James

James asked about the rationale behind adding small format hospitals to Encompass Health's capacity expansion strategy, and the advantages these hospitals provide compared to traditional de novos.

Answer

Doug Coltharp (EVP and CFO) explained that the 24-bed prototype, enabled by prefabricated construction, addresses situations where existing hospitals cannot expand or where demand in larger markets necessitates additional beds in different geographies. He highlighted advantages such as leveraging host hospital management and marketing, favorable returns, operating under the same Medicare provider number (extending managed care contracts), and avoiding new Medicare certifications. Mark Tarr (President and CEO) added benefits like market density, brand recognition, growth opportunities for staff, and decreased risk. Patrick Tuer (EVP and COO) noted existing locations operating similarly and dozens of potential sites, including underserved or fringe markets.

James of UBS inquired about the strategic rationale behind Encompass Health's new small format hospital development, asking about the advantages these facilities offer compared to traditional de novo hospitals.

Answer

EVP and CFO Doug Coltharp explained that improved design and construction methods made the 24-bed prototype economically feasible, addressing needs in markets where existing hospitals cannot expand or where demand is geographically dispersed. President and CEO Mark Tarr highlighted benefits such as market density, brand recognition, staff growth opportunities, and reduced risk. Mr. Coltharp added that these remote locations operate under the same Medicare provider number, streamlining managed care contracts and avoiding new Medicare certifications. EVP and COO Patrick Tuer noted existing successful experience with similar models and significant future expansion potential.

James (on behalf of Stephen Baxter) asked about Cardinal Health's modeling of GLP-1s, considering market changes like pricing, channel shifts, and the introduction of oral formulations. He inquired about any differences in revenue or earnings modeling for GLP-1s this year and the long-term outlook.

Answer

CEO Jason Hollar noted that oral GLP-1 contribution is currently slow but expected to grow, though not material for the current fiscal year. He suggested oral GLP-1s might have better cost-to-serve economics. He reiterated that GLP-1s are unlikely to be a significant driver for underlying profitability, despite being a substantial revenue contributor (6% of Q2 sales growth), and expects both injectables and orals to continue growing significantly in the near term.

James Coe asked about tangible signs Zurn Elkay is observing for an inflection point in project conversion within the construction industry, given elevated planning but weak conversion. He also inquired about the progression of filter attachment rates with the new ProFiltration line and how the reported increase in filtered gallons in 2025 translates into filter sales.

Answer

CFO David Pauli stated that the 2026 guidance reflects current market conditions, including institutional growth, weaker commercial, and a tougher residential market, based on incoming order rates and project starts. David Pauli and Chairman and CEO Todd Adams explained that ProFiltration's design ensures a very high attachment rate, which will boost the overall attachment rate as it gains market share, and the increase in filtered gallons directly correlates with filter sales.

James Coe requested an update on the progression of Zurn Elkay Water Solutions' filter attachment rate with the new ProFiltration line and how the increase in filtered gallons in 2025 translates into filter sales.

Answer

David Pauli, CFO, noted good early adoption of ProFiltration, highlighting its proprietary head and required filter changes for proper unit function, which drives a very high attachment rate. Todd Adams, Chairman and CEO, added that as ProFiltration units become a larger portion of shipments and grow the installed base, the overall attachment rate will increase over one to three years, compounding the filtration opportunity.

James Ko questioned whether the project pacing dynamic extending into H1 2026 was new or expected, and the level of confidence in project conversion to revenue in H2 2026. He also asked how much of the high single-digit organic growth outlook is supported by awarded but not executed projects versus broader funnel opportunities.

Answer

Ken Bockhorst, Chairman, President, and CEO, acknowledged some variability, with certain H2 projects initially expected in H1, but reiterated confidence in the 5-year horizon. Dan Weltzien, CFO, clarified that project slides are not funding-related but due to contracting and deployment phases. Ken emphasized that H2 projects are "known, awarded, not started." Ken explained the 5-year outlook is based on a comprehensive funnel of activities, underpinned by 85% replacement orders and strong software CAGR.

James Ko asked if the project pacing dynamic extending into H1 2026 was expected or new, and about the confidence in revenue conversion for H2 2026. He also questioned how much of the high single-digit organic growth outlook over the 4-5 year horizon is supported by awarded but not yet executed projects versus broader funnel opportunities.

Answer

Ken Bockhorst, Chairman, President and CEO, acknowledged some variability, noting that some H2 projects were initially expected in H1, but expressed strong confidence in the five-year horizon. Dan Weltzien, CFO, clarified that project delays are typically due to contracting and deployment phases, not funding issues. Ken Bockhorst emphasized that the H2 projects are known, awarded, and not yet started. He explained that the five-year outlook is based on a comprehensive funnel of activities, including consulting, RFPs, in-flight projects, and awarded-not-started projects, underpinned by 85% replacement orders and a 28% CAGR in software growth.

James, on behalf of Saree Broditsky, inquired about the fire service outlook for 2026, considering pent-up demand and the clearing of near-term headwinds, and asked about the confidence and potential risks associated with the early 2026 NFPA approval timing.

Answer

Steve Blanco, President and CEO, stated that 2026 fire service demand is expected to be consistent with 2025, with anticipated improvements in international markets, and expressed optimism for significant growth in 2027-2029. He also conveyed high confidence in the NFPA approval being issued no later than early 2026, acknowledging it's a government agency decision.

James, on behalf of Saree Boroditsky from Jefferies, inquired about the key factors driving the outperformance of water quality in high-growth markets this quarter, after underperforming in previous quarters, and the expected trajectory for these regions. James also asked about the drivers behind the strong high-single-digit recurring revenue growth and whether it is expected to continue outpacing equipment sales growth.

Answer

Jennifer Honeycutt, President and CEO, attributed strong high-growth market performance to China no longer being a drag, continued growth in Latin America, and double-digit growth from India and the Middle East, driven by a growing middle class, infrastructure development, and water/energy challenges. Regarding recurring revenue, Ms. Honeycutt noted strong growth from both equipment placements (printers, instruments) and their associated consumables, as well as increasing contributions from SaaS and annual revenue in software-based businesses like TraceGains and Esko. Sameer Ralhan, SVP and CFO, added that instrument business's finite life also contributes to recurring revenue.