Zurn Elkay Water Solutions Corporation Q2 FY2026 earnings call

• Overall Financial Performance & Strategic Foundation
  • Q2 2026 organic sales grew 10% year-over-year, while adjusted EBITDA grew 15% to $136 million, pushing adjusted EBITDA margin up 120 basis points to a record 27.7% (the highest margin since the Zurn Elkay merger)
  • The company generated $112 million in free cash flow in Q2, repurchased $50 million of its own shares at ~$48 per share, bringing year-to-date repurchases to $100 million
  • Net debt leverage ended the quarter at 0.3x, the lowest level in the company's history as a public entity, with strong balance sheet liquidity providing significant financial flexibility
  • Management follows an annual three-year strategic planning process focused on a small number of high-priority

Total Q2 2026 GAAP sales came in at $491 million, representing 10% year-over-year growth both core and reported. Three high-margin core product segments lead broad-based growth across all categories: Water Safety and Control, Drinking Water, and Flow Systems. All three segments outperform the company's average fleet margin, with Water Safety and Control and Drinking Water growing at slightly higher rates than Flow Systems. Hygienic and Environmental, the company's smallest segment, still posts positive growth, particularly in unit volume, though at a lower rate than the three leading high-margin segments. The recently acquired IntelliHot adjacent segment generated ~$37 million in expected full-year 2026 sales, with 50% gross margins and low teens EBITDA margins, and is projected to contribute ~$15 million in net sales to the second half of 2026. Year-to-date 2026 incremental margin across all segments hit 40%, exceeding the original 35% target set at the start of the year.

• The company raised its full-year 2026 guidance following a stronger-than-expected first half performance
  • Full-year 2026 adjusted EBITDA is now projected to range between $503 million and $513 million, with full-year free cash flow expected to be at least $350 million (excluding past or future IEPA reciprocal tariff refunds)
  • Core sales growth for full-year 2026 is expected to land in the mid-single digits, with 3-4 percentage points of growth from price, 1 percentage point from market growth, and the remainder from share gains and exposure to high secular growth categories
  • Q3 2026 core sales growth is projected at 6-7% year-over-year, with an expected adjusted EBITDA margin of ~28%; the slower core growth rate relative to H1 reflects the lap of 2025 back-half tariff-related price increases
  • The full-year 2026 outlook fully contemplates the transition from expired Section 122 tariffs to the newly announced Section 301 tariffs, with no expected material disruptions

• No material new or elevated risks were explicitly discussed during the call. Management noted that the company's multi-year efforts to shift sourcing out of China have already mitigated geopolitical and tariff-related risks, while also delivering a lower overall landed cost profile. The only minor uncertainty called out was the potential for small additional low-margin product exits from the portfolio as part of the ongoing 80-20 portfolio review process, though no material exits are expected in the near term.

Q: Can you rank the growth of your three leading high-margin segments, and what is the growth of the slower hygienic and environmental segment? Why was IntelliHot the right acquisition for this adjacency, and what should we expect for 2027 results? / A: Water Safety and Control and Drinking Water grow at similar rates, both slightly above Flow Systems. Hygienic and Environmental is still positive growing, but slower than the other segments, as it is the smallest, most competitive category. IntelliHot was the longstanding top target for Zurn Elkay, as it has the best tankless technology in the category, and the founder-led company became available after years of relationship-building. Management did not prioritize near-term 2027 earnings, noting the acquisition was made for long-term growth to a $100 million business with 30% EBITDA margins over 5-6 years.

Q: What will be the primary focus areas for your 2027 strategic plan? And what buckets drove 660 basis points of margin improvement since the Elkay merger? / A: The 2027 primary focus will be continued expansion into complementary adjacencies, adding $100-$200 million of total addressable market per year across 3-4 new categories, leveraging existing channels and sourcing capabilities to deliver $20-$30 million in incremental revenue within three years. The early margin improvement came from Elkay merger synergies: $25 million from SG&A cost cutting, and another $25 million from structural changes like footprint consolidation and manufacturing process improvements. Additional gains have come from product mix shift to higher-margin products, thousands of small associate-led continuous improvement initiatives, and ongoing 80-20 pruning of low-margin products.

Q: Is the company's 40% incremental margin, which is above the prior 30-35% guide, now the new formal long-term target? / A: The prior 30-35% range was always a general guidepost. For the present, with current growth in higher-margin categories and realized supply chain benefits, 40% is a reasonable snapshot of current incremental margins. Management notes that periods of higher investment in new products could lower margins temporarily, but no formal change to the long-term guideline has been made.

Q: How important is growing MRO and recurring revenue exposure to your adjacency strategy, and do you have a long-term target mix? / A: Growing MRO and retrofit revenue is a natural benefit of expanding the installed base of higher-margin products like filtered drinking water units. Zurn Elkay currently has a 50-50 mix of new construction versus MRO/retrofit, which acts as a natural hedge against new construction volatility. Management does not have a specific long-term target, but expects MRO share to grow alongside the expanding installed base across all product categories.