Cuộc họp công bố kết quả kinh doanh Quý 3/2026 của Zurn Elkay Water Solutions (ZWS): Nâng dự báo EBITDA

Tóm tắt điểm chính

• Doanh thu quý 3 tăng 9% so với cùng kỳ năm ngoái lên 495 triệu USD, bao gồm 7% tăng trưởng cốt lõi. IntelliHot đóng góp 2 điểm phần trăm, tương đương 6 triệu USD, trong khi chính sách giá đóng góp thêm 2 điểm phần trăm.
• EBITDA điều chỉnh tăng 15% lên 140 triệu USD. Biên EBITDA điều chỉnh mở rộng 150 điểm cơ bản lên 28,3%, nhờ cơ cấu sản phẩm thuận lợi, cải thiện năng suất và tái định vị chuỗi cung ứng.
• Dòng tiền tự do đạt 110 triệu USD trong quý và khoảng 264 triệu USD từ đầu năm đến nay. Công ty duy trì mục tiêu dòng tiền tự do cả năm ở mức trên 350 triệu USD.
• Zurn Elkay đã mua lại 35 triệu USD cổ phiếu trong quý và Hội đồng quản trị đã phê duyệt mức tăng 18% cổ tức hàng năm. Tỷ lệ đòn bẩy vào cuối quý là 0,4x.
• Ban lãnh đạo đã nâng triển vọng EBITDA điều chỉnh cả năm 2026 lên 512 triệu - 515 triệu USD. Doanh thu quý 4 dự kiến đạt 430 triệu - 437 triệu USD.
• Ban lãnh đạo kỳ vọng Zurn Elkay sẽ tăng trưởng trong năm 2027 mặc dù thị trường hiện tại có vẻ như sẽ giảm một vài điểm phần trăm. Công ty dự kiến biên lợi nhuận tăng thêm đạt ít nhất 40%, cùng với 5 triệu USD hoặc hơn lợi ích EBITDA bổ sung từ các biện pháp tiết giảm chi phí.

Dữ liệu tài chính trọng yếu

Công ty đã ghi nhận 1,5 triệu USD khoản hoàn thuế thuế quan trong giá vốn hàng bán theo GAAP trong quý. Khoản tiền này được loại trừ khỏi kết quả phi GAAP.

Kết quả hoạt động và kinh doanh

Mảng an toàn & kiểm soát nước và nước uống dẫn dắt tăng trưởng, trong khi hầu hết các danh mục sản phẩm đều ghi nhận mức tăng so với cùng kỳ. Ban lãnh đạo xác định mảng nhà ở là lĩnh vực yếu kém chính.

Mở rộng biên lợi nhuận phản ánh sự tăng trưởng liên tục của các sản phẩm có biên lợi nhuận cao hơn, cải thiện năng suất từ Hệ thống Kinh doanh Zurn Elkay và lợi ích từ việc tái định vị chuỗi cung ứng. Ban lãnh đạo cho biết IntelliHot sẽ đạt hoặc vượt mức biên lợi nhuận trung bình của công ty khi mảng nước nóng thương mại mở rộng.

Công ty đã giới thiệu Van trộn kỹ thuật số Wilkins RunPoint, cung cấp khả năng giám sát nhiệt độ và lưu lượng liên tục, cảnh báo theo thời gian thực và kết nối với các hệ thống quản lý tòa nhà hiện có. Ban lãnh đạo ước tính van trộn đại diện cho một thị trường bổ trợ vượt quá 200 triệu USD và tin rằng danh mục này có thể tạo ra 50 triệu USD doanh thu dài hạn cho Zurn Elkay.

RunPoint bổ trợ cho dòng máy nước nóng ngưng tụ không bình chứa của IntelliHot, giúp định vị công ty ở cả mảng sản xuất nước nóng và kiểm soát phân phối. Zurn Elkay có kế hoạch bổ sung thêm các sản phẩm và dịch vụ vào danh mục nước nóng của mình trong năm 2027.

Theo khu vực, ban lãnh đạo báo cáo sự tăng trưởng mạnh mẽ ở khu vực Đông Bắc, vùng Vịnh và miền Tây. Công ty cho rằng kết quả này một phần nhờ mạng lưới đại diện khu vực mạnh hơn và việc gia tăng thị phần tại địa phương sau sáp nhập Elkay.

Danh mục sản phẩm của Zurn Elkay gồm khoảng 50% xây dựng mới và 50% bảo trì, sửa chữa và vận hành (MRO) và cải tạo. Ban lãnh đạo cho biết cơ cấu này, cùng với việc tham gia vào các giai đoạn khác nhau của chu kỳ xây dựng, giúp giảm rủi ro biến động từ xây dựng mới.

Dự báo từ ban lãnh đạo

Triển vọng dòng tiền tự do không bao gồm tác động thuần của việc hoàn thuế thuế quan và thuế tiền mặt áp dụng.

Ban lãnh đạo chưa đưa ra dự báo chính thức cho năm 2027 nhưng kỳ vọng sẽ tiếp tục tăng trưởng dù thị trường đầu ra hiện tại có vẻ sẽ giảm một vài điểm phần trăm. Tăng trưởng thị phần, nhu cầu nước uống mang tính dài hạn, hoạt động MRO và sửa chữa thay thế, chính sách giá và các sản phẩm bổ trợ dự kiến sẽ hỗ trợ tăng trưởng.

Công ty kỳ vọng biên lợi nhuận tăng thêm năm 2027 đạt ít nhất 40%. Ban lãnh đạo cũng chỉ ra rằng các hành động về chi phí và chuỗi cung ứng có thể đóng góp thêm khoảng 5 triệu USD hoặc hơn vào EBITDA năm 2027, trên nền tảng khung biên lợi nhuận tăng thêm 40% so với cùng kỳ.

Về chính sách giá năm 2027, ban lãnh đạo cho biết các nhà đầu tư hiện nên giả định mức tăng bình thường một vài điểm phần trăm, tùy thuộc vào chi phí đầu vào và điều kiện cạnh tranh.

Rủi ro và các điểm cần theo dõi

• Ban lãnh đạo không kỳ vọng nền kinh tế nói chung hoặc các mảng thị trường đầu ra của Zurn Elkay sẽ tạo ra động lực thuận lợi trong năm 2027.
• Công ty hiện kỳ vọng thị trường liên quan của mình sẽ giảm một vài điểm phần trăm vào năm tới, mặc dù dự báo chính thức sẽ không được công bố cho đến tháng 2 năm 2027.
• Chỉ số Thiết kế Kiến trúc (Architecture Billings Index) vẫn ở mức dưới 50 trong một thời gian dài, cho thấy hoạt động thiết kế vẫn tiếp tục yếu ớt, trong khi Chỉ số Động lực Dodge (Dodge Momentum Index) đang phát đi tín hiệu tích cực hơn.
• Hoạt động xây dựng thương mại vẫn nhạy cảm với lãi suất và điều kiện tín dụng. Các trung tâm dữ liệu cũng đang thúc đẩy đáng kể mức tăng trưởng xây dựng văn phòng được báo cáo, khiến các con số tiêu đề ít mang tính đại diện cho các danh mục thương mại khác.
• Nhu cầu nhà ở vẫn yếu. Một số dự án xây dựng đã gặp phải tình trạng chậm tiến độ, mặc dù ban lãnh đạo cho biết xu hướng này nhất quán với các giả định trong kế hoạch của công ty.
• Dữ liệu xây dựng của Dodge phụ thuộc vào việc báo cáo chậm trễ, điều chỉnh dự báo và thay đổi các giả định. Ban lãnh đạo coi các chỉ số này mang tính định hướng hơn là các dự báo chính xác.

Điểm nhấn phần Hỏi & Đáp với chuyên gia phân tích

Tăng trưởng cốt lõi hạ nhiệt: Ban lãnh đạo cho biết chính sách giá là lý do chính khiến tăng trưởng cốt lõi chậm lại còn 7% trong quý 3. Công ty đã tận dụng hết lợi ích chuyển tiếp từ các đợt tăng giá liên quan đến thuế quan năm 2025, trong khi sự hạ nhiệt của thị trường cơ sở về cơ bản phù hợp với kỳ vọng.

Triển vọng thị trường dài hạn: Nếu các dự báo của Dodge về việc cải thiện xây dựng mảng giáo dục và y tế trở thành hiện thực, ban lãnh đạo tin rằng thị trường có thể trở thành động lực tăng trưởng sau năm 2027. Zurn Elkay chiếm tỷ trọng lớn trong các danh mục thể chế này và cũng có thể hưởng lợi từ việc bán các sản phẩm bổ trợ vào cùng các thị trường đầu ra đó.

Chiến lược sản phẩm bổ trợ: Công ty đang đánh giá các danh mục bổ sung có tổng thị trường có thể tiếp cận khoảng 100 triệu - 200 triệu USD. Ban lãnh đạo sẽ thực hiện thâu tóm khi có tài sản phù hợp và tự phát triển sản phẩm nội bộ khi các cơ hội thâu tóm không xuất hiện.

Dịch vụ nước nóng: Zurn Elkay có kế hoạch mở rộng mạng lưới chứng nhận IntelliPro và sử dụng hạ tầng đại diện khu vực để hỗ trợ việc lập thông số kỹ thuật, nghiệm thu và xử lý sự cố hệ thống.

Tiến độ xây dựng: Ban lãnh đạo thừa nhận có một số dự án bị chậm tiến độ nhưng cho biết chúng không vượt quá những gì công ty đã giả định vào đầu năm hoặc ghi nhận trong 90 ngày trước đó.

Toàn văn Biên bản Cuộc họp Công bố Kết quả Kinh doanh

Toàn văn cuộc gọi công bố kết quả kinh doanh

Phần trình bày của ban lãnh đạo

Operator

Good morning, and welcome to the Zurn Elkay Water Solutions Corporation Third Quarter 2026 Earnings Results Conference Call with Todd Adams, Chairman and Chief Executive Officer; Dan Klun, Chief Financial Officer; Dave Pauli, Chief Operating Officer; Jeff Schoon, President; and Bobbi Belstner, Vice President and Corporate Controller for Zurn Elkay Water Solutions.

A replay of the conference call will be available as a webcast on the company's Investor Relations website. At this time, for opening remarks and introduction, I'll turn the call over to Bobbi Belstner.

Bobbi Belstner

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.

Todd Adams

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 used 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 by 18%, reflecting the confidence we have in our business and desire to continue to reward shareholders with an ever-growing dividend amidst the capital allocation options that continue to have tons of flexibility.

This morning, aside from the results and outlook, we'll provide some details on how our adjacency work is coming along, including an update on the Inntilat acquisition.

In addition, as we typically do in the third quarter, we'll 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're excited about the progress we've made over the last several years to position ourselves to build on the track record we've built over the past 2 decades.

In that track record are a financial crisis, a pandemic, and several things over just the past couple of years, which on the surface seem like things that we couldn't overcome.

Sitting here today, and not surprisingly, the broader economy and parts of our end markets don't feel like they're going to be a tailwind for our business in 2027.

So we're going to simply do what we know how to do and what's worked by showing some grit and leveraging our culture and the Zurn Elkay business system to drive superior results.

We're excited to get through all of this this morning and take your questions at the end. And with that, I'll turn it over to our CFO, Dan Klun.

Daniel 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 led 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'll walk through our end market outlook in a couple of 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 '25 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.

The drivers of the expansion are consistent with what you've 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 refund activity this quarter. During the third quarter, we recognized $1.5 million of IEPA 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 0.4x after utilizing $107 million of cash to acquire Telehot earlier in the year.

As you can see on the left-hand chart, our leverage profile remains at historically low levels. Free cash flow in the quarter was $110 million. And on a year-to-date basis, we have generated approximately $264 million of free cash flow, excluding the net impact of 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.

Jeffrey Schoon

Thanks, Dan. I'm on Slide 6. Last quarter, I walked through IntelliHot, our entrance into commercial hot water.

We entered this space with the purpose of disrupting the category and bringing more value to our customers. IntelliHot's tankless condensing water heaters deliver better efficiency and lower operating costs than traditional boilers and tank 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.

With the IntelliHot and RunPoint together, we are 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. Health care 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. And it carries the Wilkins name. Wilkins is the #1 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 is 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. As we've done in prior years, I'll walk through the key published market indicators we track.

This is third-party publicly available data. It's one of several inputs we use to evaluate market conditions, but our business is hyperlocal through reps and varies meaningfully by region, vertical, and building type.

So we read these as directional signals, not forecasts. At the top of the page, you'll see 3 macro indicators. First, the Dodge Momentum Index, which measures the value of nonresidential building projects entering planning against the year 2000 baseline.

Think of it as roughly a 9- to 12-month preview of what's likely to start. It blends price, end markets, and geographies, so it's directional rather than precise.

On that basis, the DMI has improved meaningfully in recent months and is at the high of its recent range. That is a constructive read as we look into 2027.

Second is the Architecture Building Index, a monthly survey of whether architecture firms' billings grew, declined, or remained flat. 50 is neutral. A reading above 50 tells you more firms saw growth, not how much growth, and it's not weighted by firm size.

The ABI has been below 50 for an extended period, which points to a continued softness in design activities. So the DMI and ABI are sending different signals right now, which is exactly why we don't anchor to any one indicator.

Finally, construction backlog, which measures how many months of work contractors have under contract. As the latest release, commercial and institutional backlog remained stable at high levels, roughly 8-plus months.

Taken together, these give us useful direction, but to reinforce that, as we've said before, our business is hyper local, hyper regional, and these macro indices offer limited insights into what happens on an individual product basis.

The bottom of the slide is specific to Zurn Elkay. On the left, you can see that our portfolio participates across the full construction cycle, which averages about 18 months.

Flow systems tend to go in early in the build cycle; water safety and control are mid-cycle, and hygienic and environmental solutions and drinking water are installed at or near completion of the project.

This breadth across the cycle gives us visibility and durability across different phases of activity. In the center, what we call the lag effect. This is how Dodge starts translate to our new construction revenue.

In a typical year, roughly 3/4 of our new construction revenue comes from prior-year starts and about 1/4 of revenue from current-year starts.

Looking ahead, that means 2026 starts will drive most of our 2027 new construction revenue next year. When you layer on our portfolio mix of roughly 50% new construction and 50% MRO and retrofit, you begin to appreciate the degree to which our business is insulated from new construction volatility.

I'll pass it over to Dan, and he'll walk through the starts information.

Daniel Klun

Thanks, Jeff. Moving to Slide 8. As we've done for a number of years around Q3 earnings, we aggregate and analyze the Dodge construction market forecast as it relates to our end markets.

This data set is based on a semiannual report released on September 26. It covers the actual starts data from '22 to '25 and Dodge's projections out to 2030.

It's important to note that this data set is often subjected to reporting delays and/or assumption changes that can introduce a measure of volatility.

All of this data is publicly derived and forecasted. And on this call, we're simply organizing it and unpacking it through a lens that is most applicable to how it might impact our business.

Additionally, as Jeff mentioned, when looking at these projections, it is important to recognize that the new starts data in the Dodge report must be appropriately lagged to how Zurn Elkay participates across the construction cycle.

On this slide, we have summarized the Dodge institutional and commercial starts on a square foot basis, which represents our largest end market exposures.

We focus on square footage because it eliminates the noise of pricing, renovations, and alterations, giving us a clearer picture of new construction activity.

On a relative basis, the institutional end market has been a stable category over time and is less sensitive to private funding or interest rate swings and short-term discretionary demand.

Projects in this category generally have long-term planning pipelines and are funded from bond referendums, appropriations, and endowments, not by developer debt or tenant demand.

This end market represents approximately 50% of Zurn Elkay's exposure and contains a number of public building types. Education and health care together account for the majority of the Dodge institutional starts at 57%.

Switching to commercial. This is our second largest end market that comprises approximately 30% of our business. This end market can be more volatile due to the variability in subverticals that comprise it.

Interest rate spikes and credit tightening have a more direct impact on this category. While commercial headline starts are relatively flat over the last few years, there's a large mix shift occurring in its subverticals.

Inside these figures is a large mix shift away from warehouse, commercial's largest subvertical in terms of square feet, from a high watermark of 64% in 2022 to 43% in 2026, largely in favor of office. This increase in office building type is exclusively driven by data centers.

Dodge is forecasting the 2026 mix by building type to remain relatively consistent over the forecast horizon.

As a reminder, when digesting the Dodge starts data, it is also important to understand that end market and building type mix at the overall Dodge level must be further tailored to our business, as our exposures are weighted differently in our own portfolio.

Please turn to Slide 9. Here, we have the same Dodge data in terms of square feet, but now broken down in our key subverticals. On the top left is an excerpt of education and health care.

Over the last 4 years, this category has contracted by a CAGR of 4%. And over the next 4 years, the combination of these subverticals is expected to grow at a 3% CAGR.

As I mentioned, these 2 building types represent approximately 57% of all institutional square footage within Dodge, but comprise roughly 72% of our exposure to the institutional market.

The takeaway: we remain consistently over-indexed to the most stable parts of institutional construction. On the bottom left, we highlight the aggregation of retail, office, and hotel, which represents our core subverticals inside of the commercial end market.

The combination represents approximately 38% of the overall commercial starts within Dodge, up from about 30% a year ago due to the growth in data centers, and roughly 77% of our exposure to the commercial market.

As a side note, Dodge classifies data centers inside of the office category. In the aggregate, office, retail, and hotel have grown at a CAGR of 7% over the last 4 years and are expected to grow 4% over the next 4 years.

However, data centers significantly skew these numbers. When you exclude data centers from this grouping, growth over the last 4 years declined to a 1% CAGR and is expected to grow at a 3% CAGR on a forward look.

As you know, end market is only one input to our growth algorithm. We have other factors driving our outlook, such as continued secular growth within drinking water, share gain from our key initiatives, and price.

As Dave will highlight, our growth track record has been remarkably consistent. I'll now turn the call over to Dave to cover Slides 10 and 11.

David Pauli

Thanks, Dan. Please turn to Slide #10. Dan just walked through a lot of good information, and I'll try to help frame what that means for Zurn Elkay.

I think it's important to understand that while Dodge data is an input into how we think about the market, it's certainly not the only input we use.

We monitor a host of other data points, including quote volumes, conversations with our reps in local regions, and the backlog of construction jobs in various phases, among other sources.

The chart at the top left-hand side of the slide helps to illustrate how resilient our business has been and shows our year-over-year core growth alongside the year-over-year square foot growth based on Dodge data of our end markets.

What you see is that we have not had a year in the last 5 years where the institutional, commercial, and residential markets have all been in our favor. Or, in the case of this chart, all shown as green.

What we have seen is a tough residential market, choppiness in the commercial space, and a more steady institutional end market. The good news is that even with some tougher end markets, we have demonstrated the ability to deliver core growth.

Historically, you can see we have navigated a mix of red, yellow, and green in our end markets. However, Zurn Elkay core growth has remained green or positive each year, ranging from plus 3% to plus 11% core growth.

While the starts data has evolved this year as events like changes to tariffs, war overseas, oil prices, and the projections around interest rates move, the level of construction starts, pure square feet of construction starting, remains strong.

Ultimately, we like our chances in a variety of end market scenarios. And that's where our long-term growth algorithm comes in. We have strategically built our portfolio over years, being intentional with where we play, the markets we serve, and the M&A we transact.

The strategic position is grounded in a couple of items. We are focused on a single geography here in North America. Our retrofit exposure has increased over the years to 50%.

Our portfolio has the advantage of some secular growth tailwinds. We know drinking water has been a focus, and we have seen excellent growth in our filtration business as an example.

In the last 4 years, our filtration sales have grown by over $40 million alone. We are deploying resources at the local and regional levels where we win every day.

There's not a single contiguous non-res market here in the U.S. This is a hyperlocal, hyper-regional business. There's no one-size-fits-all non-res market, but rather distinct local markets that can vary greatly.

And lastly, as we've discussed, there's a focus on adjacent markets that we believe can provide some meaningful growth opportunities. Not only have we been intentional with the strategic position of Zurn Elkay, but we also have a business model that allows a lot of flexibility in a variety of market conditions.

Our margin strength has come from leveraging our variable cost model and relentless continuous improvement through the deployment of the Zurn Elkay business system.

We have highlighted our journey with #CI, or continuous improvement, and we continue to gain valuable insights and improvements from our associates every day with the goal of getting just a little bit better each and every day.

These factors all add up to very strong [Technical Difficulty]. If we look back, our expectations of incremental margins around the time of the Elkay merger were 25% to 30%. We quickly raised that to 30% incrementals.

At the start of this year, we guided to 35% incremental margins. And in the second quarter, we talked about an increase to those expectations up to 40%.

We have a high level of confidence in our ability to continue to grow earnings, and 2027 specifically is no different.

Sitting here today, 2027 looks like 40% incrementals plus, with the plus coming from some SCOFR benefits that we have been executing on behind the scenes and will provide a benefit in 2027.

We will provide further detail when we give guidance in 2027, but the impact of the work we have done is meaningful. Think about it as a benefit to EBITDA of around $5 million or more in 2027, on top of our year-over-year 40% incremental.

All that sits on top of a balance sheet that has never been in a better spot. Dan talked about it earlier.

We are hovering around the lowest leverage we have had as a public company with a flexible balance sheet, allowing us to increase our return of capital to shareholders via a dividend and share repurchases while, in the background, cultivating M&A and investing in adjacencies.

I'll wrap up with Slide 11, which gives some further detail on the growth algorithm I just mentioned. The core growth trends section of the slide walks through the more detailed components of our growth.

Starting from 2022 to 2026, Zurn Elkay core growth CAGR was plus 6%. That was made up of a flat to slightly down market, low single-digit price and share gain, about 1 point from secular growth tailwinds, offset by about 1 point of product line simplification as we executed on a number of 80/20 initiatives.

And with the exception of our recently completed acquisition of IntelliHot, those years from 2022 to 2026 have been all core as we focused on the successful integration of Elkay.

While we won't provide guidance on 2027 until next February, I did want to share some thoughts based on the market detail we just walked through. Just like the track record for the past 16 years, we see growth in 2027.

Share gain initiatives, secular growth areas, our MRO break-fix at 50%, price, and adjacencies all help drive growth despite a market that, sitting here today, looks to be likely down a couple of points next year.

How the market in 2027 actually shakes out, we will see. And in the meantime, we'll continue to monitor as we look to provide further clarification on our outlook next February when we guide 2027.

While the market has had its ups and downs over a long period of time, we have demonstrated an ability to deliver core growth through a number of different market dynamics.

Over the last 63 quarters, we've had positive core growth 59x, and our long-term core sales CAGR back 10 years is 6%. The bar chart at the bottom of the page does a nice job of illustrating our continued growth over the last 16 years, when we have seen a number of different market dynamics play through.

All in all, the punchline is that we have a lot of confidence in our ability to grow profitably, and our long-term growth algorithm that has delivered positive core growth year in and year out remains intact.

I'll turn the call back to Dan to cover guidance.

Daniel Klun

Please turn to Slide 12 for our outlook. For the fourth quarter, we expect sales in the range of $430 million to $437 million.

We anticipate adjusted EBITDA to be between $120 million and $123 million. Our adjusted EBITDA guidance reflects the continued strength of our operating model.

For the full year 2026, we are raising our adjusted EBITDA outlook to a range of $512 million to $515 million, and we maintain the expectation of full-year free cash flow of greater than $350 million, excluding the net impact of tariff refunds and taxes.

Within our presentation, we have also included the fourth quarter and full-year outlook assumptions for interest expense, noncash stock comp, depreciation and amortization, adjusted tax rate, and diluted shares outstanding.

We look forward to updating everyone on our Q4 and calendar year 2026 results in early February. With that, please open the line up for questions.

Operator

[Operator Instructions]

Your first question comes from the line of Bryan Blair with Oppenheimer.

Phần hỏi đáp

Bryan Blair

Another solid quarter, and I appreciate all the color on the market backdrop and DWS framing. To level set on trends, the decel to 7% core growth in the third quarter, which was still obviously above your guidance framework.

Was that simply a price differential from Q2 to Q3? Obviously, you're lapping tariff-driven pricing from the year prior. Just curious if there was any area of underlying volume deceleration in the quarter?

Daniel Klun

At a high level, Brian, I think price is clearly the biggest mover underneath, and I think as the guys pointed out, we walked into the year knowing that the market would soften throughout the year.

So when we say it's been consistent with what we expected, if you look at that Dodge starts data from '25 and how that rolls through, we were anticipating the market to slow a little bit.

But the biggest difference from Q3 to Q4 is clearly the change in the price realization year.

Bryan Blair

And it's great to see 40% plus incremental margins officially cited as part of the DWS growth algo.

We know a lot has gone into that, and there seems to be an overlay of incremental SCOFR benefits and some other actions that will come through in '27.

I'm curious if, in addition to that, the entrance into the hot water adjacency for your team, anticipated growth, and profit trajectory there also influence the call to make the official incremental targeting.

Daniel Klun

I'm not sure that it specifically did. I think it clearly is a category that will punch at or above our fleet average. And so as that grows, it will clearly be beneficial to our underlying margins.

But I would say the 40% and the adoption of that, if that's what you want to call it, really comes from our core business as it sits today. So we're not projecting really the impact of it other than to say that it's not going to be a headwind as that part of our business continues to grow.

Operator

Your next question comes from the line of James Ko with Jefferies.

Jae Hyun Ko

I just wanted to think about the longer-term growth here. I mean, you talked about the 2027 end market being potentially down a bit.

But I think your Dodge data shows that education and health care starts turning from like negative 4% CAGR to positive growth over the next few years, and you're obviously over-indexed there.

So does the market finally become a contributor rather than a drag over the next few years? And with kind of adjacency revenue on top, can you now do better than the historical 5 years in terms of the growth rate here?

Daniel Klun

Well, it's all assumption-based, James. So if that market projection that Dodge has for education and health care comes through, it would be the first tailwind, I think, that we've obviously seen in a really long time.

So that would clearly help our underlying growth rates. And then obviously, on top of that, as we enter adjacencies and things like that that go into those same subverticals, we think that we probably get a double benefit there as the market recovers and we enter the category.

So it's too early for us to make that call. But if you sit back and look beyond '27, I would suggest that we're probably due for some market improvement relative to where it's been.

And if that comes to fruition, I think you will see an increase in our underlying organic growth rate.

Jae Hyun Ko

And as a follow-up on the adjacencies. I think in July, you mentioned several new products in adjacent categories in the second half of 2027.

How many are still to come, and roughly what is the next wave? And I think RunPoint was developed in-house, and IntelliHot was acquired. So how do you decide which route to take? And what does the M&A pipeline for adjacencies look like now?

Daniel Klun

Yes. To think about '27, I would think about it again in categories in the $100 million to $200 million range, and there will be more of those as we head into '27.

And as it relates to the choice to develop it versus acquire it, we always look at both. So we're obviously cultivating things. And if for some reason, we come to the conclusion that it's not going to happen, then as you see with RunPoint, we go out and do it on our own.

And I think doing it on our own is a little bit of a longer road for sure, but we think we've developed just a dynamite, far superior product at far less cost, but it's a little bit of a long game. And so we're going to continue to look at and do both, and it's really on a situation-by-situation basis.

Operator

Your next question comes from the line of Nathan Jones with Stifel.

Adam Farley

This is Adam Farley on for Nathan. Maybe first on pricing again. Inflation has picked up again this quarter. How should we think about maybe incremental pricing actions for the rest of this year and then going into 2027?

Daniel Klun

Well, we're not guiding yet for '27, but I think you should think about price in the regular way. So a couple of points on pricing in '27.

And obviously, it's something we're monitoring both from an input perspective and competitively. And so should the need arise, we obviously, I think, have proven the ability to price accordingly.

But at this point, I would think about it as a regular way. We don't have any incremental price assumed in our fourth quarter other than what's already been implemented.

And we've got a teed-up price increase for next year that you should think about in a regular way at this point. And obviously, subject to change depending on what happens with input costs and really our competitive set.

Adam Farley

I appreciate the commentary on nonresidential construction being hyper local. So maybe to that point, are there any regions within the U.S. that are showing maybe more relative strength or weakness?

Jeffrey Schoon

Yes. No, as you said, it is hyper local. I think as you look at this year, we've seen strength in the Northeast, in the Gulf region, and in the West.

And again, I think as you look at it year-over-year, it kind of ebbs and flows. The West had challenges a few years ago and then bounced back, and we see that remaining strong for us.

But again, I think since the Elkay merger, we've been able to really strengthen our regional rep networks, our resources that we have in these regions. And we feel that across the board, we've been able to take market share and outperform most of these regions.

Operator

Your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

Jeffrey Hammond

So I'm intrigued by the hot water loop and the new product in Intellihot. I just think, Todd, you said internally developing it maybe takes a little longer.

I'm just wondering how far along or how rich the pipeline is in terms of introducing and developing new products in that hot water loop or other adjacencies?

Todd Adams

Yes. I mean, over the last couple of years, we've been identifying it, talking about it, cultivating, growing our own internal resources to do some more of this heavy lifting. And they're all in various stages of fruition.

So we wouldn't be able to commit to adding served market in '27, if not for some of that being underway already. So I think it's always going to be a combination, Jeff, of stuff that is under development and stuff that's being worked on and then stuff that ideally is coming to market.

So getting that flywheel to turn on a more consistent basis, I think, is what we highlighted probably about a year ago.

And I think we're well underway with that and excited about what that can mean both for organic growth, but also what it can mean for cultivating M&A opportunities along the way because obviously, if we find a good fit, but for whatever reason, the counterparty is unwilling to sell, we do have the ability to do it on our own.

And so I think it's a great push-pull to help our M&A activities. But I also think that we're coming into these markets one way or another. And so I think it's a little bit of both, and I expect more to come out of the pipe in '27.

Jeffrey Hammond

And then I think you said most of your subverticals or markets were up. I'm just wondering if anything has weakened, and just with some of the rate spike and nervousness there, if you've seen any defers, delays, noise near term around that?

David Pauli

Yes. We really haven't, Jeff. I think if you look at this quarter, Dan mentioned that our water safety and control and drinking water businesses both had nice quarters.

And then obviously, resi is down, and resi has been in a tough spot. So that would be the one to maybe call out as a little bit weaker.

Operator

Your next question comes from the line of Jeff Reive with RBC Capital Markets.

Jeffrey Reive

So just a question on construction backlogs.

They remain pretty stable. I was curious if you're seeing any changes in the pace at which projects are progressing through construction. Or, in other words, are projects taking longer to complete, and could that affect the timing of your shipments?

David Pauli

I wouldn't necessarily view it from the standpoint of timing of shipments. I think as Todd talked about, we came into the year knowing the back half would soften a little bit.

That's how we approached the year from a planning standpoint. And I think it's played out similarly to that. So some of it has had delays. But I wouldn't say it's above and beyond what we assumed coming into the year and what we've seen over the last 90 days or so.

Jeffrey Reive

And then maybe just a follow-up on the hot water loop. You talked about adding products and services. On the services side specifically, like what type of services are you contemplating adding?

David Pauli

Yes, I think so we talked a little bit about it last quarter. So with IntelliHot, there's also an IntelliPro network, which is a certified network that supports IntelliHot.

And so we'll continue to bolster that and leverage the rep networks that we have in regions. And then as we continue to add products into that portfolio, we'll be able to better size, specify with the engineers, but then also support the contractor from the standpoint of commissioning and troubleshooting of the overall hot water network.

So really building off of an asset that we acquired with IntelliHot and then applying our breadth and capability that will play over the long term.

Operator

There are no further questions at this time. I will now turn the call back to Bobby Belstner for closing remarks.

Bobbi Belstner

Thanks, everyone, for joining us on the call today. We appreciate your interest in Zurn Elkay Water Solutions, and we look forward to providing our next update when we announce our fourth-quarter results in February.

Have a great day.

Operator

This concludes today's call. Thank you for attending. You may now disconnect.