Zurn Elkay's Q3 2025 Earnings Call: Contradictions Emerge on Volume and Pricing Dynamics, Market Conditions, M&A Strategy, and Growth Expectations

Date of Call: October 29, 2025

Financials Results

• Revenue: $455M in Q3, up 11% core (organic) year-over-year
• Gross Margin: 26.8% adjusted EBITDA margin, up 120 basis points year-over-year

Guidance:

• Q4 2025 core sales growth expected in the high single digits; adjusted EBITDA of $99M–$102M.
• FY2025 core sales growth now ~8%; adjusted EBITDA $437M–$440M; free cash flow > $300M.
• 2025 tariff cost estimate revised to approximately $50M; team expects to remain price/cost positive.
• Company provided Q4/FY assumptions for interest expense, noncash stock comp, D&A, tax rate and diluted shares.

Business Commentary:

* Strong Financial Performance: - Zurn Elkay Water Solutions reported sales growth of 11% organically year-over-year and EBITDA growth of 16% to $122 million in Q3, with margins expanding 120 basis points to 26.8%. - The growth was driven by leveraging free cash flow, repurchasing shares, and successful implementation of cost management initiatives.

• Tariff Management and Pricing Strategies:
• The company managed tariff costs, with the full-year impact estimated to be approximately $50 million, emphasizing a continuation of price/cost positivity.

• The effective management of tariffs and strategic pricing actions contributed to maintaining profitability amidst a challenging environment.

• Sustainability Initiatives:

• Zurn Elkay continued its filtration initiatives, delivering 1.8 billion gallons of filtered water through commercial bottle filling stations, eliminating the need for 14.6 billion single-use plastic bottles.

• The focus on sustainability aims to provide cleaner water solutions, aligning with growing customer demand for environmentally responsible products.

• Market Dynamics and Outlook:

• The company's performance aligns with expectations as the U.S. nonresidential construction market remains stable, with growth projected similar to 2026.
• The strategic focus on internal growth initiatives and competitive advantages in product portfolio breadth has contributed to consistent market outperformance.

Sentiment Analysis:

Overall Tone: Positive

• Management reported 11% organic sales growth and EBITDA up 16% to $122M with margins expanding 120 bps to 26.8%, raised full-year estimates for growth, profitability and cash flow, returned cash via $25M repurchases in the quarter (YTD $135M) and a 22% dividend increase while leverage fell to 0.6x.

Q&A:

• Question from Bryan Blair (Oppenheimer & Co. Inc., Research Division): Has there been any meaningful divergence in the growth rates across legacy Zurn product categories over Q3 or into Q4? And given the run rate market reads and the lag effect detail on the new construction side, can you offer any finer points on how your team is thinking about momentum into the first half of 2026?
  Response: Most core categories show solid unit growth plus modest price; no material divergence versus Q2 and momentum is expected to continue into Q4.

• Question from Bryan Blair (Oppenheimer & Co. Inc., Research Division): Any update on reception of Elkay Pro Filtration and surprises in early uptake? And color on market opportunity for the Liv EZ line and how impactful that launch might be to growth?
  Response: Pro Filtration has seen strong early uptake; Liv EZ is a small, promising residential extension to test design/tech but not expected to be a major revenue pillar.

• Question from Adam Farley (Stifel, Nicolaus & Company, Incorporated, Research Division) (on behalf of Nathan Jones): How should we think about volume in the back half given some pull-forward into Q3 and guidance for strong high single-digit Q4 growth?
  Response: Q3 saw good volume even after ~$8M pulled into Q3; units continue to grow and Q4 guidance reflects similar high-quality momentum.

• Question from Adam Farley (Stifel, Nicolaus & Company, Incorporated, Research Division) (on behalf of Nathan Jones): With the dividend increase and refreshed buyback, what are capital allocation priorities going forward—should we expect more repurchases?
  Response: Priorities unchanged: invest in core, pursue selective M&A, maintain dividend and steady repurchases with flexibility for opportunistic larger buybacks.

• Question from Michael Pesendorfer (Robert W. Baird & Co. Incorporated, Research Division): Please provide color on the M&A funnel evolution over the last 12 months—actionability and pricing expectations—and comment on the mix between hygienic/environmental versus drinking water opportunities.
  Response: Top-of-funnel modestly larger; actionability and valuations vary by fit; funnel remains broad across drinking water, flow systems and valving—not concentrated in one category.

• Question from Michael Pesendorfer (Robert W. Baird & Co. Incorporated, Research Division): What are your aspirations for residential drinking water beyond the Liv EZ product—internal development or M&A opportunities?
  Response: No plan for a major residential push; Liv EZ is a small extension to test designs/technology, not a strategic move into large-scale residential filtration.

• Question from Edward Magi (BNP Paribas Exane, Research Division) (on behalf of Andrew Buscaglia): You delivered another strong margin quarter—how should we think about where margins can go from these record levels?
  Response: Margin expansion reflects synergies, Zurn Elkay Business System and CI; management views current levels as a new baseline with long-term volume incrementals around 30%–35%.

• Question from Edward Magi (BNP Paribas Exane, Research Division) (on behalf of Andrew Buscaglia): Why is Zurn Elkay relatively well positioned to navigate tariffs versus competitors—how has the Zurn Elkay Business System helped?
  Response: They proactively diversified supply chain away from China over years—now >50% of COGS U.S.-sourced and expected China exposure to drop to ~2%–3%—giving resilience versus tariff volatility.

• Question from David Tarantino (KeyBanc Capital Markets Inc., Research Division) (on behalf of Jeff Hammond): What was price vs. volume in the quarter and what carryover pricing should we expect into next year given recent increases?
  Response: Q3 saw ~5 points of price realization; pricing actions have been deliberate to remain price/cost positive; expect more price realization in H1 2026 versus H2, with final 2026 pricing to be decided later.

• Question from David Tarantino (KeyBanc Capital Markets Inc., Research Division) (on behalf of Jeff Hammond): Any further color on 2026 end-market growth assumptions and how to think about outgrowth levers across product lines including drinking water?
  Response: Dodge data implies 2025 and 2026 are similar (low-growth) markets; outgrowth expected from drinking water, water safety/control and other company initiatives plus price and market mix.

• Question from Brett Linzey (Mizuho Securities USA LLC, Research Division): Post-mortem on year 1 of the Filter First program in Michigan—can you quantify contributions and share capture so far?
  Response: Captured expected Michigan opportunity to date; program covers ~1.5M students with requirement of 1 bottle filler per 100 occupants and $50M state funding, and similar funding activity is occurring in New Jersey.

• Question from Brett Linzey (Mizuho Securities USA LLC, Research Division): Has there been any discernable inflection in flow systems (the leading category) that suggests commercial is improving?
  Response: Flow systems have grown at or above the company average over the last 24 months and serve as an encouraging leading indicator of underlying demand.

Contradiction Point 1

Volume and Price Dynamics

It involves the differing perspectives on the impact of volume and price on growth, which is crucial for understanding the company's growth strategy and financial performance.

What were the price vs. volume dynamics in the quarter, and can you address pricing carryover for next year? - David Tarantino (KeyBanc Capital Markets Inc.)

2025Q3: We saw about 5 points of price in the quarter. More price in the first half of next year than in the second half. - David Pauli(CFO)

Could you provide details on Q2 growth by product category and your Q3 guidance expectations by category? - Bryan Francis Blair (Oppenheimer & Co. Inc.)

2025Q2: The growth rates by category were strong across the board. This momentum is driven by new product introductions, particularly in drinking water, flow systems, and water safety control. - Todd Adams(CEO)

Contradiction Point 2

Volume Growth and Market Conditions

It highlights varying perspectives on volume growth and market conditions, which are crucial for understanding the company's performance and strategic positioning.

How should we assess volume in the back half of the year considering potential pull-through into Q3? - Adam Farley (Stifel, Nicolaus & Company, Incorporated, Research Division)

2025Q3: We saw good volume growth absent the modest pull-forward in Q3, and we expect the same as we go into Q4. - Todd Adams(CEO)

Is the education vertical experiencing a slowdown currently? - Andrew Krill (Deutsche Bank)

2025Q1: We have not observed any slowdown in the education vertical. - Todd Adams(CEO)

Contradiction Point 3

M&A Funnel and Strategic Focus

It involves the company's approach to mergers and acquisitions, which can impact growth strategies and financial outlooks.

Can you update on the M&A funnel's feasibility and pricing outlook? What are your plans for residential drinking water initiatives? - Michael Pesendorfer (Robert W. Baird & Co. Incorporated, Research Division)

2025Q3: We are not looking to expand into residential water significantly. - Todd Adams(CEO)

How has guidance changed since early February, and what is the current framework for 2025 volume and price contributions? - Bryan Blair (Oppenheimer & Co. Inc., Research Division)

2025Q1: We're looking for adjacent categories that really fit well with our product portfolio. - Todd Adams(CEO)

Contradiction Point 4

Volume Growth Expectations

It involves differing expectations regarding volume growth, which is a crucial indicator for investors and stakeholders.

How should we think about volume in the second half of the year considering some may have been pulled forward into Q3? - Adam Farley (Stifel, Nicolaus & Company, Incorporated, Research Division)

2025Q3: We saw good volume growth absent the modest pull-forward in Q3, and we expect the same as we go into Q4. Some of the pull-forward is offset by weakness in the residential market. - Todd Adams(CEO)

Can you elaborate on first-half versus second-half dynamics across institutional Waterworks resi and commercial exposures? - Bryan Blair (Oppenheimer & Co. Inc., Research Division)

2024Q4: We've been forecasting and planning for an acceleration in growth in the back half of '25 as starts pick up. It doesn't mean that we're going to see a step function change, but we think there will be a bit more momentum. - David Pauli(CFO)