Zurn Elkay Water Solutions Corporation 2026 Q3 Earnings Call

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 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 are 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 Zurn Elkay Water Solutions.

Thanks, Bobbi, and thanks for joining us this morning. As you may have seen in the materials, we've got a lot to cover this morning, so I'll get right to it. We grew our top line 9% in the quarter, 7% organically, and EBITDA grew 15% year-over-year as margins expanded 150 basis points to 28.3%. In addition to that, we continue to generate significant free cash flow, which we use to invest in Zurn Elkay stock, repurchasing $35 million of stock in the quarter. Our board also made the decision to increase our annual dividend 18%, reflecting the confidence we have in our business and desire to continue to reward shareholders with an ever-growing dividend amidst a capital allocation option set that continues to just have tons of flexibility.

This morning, aside from the results and outlook, we will provide some details how our adjacency work is coming along, including an update on the Intellihot acquisition. In addition, as we typically do in the third quarter, we will provide a market overview based on the Dodge information available and provide some perspective as to how that information translates to our business. As we close out another record year in 2026 and begin to look ahead, we are excited with the progress we have made over the last several years to position ourselves to build on the track record we have built over the almost past two decades. That track record is a financial crisis, a pandemic, and several things over just the past couple of years, which on the surface seems like things that we could not overcome.

Sitting here today, and not surprisingly, the broader economy and parts of our end markets do not feel like they are going to be a tailwind for our business in 2027. We are going to simply do what we know how to do and what has worked by showing some grit and leveraging our culture and the Zurn Elkay Business System to drive superior results. We are excited to get through all of this this morning and take your questions at the end. With that, I will turn it over to our CFO, Dan Klun.

Thanks, Todd. Please turn to slide 4. Our third quarter sales totaled $495 million, representing 9% reported and 7% core growth year-over-year, which landed at the high end of our guide for the quarter. We saw broad-based growth across the majority of our product categories, with Water Safety and Control and Drinking Water again leading the fleet. I will walk through our end market outlook in a couple slides. Unpacking our quarter's growth, Intellihot was performing in line with expectations and contributed 2 points or $6 million of sales growth in the quarter. Price also added another 2 points to our year-over-year growth, with the remainder coming from unit volume. As we have previously indicated, we have now cycled fully against the carryover benefit of our Calendar 2025 tariff-related price increases.

Turning to profitability, our third quarter adjusted EBITDA was $140 million, up 15% year-over-year, and our adjusted EBITDA margin was 28.3%, up 150 basis points versus the third quarter of 2025. Drivers of the expansion are consistent with what you have heard us discuss throughout the year. Ongoing mix improvement as our highest margin products continue to lead our growth, productivity gains from the Zurn Elkay Business System, and continued benefit from our supply chain repositioning work. Before moving on to our year-to-date results, I want to briefly address the tariff refunds activity this quarter. During the third quarter, we recognized $1.5 million of IEEPA and reciprocal refunds reflected in cost of goods sold in our GAAP financial statements. Consistent with our treatment in the second quarter, this amount is excluded from our non-GAAP measures.

On a year-to-date basis, net sales were $1.419 billion, up 10% year over year on a reported basis and 9% on a core basis. Year to date, adjusted EBITDA of $392 million was up 16% with a margin of 27.6%, an improvement of 140 basis points versus the prior year period, which translates into an incremental margin of 41%. Please turn to slide 5. With respect to leverage, we ended the third quarter at 0.4 times after utilizing $107 million of cash to acquire Intellihot earlier in the year. As you can see in the left-hand chart, our leverage profile remains at historically low levels. Free cash flow in the quarter was $110 million.

On a year-to-date basis, we have generated approximately $264 million of free cash flow, excluding the net impact tariff refunds and applicable cash taxes, keeping us firmly on track to attain our full-year free cash flow guidance of greater than $350 million.

Our liquidity, leverage, and cash flow generation continue to give us significant flexibility to reinvest in the business, to pursue attractive adjacencies, as you'll hear from Jeff, and to return capital to shareholders through buybacks and dividends. With that, I'll now turn the call over to Jeff to cover the Wilkins RunPoint announcement on page 6.

Thanks, Dan. I'm on slide 6. Last quarter, I walked through Intellihot, our entrance into commercial hot water. We entered this space with purpose, to disrupt the category and bring more value to our customers. Intellihot's tankless condensing water heaters deliver better efficiency and lower operating costs than traditional boilers and tanked units in a smaller mechanical room footprint and a segment growing faster than the overall category. Today, I'm excited to introduce the next step, the Wilkins RunPoint Digital Master Mixing Valve. Let me start with the market opportunity. The hot water system is a critical but historically underserved part of the building plumbing infrastructure. Mixing valves regulate water temperature and flow to deliver consistent, safe, hot water throughout a facility and to help manage the risk of Legionella growth in stagnant or improperly tempered water.

The Intellihot and RunPoint together, we're establishing our position at the core of the domestic hot water system, both generating the hot water and controlling how it is delivered throughout the building. Mixing valves open a complementary market of more than $200 million. Expectations in this area are rising. Healthcare facilities are required to maintain water management programs, and schools, hotels, and other building owners are increasingly adopting active temperature monitoring. That's driving a shift to digital, where RunPoint competes. This digital segment is growing double digits. From a product standpoint, RunPoint is differentiated in several ways. It is meaningfully easier to install, commission, and maintain compared to legacy alternatives. It provides continuous temperature and flow monitoring with real-time alerts, and the digital architecture makes it straightforward for facilities teams to document compliance. The product is completely field adjustable and connects to existing building management systems.

It carries the Wilkins name. Wilkins is the number one brand of technology in backflow prevention, with deep relationships with engineers who specify, the reps and wholesalers who sell, and contractors who install. RunPoint goes through those same existing channels. We don't need to build anything new. We are putting a new product in the strongest specification and distribution network in the industry. The combination of our core portfolio, competitive position, and our go-to-market strength are why we believe mixing valves can become a $50 million category for us over the long run. We are focused on developing the highest performing products for our customers, and throughout 2027, we will continue to add products and services to our hot water portfolio. Turning now to slide 7. I want to transition now to our annual market update.