, I would say, higher levels of installation capability. This product was developed really to make it easy and do-it-yourself. And we're excited about it. I think it's just good exposure to begin to tap into a market that is not big. I mean this is not something that everyone is going to put in their home for a whole bunch of reasons. But we do think it's a nice extension of what we're doing, and it affords people the opportunity to gain the benefits that they get from using these filters when they're at school, when they're in the office, when they're in the airports, et cetera, you can get that same kind of quality water at home. And so I expect it to grow nicely, but I don't know that we're counting on this to be sort of a pillar of what our commercial drinking water offering is. It's something that we're excited about and I think the uptake on it will be pretty nice.

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

This is Adam Farley on for Nathan. My first question is going to be around growth, and specifically volume expectations. So it sounds like there's a little bit of volume may be pulled forward into the third quarter. But you're guiding strong high single digits for the fourth quarter. So how should I think about volume in the back half?

Well, Dave, maybe you can clarify, but we saw good volume growth absent even this modest pull-forward in Q3. And we expect sort of the same as we go into Q4. I will tell you that I think that some of the pull-forward is essentially offset by, I would say, a little bit of incremental weakness in the residential market. And so when you look at it all the way through, I think the growth in Q3 is relatively high quality. And I think the way we're guiding Q4 is equal to that kind of momentum that we saw in really Q3 and for the second half.

Yes. The only thing I'd add, Adam, is in the quarter we had a price increase late September, and so we saw customers order in advance of that. And so about $8 million was pulled from Q4 into Q3. If you look at where we've -- if you eliminate that from Q3 and look at where we've guided Q4 to, it's about the same. The unit volumes continue to grow nicely.

Yes. We don't communicate order rates. But if you go to the first 9 months of the year, the order rates in aggregate are a touch above 1. And I think we're sort of guiding to book-to-bill of about 1 in Q4. So nothing crazy. A little bit of choppiness from Q1 to Q2, Q2 to Q3, but I think when you get to the Q4 numbers, it sort of plains out and we're delivering to real live demand.

That's great to hear. Thanks for that additional detail. My second question is going to be around capital allocation. So increased the dividend, increased the share repurchase authorization. So what are the priorities going forward? Has anything changed? Should we maybe expect a little more share repurchase going forward? Any color there?

Yes. As we've done for a long time, we obviously generate significant amount of free cash flow. If you go way back, the objective initially was to reduce our leverage to a very comfortable zone, continue to invest in our core business, cultivate proprietary M&A opportunities, establish a dividend and then look at the value of our stock relative to what we think the intrinsic value of the company is. None of those things have changed. And so I think that we continue to generate significant amount of free cash flow. Our dividend yield, we've tried to leverage that cash flow to keep the dividend yield right around 1. We're in the process of looking at the next 3 years and determining what we think we can do and how that translates to where the current stock price is. I think we will be sort of steady repurchasers. And obviously, this gives us just incremental flexibility to the extent there's a larger dislocation for whatever the reason. So I don't think we're signaling anything new, just that over the last 3 years we've generated a ton of cash, we've increased the dividend, we bought back some shares and cultivated M&A. And I think that's what you should expect going forward.

Your next question comes from the line of Mike Halloran with Baird.

This is Pez on for Mike. Maybe following up on Adam's question here, Todd. Maybe if you could provide a little bit more color on the M&A funnel. How has it changed over the last 12 months in terms of actionability, the pricing expectations? And then maybe if you would comment a little bit on the mix of hygienic and environmental versus drinking water. If we could just get a little bit more color on what you're seeing in the funnel and how that's evolved over the last 12 months.

Yes. I mean the funnel hasn't changed a bunch near the bottom. I think near the top of the funnel, some incremental things have come in, and we continue to cultivate those things. As far as valuations and actionability, it sort of -- it depends, right, depending on the fit, depending on where people are thinking. So I don't know that you're ever going to get us to talk about valuation because we look at M&A through the lens of what can we -- what kind of returns on invested capital can we generate at a particular value and the synergies we bring to the party. So I don't think much has changed in aggregate. There's been a handful of things that are in an auction process. Some modestly interesting, others not at all. So we continue to do the work, and I wouldn't characterize our funnel as unique to just drinking water. I think our flow systems funnel, I think our valving funnel, all those are equally important. And so it's broad. Not much has changed in the middle to the bottom. I would only say that the top of the funnel has gotten modestly larger really over the course of the last 12 months.

Got it. That's super helpful. And then maybe just on a more philosophical question, obviously, moving into residential drinking water with the Liv E

Yes. I wouldn't characterize our appetite to go into residential filtration as high. I think this is more of an extension of what we're already doing to a relatively small market that we have access to. So the technology -- it's an opportunity for us to try some design work, try some technology with speed, and I don't think you're going to see us wade into residential filtration in a meaningful way. I think this is more of an extension from what we're doing on the commercial and institutional side to a relatively small market that gives us the opportunity to test some things and learn.

Your next question comes from the line of Andrew Buscaglia with BNP Paribas.

This is Ed on for Andrew. Another very strong margin quarter with high incrementals. Just wondering if you could speak to the consistent strong margin results and how to think where we can go from here off of these record levels?

Yes. I mean I would say we've had consistent margin expansion. If you go back to when we merged with Elkay and just look at the quarterly progression each year, we've seen nice margin expansion. So started with delivering on the synergies, leveraging our

That's helpful. And then just a follow-up here. You managed the tariff environment very well on the top and bottom line. Can you speak to the

Yes. I won't really speak to comparisons because I wouldn't want people speaking about us. I think what we did going on 5 years ago is think through the risks to our business and how we protect our service levels over a long period of time and developed a plan to primarily move our manufacturing supply chain partners out of China to other regions, including the U.S. And so over 50% of our COGS comes from the U.S. today, and by the end of next year, only about 2% to 3% will come from China. And so I think it speaks to that front end of what are we trying to do, what game are we trying to play, getting in front of it, doing the hard, long work to position ourselves. And as it turns out, no one, including us, would have predicted the kind of tariff environment that we saw beginning in April, but by starting well in advance, doing the long, hard work, I think it's positioned us really well, not only this year, but really for the long term.

Your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

This is David Tarantino on for Jeff. Maybe could you give us what price versus volume was in the quarter? And then maybe could you give us what you think the carryover pricing into next year will be based on the increases you've already taken to date? I think you highlighted another increase in 3Q. So do you think this supports another year of above-average price realization in 2026?

Yes. So I think, David, to start, price realization in the quarter, we saw about 5 points of price in the quarter. I think we'll wait to provide 2026 price till we provide guidance. But I think the way to think about it is we've been deliberate with the pricing actions and how that has followed our cost. And so as we've seen incremental tariff costs, we put the right amount of price to be price/cost positive into the market. And so as we think about price next year, what I will say is think about it in terms of last year -- or this year, Q1 into Q2 had very little price and then you start to get to a run rate price here in Q3 and Q4. So more price in the first half than in the second half going into next year. And then we'll evaluate whether or not a 2026 price increase is necessary as we move forward here.

Okay. Great. And then maybe just to put a finer point on the 2026 commentary around the end market. It seems like this points to market growth in the low single-digit range. So any more color there would be helpful. And then how should we think about the outgrowth levers into next year between the key product lines both in and outside of drinking water?

Yes. So our read of the Dodge data that we presented is really, from a pure market perspective, 2025 and 2026 looks a lot alike. And so that's a low-growth environment. If you look at where we think some of the levers are going on a forward basis, I would think about things like we've continued to see outperformance in drinking water. We've continued to see some of the other sales initiatives, whether that's in product categories like our water safety and control have outperformance, the new products that we've talked about, adjacent markets. And so there's a number of things as we look forward that we feel like we have the opportunity to outgrow the market. And so when we think about growth, it's market, price and then our initiatives. And if you put those together, that's how we think about our ability to grow.

Your next question comes from the line of Brett Linzey with Mizuho.

This is Brett Linzey on for Brett Linzey. Just wanted to come back to the Filter First and really wondering if you had a post-mortem assessment on year 1 of that program specific to Michigan. Are you able to quantify the contribution from those installments thus far? And any color on some of the share capture as part of that program?

Yes. I would say we've done a really nice job in Michigan. There's about 1.5 million students in Michigan, and the law requires 1 bottle filler per 100 occupants. And so you can do some math on that, Brett, just to see how much the opportunity is. But I would say our team has done a nice job of capturing what we expected in terms of the Michigan opportunity, and it's still ongoing. And so this was the first year that schools actually were able to access the money from the state. The state set aside $50 million to accomplish Filter First, and it will continue into next year. And so while we saw a lot of schools comply with the law this year, there's still a series of schools that need to comply next year. I'd say also on the Filter First front, while not a Filter First fill, we did see New Jersey enact some legislation and release some funding that will help accomplish the same thing: allow schools to purchase filtered bottle fillers to eliminate lead and other harmful contaminants for students. So we spent some time in New Jersey over the last 90 days helping schools work through what their drinking water plans are and really just helping keep students safe in New Jersey and Michigan.

Okay. Great. And then just back to Slide #8 and specific to the project cycle that you laid out, you illustrated the flow systems tends to lead. I guess has there been any discernable increase or inflection in those categories or that product segmentation that maybe informs you some of these areas like commercial are beginning to show some improvement?

Taken as a whole, our flow systems business has grown at or above the fleet average the entire year. So I think that portends I think the kind of market that we're talking about, which is relatively stable to low growth, at least for the near term, with the opportunity to accelerate moving forward. So I think from a leading indicator perspective, our flow system business has done well really over the course of the last 24 months. So I think we're monitoring all these things, but recognizing that we're sort of in a unique environment, to say the least. But we do find that that leading indicator is relatively encouraging for us.

Congrats on the quarter.

That concludes our question-and-answer session. I will now turn the call back over to Bryan Wendlandt for closing remarks.

Thanks, everyone, for joining us on the call today. We appreciate your interest in