Zurn Elkay Water Solutions Cor Q3 Earnings Call Highlights

Key Points

• Strong third-quarter performance: Sales rose 9% year over year to $495 million, while adjusted EBITDA increased 15% to $140 million and margins expanded to 28.3%. Zurn Elkay raised its full-year 2026 adjusted EBITDA outlook to $512 million–$515 million.
• Expansion into commercial hot water: The company is developing its Intellihot platform with the Wilkins RunPoint Digital Master Mixing Valve, targeting a complementary market exceeding $200 million and potential annual revenue of $50 million.
• 2027 outlook remains mixed but financially solid: Management expects its served market to decline by a couple of points, although share gains, retrofit demand and product adjacencies could support growth. The company ended the quarter with 0.4-times leverage, repurchased $35 million in shares and raised its annual dividend by 18%.

Zurn Elkay Water Solutions Cor NYSE: ZWS reported third-quarter sales growth and higher profitability, while raising its full-year adjusted EBITDA outlook and outlining plans to expand its commercial hot water portfolio.

Third-quarter sales totaled $495 million, up 9% year over year on a reported basis and 7% on a core basis, landing at the high end of the company’s quarterly guidance, Chief Financial Officer Dan Klun said. Water Safety and Control and Drinking Water led growth across the company’s product categories.

Intellihot, the commercial hot water business acquired earlier this year, contributed 2 percentage points, or $6 million, to quarterly sales growth. Pricing also contributed 2 percentage points, with the remaining growth coming from unit volume. Klun said the company has now fully lapped the carryover benefit from its calendar 2025 tariff-related price increases.

Margins, cash flow and shareholder returns

Adjusted EBITDA rose 15% from a year earlier to $140 million, while adjusted EBITDA margin expanded 150 basis points to 28.3%. Klun attributed the margin improvement to favorable product mix, productivity gains from the Zurn Elkay Business System and supply-chain repositioning efforts.

The company recognized $1.5 million of IEEPA and reciprocal tariff refunds in the third quarter, reflected in cost of goods sold under GAAP. As in the second quarter, the amount was excluded from non-GAAP measures.

For the first nine months of 2026, net sales increased 10% on a reported basis and 9% on a core basis to $1.419 billion. Adjusted EBITDA increased 16% to $392 million, producing a 27.6% margin, up 140 basis points year over year. The company said its year-to-date incremental margin was 41%.

Free cash flow totaled $110 million in the third quarter and approximately $264 million year to date, excluding the net impact of tariff refunds and applicable cash taxes. Zurn Elkay ended the quarter with leverage of 0.4 times after using $107 million earlier in the year to acquire Intellihot.

Chairman and Chief Executive Officer Todd Adams said the company repurchased $35 million of stock during the quarter. The board also increased the annual dividend by 18%.

Commercial hot water expansion

President Jeff Schoon introduced the Wilkins RunPoint Digital Master Mixing Valve, which is intended to complement Intellihot’s tankless condensing water heaters. Mixing valves regulate hot-water temperature and flow, and Schoon said the products can help facilities manage water delivery and address risks associated with stagnant or improperly tempered water.

Schoon said the mixing-valve market represents a complementary opportunity of more than $200 million, with the digital segment growing at a double-digit rate. The company believes the category can eventually become a $50 million business for Zurn Elkay.

RunPoint provides continuous temperature and flow monitoring, real-time alerts and connectivity to existing building-management systems, according to Schoon. He said the product can be sold through Wilkins’ existing specification and distribution network rather than requiring new sales channels.

The company expects to add products and services to its hot-water portfolio throughout 2027. In response to analyst questions, Adams said future adjacency opportunities could be in categories with addressable markets in the $100 million to $200 million range. He said the company will continue to weigh acquisitions against internal product development.

Market outlook and 2027 considerations

Management said broader construction indicators provide mixed signals. Schoon said the Dodge Momentum Index has improved in recent months and reached the high end of its recent range, which he described as constructive for 2027. However, the Architecture Billings Index has remained below 50 for an extended period, signaling continued softness in design activity. Commercial and institutional construction backlog remained stable at more than eight months, according to the company.

Zurn Elkay estimates that about half of its business is tied to new construction and half to maintenance, repair and operations, or retrofit activity. Management said roughly three-quarters of its new-construction revenue in a typical year comes from projects started in the prior year.

Klun said education and healthcare represent approximately 72% of the company’s institutional exposure, while retail, office and hotel account for about 77% of its commercial exposure. He noted that Dodge classifies data centers within office construction, which has influenced commercial-start data.

Chief Operating Officer Dave Pauli said the company expects its served market to be down “a couple points” in 2027 based on current conditions, though it does not plan to provide formal 2027 guidance until February. Despite that expectation, Pauli said management sees growth opportunities from share gains, secular Drinking Water demand, MRO and retrofit exposure, pricing and adjacencies.

Pauli said the company expects 2027 incremental margins of more than 40%, plus approximately $5 million or more of EBITDA benefit from initiatives already underway. Adams said the 40%-plus margin framework is primarily based on the existing core business, while hot-water expansion should not be a margin headwind.

Raised EBITDA outlook

For the fourth quarter, Zurn Elkay forecast sales of $430 million to $437 million and adjusted EBITDA of $120 million to $123 million.

For full-year 2026, the company raised its adjusted EBITDA outlook to $512 million to $515 million and maintained its expectation for free cash flow of more than $350 million, excluding the net impact of tariff refunds and taxes.

Management said it expects regular-way pricing actions of roughly a couple of points in 2027, subject to changes in input costs and competitive conditions. The company said it has not assumed additional pricing beyond actions already implemented in its fourth-quarter outlook.

About Zurn Elkay Water Solutions Cor (NYSE:ZWS)

Zurn Elkay Water Solutions Corporation NYSE: ZWS is a manufacturer of products and systems used to manage, conserve and protect water in commercial, institutional, industrial and residential buildings. The company provides plumbing and water-management solutions designed to support water distribution, drainage, safety, hygiene and efficiency.

Its product portfolio includes commercial faucets, flush valves, fixtures, drains, plumbing specialties, backflow-prevention devices, water coolers, bottle-filling stations, water filtration systems and related accessories.

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