a difficult decision to do it, but you can see the benefits long-term, not only in the profitability and the growth, but the management time and the resources to reinvest in faster-growing things. And so as we sit here today, obviously we're going to go through that review, and of course there might be things that fall out. I don't think that's going to be anything significant in any particular way, but there is always going to be something that we're looking at saying, Should we continue to invest in this at the expense of things that can grow faster? And that's, to me, the full life cycle of 80-20. It's one thing just to exit it, but the real power of 80-20 is focusing your resources on things that actually grow and can outrun the deficit that you're creating by exiting something. And so, you know, as we go through the summer here, you know, we'll go through that review. And do I expect that it will be anything significant? But do I think that there likely could be some?

All gray color.

Your next question comes from the line of Jeff Reeve with RBC Capital Markets. Your line is now open.

Thank you. Good morning, everyone. So you talked about growing filtration, attachment rates, and drinking water, but also shifting the mix towards retrofit and replacement, which is now about 50%. How important is expanding either recurring revenue and MRO exposure as part of the adjacent growth strategy? Is there a long-term mix you're targeting?

I mean, within drinking water, we've always focused on growing the install base of filtered units. And so you see in some of the numbers that I talked about how that filtered install base has grown. That growth in the filtered install base has then directly led to a nicer mix in terms of – and so a combination of making the units easier to change filters, doing some things to enhance the attachment rate has all led to that filter portion of drinking water.

Jeff, maybe one thing to add to what Dave said. But, you know, I think if you look at our new construction versus MRO, retrofit, replace, as you highlight, it is about 50%. And so I don't know that we have a target other than to say it really creates a hedge against new construction activity. So I don't know that we have a specific target. But with the massive installed base of not only drinking water, but water safety and control, hygienic and environmental products, all those do undergo a combination of two usage. And then as buildings and facilities get repurposed, there is a retrofit opportunity. And so a 50-50 mix is a great place to start. You're seeing that, you know, sort of play out even with IntelliHot and obviously drinking water. So it's a great point to make that, you know, that 50% of our business that is MRO, retrofit, replace, you know, is sort of immune from whatever activity happens in.

Very helpful. And then as a follow-up, just on the organic opportunity to expand in adjacencies, is there a framework for how much annual organic growth you'd like adjacencies to contribute? Should we think of this as 50 bits a year, 100 bits, or something more meaningful over time?

I don't know that I would give it to you per year. I think it's going to be one of those things where, you know, as we look at these $100 to $200 million markets and bring things where we can develop a meaningful share, and we're trying to think about it as, you know, a $20 to $30 million opportunity over three years. It may not all show up in year one. It may be more aggressive in year two. So I think it's really a function of identifying categories where we can win and build a competitive advantage, develop the products, source them the right way, work through the specifications, and then begin to pull it through. And so the compounding benefit of that is what sort of you're seeing in some of that outgrowth today, and our objective is to continue to do that.

Great. Thank you.

Your next question comes from the line of Jeff Hammond with KeyBank Capital Market. Your line is now open.

Hey, morning, everyone. This is David Tarantino on for Jeff. Maybe following up on IntelliHot, how should we think about the levers you can pull to grab more of the TAM aside from just a shift to tankless from the broader end market? I guess what are the opportunities to grow spec share, and are there gaps you'd like to fill from a product perspective, either organically or through bolt-ons?

Well, maybe a way to think about it, David, is, you know, when you think about some of the regulatory tailwinds, some of the efficiency tailwinds, you know, we think that that tankless addressable market today is growing in the mid to high single digits relative to the remainder of the category, which is growing 1% to 2% a year. And, again, this is all sort of X price. And so we think we're in a great segment of a very big market that will convert over a long period of time. So we're not anticipating, you know, big changes in the size of the surf market, but we do expect that tankless category to grow. And so if you marry that with our ability to leverage the application capabilities we have, the full suite of influencers, right, owners, engineers, architects, wholesalers, you know, we think that not only can the spec share go up, but the category itself will grow. and on top of that, our ability to leverage everything else we do with these customers will aid in all of that pull through. Jeff, I don't know if you had anything else.

Yeah, I think as you asked the question, this is a heavy spec product. And as Todd mentioned, these are projects that we're already working on. As you think about the beginning of the construction cycle, starting with our waterworks and flow systems portfolio. And so we feel that these are engineers that we're already having deep relationships and design discussions with and contractors that are using the breadth of our portfolio. And so we think that with those leverages, we can take our unfair share of that TAM versus IntelliHot being a single-line manufacturer and trying to get leverage with not only the rep network, but also the specifiers, contractors, and wholesalers.

And maybe looking at the guide for 3Q and 4Q, how should we think about the underlying assumptions here from an end market standpoint? I assume the core growth step down is more moderating price as you lapped kind of the tariff increases last year. But is there also some conservatism here, especially in 4Q on the end markets?

I think the way to – you're absolutely right in that, you know, the compounding benefit of the price that was put in place is less in the second half versus the first. You know, we're still seeing good unit volume growth. I wouldn't call out any discernible changes in sort of our end market view. And, you know, we've given you a Q3, and we've got a place marker in for Q4, and we'll sort of update what that looks like when we announce Q3 earnings right around Halloween.

That concludes the question-and-answer session. I will now turn the call back over to Bobbi Belsner for closing remarks.

Thanks, everyone, for joining the call today. We appreciate your interest in Zurn-LK Water Solutions, and we look forward to providing our next update when we announce our three-quarter results in October. Have a great day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.