Zurn Elkay Water Solutions Corporation (ZWS) Q2 2026 Earnings Call Summary

1Key Financial Results and Metrics

Sales Growth: Q2 2026 sales totaled $491 million, reflecting a 10% year-over-year organic growth.

EBITDA: Adjusted EBITDA reached $136 million, with a margin of 27.7%, up 120 basis points from the previous year and marking the highest quarterly margin since the Zurn Elkay merger.

Free Cash Flow: Generated $112 million in free cash flow during the quarter.

Share Repurchases: $50 million worth of shares repurchased at approximately $48 each, totaling $100 million year-to-date.

Net Debt Leverage: Ended the quarter with a net debt leverage of 0.3x, the lowest in the company's public history.

2Strategic Updates and Business Highlights

Intellihot Acquisition: Zurn Elkay acquired Intellihot for $109 million, expected to generate $37 million in sales this year with 50% gross margins. The company aims to grow Intellihot into a $100 million business with 30% EBITDA margins over the next 5-6 years.

Market Growth: Strong demand in water safety and control and drinking water product lines, with a focus on leveraging existing capabilities to scale Intellihot.

Product Development: Continued investment in high-margin products, with successful launches in drinking water filtration systems, leading to increased attachment rates.

Operational Excellence: Ongoing improvements in supply chain management and productivity through the Zurn Elkay Business System, contributing to margin expansion.

3Forward Guidance and Outlook

Q3 2026 Expectations: Projecting core sales growth of 6% to 7% and an adjusted EBITDA margin around 28%.

Full Year 2026 Outlook: Raising guidance for full-year adjusted EBITDA to between $503 million and $513 million, with free cash flow expected to exceed $350 million. Anticipating mid-single-digit growth for Q4.

Market Dynamics: Expecting a mix of price increases (3-4%), market growth (1%), and share gains to drive overall growth.

4Challenges and Points of Concern

Market Softness: Some softness noted in residential and pockets of commercial markets, which could impact future growth.

Pricing Pressure: While current pricing remains stable, the company anticipates a normalization in pricing strategies as it laps previous tariff-related increases.

Integration Risks: The successful integration of Intellihot poses challenges, particularly in scaling operations and aligning product offerings with Zurn Elkay's existing business model.

5Notable Q&A Insights

Product Mix and Growth: Drinking water and water safety/control are leading growth segments, with hygienic and environmental products lagging but still positive.

Intellihot's Competitive Position: The acquisition was strategic, focusing on a technology leader in the tankless water heating market, which is expected to grow significantly.

Incremental Margin Guidance: Current incremental margins are around 40%, exceeding previous guidance of 30-35%. The company remains cautious about formally raising this target but acknowledges strong performance.

Future Strategic Focus: Plans to continue exploring adjacencies and product launches that could contribute $20-$30 million in revenue over the next three years. Overall, Zurn Elkay Water Solutions reported a strong quarter with solid growth metrics and strategic initiatives, particularly with the Intellihot acquisition, while also acknowledging some market challenges and integration risks moving forward.