Zurn Elkay Water Solutions Q2 FY26 earnings call ZWS

Zurn Elkay acquired Intellihot for $109 million ($100 million net of tax asset), a company generating $37 million in sales with 50% gross margins and low teens EBITDA margins. This acquisition expands Zurn Elkay's available market by $1.1 billion in commercial water heating, specifically targeting the faster-growing $200 million tankless segment. Management expects Intellihot to become a $100 million business with 30% EBITDA margins within 5-6 years, driven by regulatory tailwinds, owner mandates for health and safety, smaller mechanical room footprint, and operating savings. The integration will leverage Zurn Elkay's specification, channel relationships, and supply chain expertise.

The company achieved a record adjusted EBITDA margin of 27.7% in Q2 FY26, representing a 120 basis point expansion year-over-year. On a trailing 12-month basis, adjusted EBITDA margins improved 660 basis points from Q1 2023 to Q2 2026. This performance is attributed to operating leverage, continuous productivity from the Zurn Elkay Business System (#CI ideas), mix improvement towards higher-margin products (water safety and control, drinking water, flow systems), and strategic 80/20 portfolio pruning. The supply chain work has also provided a competitive advantage in navigating tariff environments.

The drinking water business, particularly filtration, has more than doubled its sales from less than $25 million before the Elkay merger to over $60 million this year. The recent launch of Elkay Pro Filtration, designed with customer feedback, features eye-level filters, dual filter capacity, enhanced aesthetics, smart connectivity, and proprietary heads to prevent counterfeit filters. The company has significantly evolved its filter technology, introducing high-capacity (6,000-gallon, 10,000-gallon), PFOA/PFOS certified (2,250-gallon), microplastics certified, and total PFAS (4,000-gallon) filters. The percentage of filtered units sold increased from 50% in 2023 to over 60% in 2026, with a target of 70% in 2027.

Zurn Elkay consistently outperforms the market by leveraging its business system, voice of customer feedback, and sustained investments in new product development, technology, and commercial resources. The company over-resources growth opportunities like drinking water, high-growth regions, and key institutional verticals. Water safety and control, flow systems, and drinking water are currently the fastest-growing businesses, all operating above fleet average margins. The company's MRO/retrofit/replace business accounts for approximately 50% of sales, providing a hedge against new construction fluctuations.

The company received $48 million in cash from IEEPA and reciprocal tariff refunds in Q2 FY26, which is excluded from adjusted earnings and free cash flow. Approximately $6 million of IEEPA and reciprocal tariffs remain uncollected and unrecognized. The full-year outlook contemplates the transition to new Section 301 tariffs, indicating proactive management of trade policy impacts. The strong balance sheet, with 0.3x net debt leverage and robust free cash flow generation, provides financial flexibility for continued investment and strategic acquisitions like Intellihot.