Zurn Elkay Water Solutions Corp Q3 FY2026 earnings call

• Financial Strength & Capital Allocation: The company generated significant free cash flow, enabling $35 million in stock repurchases and an 18% dividend increase. Leverage remained low at 0.4 times, providing flexibility for reinvestment and shareholder returns.
• Adjacency Expansion (Hot Water): Management highlighted the strategic entry into commercial hot water via the IntelliHot acquisition and the new Wilkins Runpoint Digital Master Mixing Valve. This positions Zurn Elkay at the core of domestic hot water systems, targeting a long-term $50 million category opportunity within a $200+ million market.
• Market Outlook & Construction Data: While macro indicators like the Dodge Momentum Index are constructive, the Architecture Building Index remains soft. However, Zurn Elkay’s business is insulated due to its mix of ~50% MRO/retail and ~50% new construction, plus exposure to stable institutional sectors (education/healthcare).
• Operational Resilience: Core growth has been positive in every quarter over the last 63 quarters despite varying market conditions. Growth drivers include price realization, share gains, secular tailwinds (e.g., filtration), and productivity gains from the Zurn Elkay Business System.
• Margin Expansion: The company maintains high confidence in achieving 40%+ incremental margins in 2027, driven by cost savings, supply chain repositioning, and SCOFR benefits estimated at $5 million or more.

Zurn Elkay reported total third-quarter sales of $495 million, representing a 9% increase on a reported basis and 7% on an organic (core) basis year-over-year. Adjusted EBITDA reached $140 million, up 15% year-over-year, with margins expanding to 28.3%, a 150 basis point improvement. The company’s growth was broad-based, led by its water safety and control and drinking water product categories. Year-to-date net sales totaled $1.419 billion (up 10% reported/9% core), while year-to-date adjusted EBITDA was $392 million (up 16%). Free cash flow for the quarter was $110 million, contributing to a year-to-date free cash flow of approximately $264 million.

• Q4 2026 Sales: Expected between $430 million and $437 million.
• Q4 2026 Adjusted EBITDA: Expected between $120 million and $123 million.
• Full-Year 2026 Adjusted EBITDA: Raised to a range of $512 million to $515 million.
• Full-Year 2026 Free Cash Flow: Maintained guidance of greater than $350 million, excluding tariff refunds and taxes.
• 2027 Outlook: No specific financial guidance provided for 2027 until February; however, management expressed strong confidence in continued profitable growth and 40%+ incremental margins.

• Macroeconomic Volatility: Parts of the broader economy and end markets may not provide tailwinds in 2027, with potential softness in design activities and commercial construction.
• Interest Rate Sensitivity: Rising interest rates and credit tightening can directly impact private funding for commercial projects, particularly in office and retail sectors.
• Construction Delays: Project timelines may extend due to various factors, though current delays appear consistent with prior expectations.
• Tariff Impact: While past tariff-related price increases have cycled out, future trade policies and reciprocal tariffs remain a variable affecting costs and pricing strategies.

Q: Brian Blair asked if the deceleration in core growth to 7% was due to volume weakness or just the lapping of prior-year tariff-driven price hikes.

A: Todd Adams clarified that the primary driver was the change in price realization YoY, as the company was already anticipating market softening based on Dodge Starts data. He confirmed no significant underlying volume deceleration beyond these expectations.

Q: James Coe asked if the improved outlook for education and healthcare starts would allow Zurn Elkay to exceed historical growth rates, given their heavy exposure to these stable sub-verticals.

A: Adams noted that while market recovery would be a significant tailwind, it is too early to project specific growth rates beyond 2027. However, he suggested that if these projections hold, combined with adjacency expansion, organic growth could improve significantly.

Q: Adam Farley inquired about the trajectory for pricing actions in late 2026 and 2027 amidst rising inflation.

A: Adams stated that price should be viewed as a 'regular way' component, likely adding a couple of points in 2027. There are no incremental price assumptions for Q4 2026, but a price increase is prepared for next year, subject to input costs and competitive dynamics.

Q: Jeff Hammond asked about the pipeline for new products in the hot water loop and whether internal development or M&A is preferred.

A: Adams explained that the company cultivates both paths. Internal development (like Runpoint) offers superior products at lower cost but takes longer. M&A provides immediate scale. The strategy is situational, using internal capabilities to strengthen their position in negotiations and ensure they enter adjacent markets regardless of deal outcomes.

Q: Jeff Reeve asked if construction backlogs were slowing down, potentially delaying shipments, and what services accompany the new hot water products.

A: Schoon indicated that while some delays exist, they are consistent with initial plans and not above average. Regarding services, the company will leverage the IntelliPro certified network to support contractors with commissioning and troubleshooting, enhancing the value proposition alongside new hardware.