Earnings call transcript Q1 2023

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Operator

Good morning, and welcome to the Zurn Elkay Water Solutions Corporation First Quarter 2023 Earnings Results Conference Call with Todd Adams, Chairman and Chief Executive Officer; Mark Peterson, Senior Vice President and Chief Financial Officer; and Dave Pauli, Vice President of Investor Relations for Zurn Elkay Water Solutions.

This call is being recorded and will be available for one week. The phone numbers for the replay can be found in the earnings release the company filed in an 8-K with the SEC yesterday April 25.

At this time for opening remarks and introduction, I'll turn the call over to Dave Pauli.

Dave Pauli

Good morning, everyone and thanks for joining us on the call today.

the would forward-looking remind to well statements Harbor contained I call that the as begin, we language certain that with contains that in in we our like afternoon the everyone to this Safe issued filings Before yesterday release SEC. as press are subject

some comparisons non-GAAP In refer addition, measures. to will

to reconciliations and Our measures, why non-GAAP the earnings about why believe information. information we these release contain and additional SEC investors they're GAAP corresponding helpful use to filings them, and contain we

with speak our information and Consistent GAAP provide to non-GAAP our in filings. metrics are our prior SEC understanding operating measures and GAAP for better substitute we they earnings release feel encourage certain not quarters, we a These results. you will as to in a of the we review

that, the With and Todd CEO Solutions. Adams, Zurn to Chairman over Elkay Water turn of call I'll

Todd Adams

thanks announced a in the morning, against Thanks, joining call. we for the Good XXXX plans about lot February, we When of early throughout a that as everyone simply Dave. XXXX. developed year executing earnings QX we and had our talked

look were you to said payment we on at we a results our what simply If it’s down do. going QX

outlined. for Mark you'll hear we've we're to full leaving our outlook time As from unchanged, another at the the it that deliver QX being look year take intend but after we

XXX basis the core X% EBITDA over up and were were points Pro up sales year forma forma to pro prior XX.X%. margins

for of profile at into of that to on XXX and to cost roll we've the improve throughout basis confidence our continue that As current year. second relative we'll will that half ramp LK the will What in least this first and of high the half. the synergies have based million is means balance points to year $XX margins margins the we reiterate benefit continue results locked discussed in morning, the February we the will the

to million or the our quarter. X.X million begin this $XX minimum $XXX an repurchases repurchased we so of anticipated continued against in million additional Next do shares to have and second year

cash year Our expectations of even flow. full even and delivering strong free QX, was ahead QX which further cash flow confidence gives a our was in us in

filtration the the Late water with quarter lead to It's bring in awareness we're we launched solutions to particularly, seeing in for national help and schools problem. fillers drinking them water, incredibly we this campaign and the problems solve can to our still accelerate. both and K-XX do drinking solvable innings early demand but what bottle

pretty behind to and with Taken XX-XX down a no whole, the simplification supply times middle us. was much lead the back constraints QX as XXXX work levels all chain

on were we developed. the So strategic to growth and we've efforts the on Elkay integration able work executing plan

this Elkay through year next We synergies remain we the to the cost incremental to XXXX highly from reading do in while million work benefit year. the continue get confident $XX

I'll turn it take on you some page that, details X With financial QX. Mark on through over to to

Mark Peterson

contributed first XXX increased to and sales Thanks, X% basis basis by points. million. The year core reduced sales year-over-year a slide turn Todd. basis from number merger On X. while the prior quarter translation Please increased year-over-year Elkay XX% sales $XXX currency growth, points foreign our to XXX

call, prior pro outlined we year and the including year-over-year. X% last sales that On in during forma Elkay a for core product exits the basis earnings line first adjusting expanded quarter quarter's

non-recurring partially residential the million sales $X pro a year-over-year last offset better our decline approximately forma sales in core bit was certain few and anticipated of that were growth, end on the for time resulting by a quarter. in buys we exited for SKUs Breaking than mid-teens we markets a

safety balanced growth and markets for control quarter single-digits control, water the outlook also and and year-over-year our flow end increased non-residential mid environmental were our hygienic of drinking with water. to management Sales ahead across

respect exits the planned. in our first the we've With quarter Elkay-related as completed works, product exit to line

slightly call the on will second calendar been the the $XX for will quarter As and see outlook in sales you those of million impact later our year-over-year we've in million exits year highlighting $XX a XXXX. have

profitability. to Turning

adjusted the inventory initiatives million will adjusted chain in prior and each of the investments The in This of cost $XX our benefit as initiatives by and totaled realization earnings a at that in our Elkay XXXX, quarter outlook the high margin EBITDA price well Our year, was $X than EBITDA in quarter compares over end to quarter. merger. calendar of benefit $XX first year's inclusive quarter growth sell-through million the by the of little synergies the and XX.X%. productivity our cost for our as XX.X% versus the million higher last the of supply more offset impact year was in at

quarter slide I’ll leverage we Please net approximately with inclusive of X.X and at sheet respect balance of used common the highlights. our turn cash on some $XX to stock the quarter. to debt leverage, X. And leverage million touch to repurchase times, ended With in

stock total just another first million from $XX under the repurchase worth second part fourth the share of through through We of quarter to of purchased million have yesterday. quarter $XX the XXXX bringing our

highlighted ratio $XXX to plan our at we flow program to And one to range quarter, last million cash In to million. share times a our time. over our Board Directors leverage as in utilize call debt an February, of share of repurchase two approved targeting on XXXX while earnings intend in least we increase continue execute our in our free the net repurchase of $XXX

Todd. call I'll turn the back to

Todd Adams

page on I'm Mark. Thanks X.

levels water to various to growth other Michigan on from of water slides, to Senate in of were things lead developments doing water, couple especially share are the drive no safe week. pleased comes safe a Over Filter our it platform, drinking the legislation there we when to because last we're First safety pass and outsized see legislation few drinking positive want I kids, next

test to water management filters bottle operating water from to designated drinking filtered the all centers install children intended ensure and protect implement properly. is and and requiring drinking lead filtered by filling faucets stations water This water outlets on are the to a in for that installed plan or filtered legislation schools drinking childcare

legislation is Michigan because and Representatives experts, This House cost adds repeated health from more it consideration State and every for widespread environmental of has effective school. now to the at support than testing requiring

awareness country, view can this as legislation within standard, here. states the is Massachusetts as Michigan’s California, we see While other and just the growing there is you gold And three developing across more Texas in months. all legislation including last the and

per getting solution per well at drinking the and can believe for this to supporting of as others most to our and through school student care exposed solution. is lead to point that the actively accomplish kids as schools place about been filtration legislation water child We've And year, with and proactive protective use. $X filters

greater about Moving a through to healthy the streaming drinking safer video-on-demand importance and resources. started social media, broad bring and video launched entire page that a hydration understanding an across supported series services X. to and information of water awareness toolkit also part of awareness doing with that connected our We're and with We campaign. and

We administrators, and ranges is indicating a to teachers ignored. teachers, our change teachers attention awareness students with for from administrators and filters we where and the dedicated problems, managers. drives parents, how school buy when drinking at the issue community to to and maps quality curriculum know addition, information risk content facility where send cannot for specifically to launched The managers. letters facility and call plus Elkay.com their water and school for designed, parents boards administrators most action can of section In parents water for be

our why bottle fact filters the however, filling some all in X. to water learning in page or school all XXXX, program Youth Fountains these deserve than to stations just a for combination more That's and day. in It's providing the districts schools resources clean have we need. that of they're where Moving created places growing installation children safe of grants every filtered others,

assesses has and based with the to on of attending quality water several preference the education program developing students in minds impact including donation the and and early The bodies. elementary school ages schools needs greatest schools on given where lead the issues criteria

most The Milwaukee. program Harbor Los Michigan Benton of across recent with focused benefited dozens the our country and efforts Angeles, has on schools

roll to like Jackson country and year Mississippi others. places the schools across in even plans this out have We more this

piece me on our for program last overall just page efforts of ESG a This and to X. one the is a segue nice

We continue efforts make strides to in ESG our mission in Clean overall. Water

sustainability we also provide addition report Communication issue XXXX additional in to ESG In Global our key progress to of our first share on to transparency month against UN next our and quarter that our and accountability journey. Progress Compact targets wanted issued we'll February

coming revenue is the core water solutions from water that attributes challenges their sustainable XX% help technology with sustainability our of clean customers quarter. strategy our our with to goals Developing products during meet and

water, keeps technology environment, Our innovation focused energy to our of us on to and use improvements commitment expanding to non-renewable conserve health of the a line and protect plastics contribute save human hydration and clean other and reduce resources. cleaner continuous and products

of to Zurn XX the quarter goal estimated our XXXX. gallons eight Elkay reach annually water billion of water during an product gallons save is and billion saved by

bottles than bottle plastic annually. four water $XX of of target use our water way Elkay fillers prevented single-use well Additionally, preventing the the billion to more have billion on

a path meet projects and are our own to reduce defined our emissions both. energy targets gas identified and usage Within we launching to new greenhouse eight have for operations and we clearly

in donations philanthropic gifts associate billion. exceeded of In kind our announced Directors. volunteer our $X Board Emma quarter and the for joined March, McTague, Collectively time we

has of women. of efforts. strong our Emma, the With addition Board continued three Overall, directors; whom our independent are progress ESG with nine now

to our turn to over Mark I'll it now through take And back you outlook.

Mark Peterson

Please our slide of I'll cover and Thanks turn highlights Todd. to the XX outlook.

take in of our to issued volatility that a have we encompasses on XXXX broader range of the years. press we continue in to for couple the we past a are you saw yesterday, going than outlook view release external As

in billion unchanged at calendar basis in the consolidated year of EBITDA the to our least to XXX $XXX billion XXX for resulting of points. year-over-year points outlook $X.XX million Our and range of margin adjusted XXXX basis million, expansion $X.X with $XXX remains to in range up sales

less better last help of the we second trends reported the for business we XXXX understand the XXXX executed. chart of Elkay to pro forma quarter impact Elkay have on sales which the the sales year-over-year exits takes the XXXX, the the growth side of XX/XX product for quarter quarter, presented plus Similar for in sales XXXX right line in second to Zurn

$XXX first projecting from to quarter. of be basis For XXX range step-up we points to of quarter to which be adjusted $XXX million range the XX% in EBITDA XX.X% the XXX XXXX, the second to the sales in of million to and our are is a, margin

of timing page can product as the the to groups in assumptions respect working backlog shipments for XXXX. and an are we year, non-residential see elevated With year-over-year the last residential our the down began of outlook, second growth on impacted which sales you in our by quarter

low-to-mid-single end forma pro the growth in single-digit mid-to-high with we our residential second offset decline partially expand anticipate markets by orders the a digits in market. the We mid-teens end in year-over-year non-residential quarter

sequentially is points profitability, XXXX. quarter our expanding to to from second Turning basis the XXX first XXX quarter margin of

As half begin lower to benefit XXXX, higher quarter. of of be a in the into the sell-through costs where and half back the part we our transportation quarter anticipate inventory the we the quarter from purchased margin first second in second the we'll and in will second cost the commodity step-up and in of XXXX the of complete another margin

$XX $X the million merger to Our in over for just related the million savings full to synergy and will Elkay a year quarter continue XXXX. deliver

reminder tax the diluted shares we non-cash second Before outstanding. and for comp rate expense, open quarter XX, assumptions have included expense, a on our adjusted questions stock depreciation page interest that for and amortization, our just we call outlook

We'll open up call for questions. now the

Operator

question Oppenheimer. Instructions] [Operator the first Blair ahead. Our Bryan will line of Please go from come with

Bryan Blair

Thank Good you. guys. morning,

Mark Peterson

Bryan. morning, Good

Todd Adams

Good morning, Bryan.

Bryan Blair

with unanticipated you roughly the they was sales that [indiscernible] being of quarter. believe said that while I mid-teens down stayed million in resi $X

Just to $X on was margin the clarify the what million?

Mark Peterson

was million $X we the fleet the for of margin about had quarter. The average what

state, that in quarter. better but a it margin on below the fact impact buy didn't the did given the materially in time overall EBITDA net is the you'd the normally little we what last that So

Bryan Blair

terms the non-res Maybe in dynamics more growth easier QX? impacting is Any in little progression also about of Understood. year your the half how and Okay. there rates and year-on-year as offer color resi should on much additional the a a insight think for headwind the how you into but backlog offer of can sales extension back we of the in particular obviously progresses? comps that phasing

Todd Adams

Yes.

reduction. to from relates it sizable as QX, Specifically in a there's headwind a QX backlog

in significantly So, it reduced and we built QX. QX backlog QX in

relative to be rates look our prior actually So, nicely. at the they're to year if going you order in QX, up

reduction and sales as in also the the QX result acutely of backlog So, QX. clearly reasonably a impacted is growth

the we the be growth. not positive underlying what you rates market order trajectory about are the about go the and impacting terms as for would throughout stabilize or year. But is seeing It's growth as So, for continue year-on-year sales of to Bryan demand in we're we that talking characterize what we talked phenomenon the the quarter. of

Mark Peterson

Yes, last was back of That's referring to. about if to Zurn just the backlogs year Todd's Qs, last burn go you go back the it what million at and a year's business. side $XX backlog on the core look

you that the into consideration. take order got When to the sales look at you've rates

pattern. think rates now out pointed half Todd As and the we we order right a good second demand accelerating in see year-over-year QX are

Bryan Blair

level one question. last one And it. Got higher

general. a related levered recent of non-res to past banking sector. Just the be to cycle on regarding in concern thoughts that's the been There's obviously amount consternation hear great fair your in

Just and there Zurn the Elkay wondering about in lines most be backdrop which risk forward? a end growing may more market or feels in your going bit uncertain how team product confident overall and through where to you're an markets

Todd Adams

Sure. Yes, concerns. heard the we've

we the you year. qualitatively look unchanged the essentially at year, what the our start remainder think forecast it's of developed for to I from if had

piece I take consideration. an important to think that's into

nonresidential at Secondly, and health look if mix, overall institutional some water of that our is care you education and XX% primarily works.

to get the revenue. of over you half So, overall

lot had being seeing that we risk look than at at to identified points watching a the slice that When we you year, this that of had us we're the outsized not If of anything outlook We're obviously commercial, in we the point. obviously, it. provided. entered that more

the for remainder unchanged. forecast But outcomes year little again from days sort wouldn't consensus for of view very standpoint year. the maybe change is reflected relative could but thought be our that the essentially our XX world, Bryan the the we think last the in the of of I of happen to in range That

Bryan Blair

the all color. Appreciate

to start Solid the year.

Operator

go Your Jeff Please next the from line ahead. of question KeyBanc. comes with Hammond

Jeff Hammond

Hey, good morning guys.

Todd Adams

Jeff. Good morning

Mark Peterson

Good morning Jeff.

Jeff Hammond

XXX to certainly So, I pieces? some half, drinking safe just the point us basis of the you half of just guess know first remind got kind half then first and move. but in kind investments just the water -- on that kind us the walk you've half I of bridge second you the through higher the synergies, inventory, second I think said to margin moving can cost

Mark Peterson

I Jeff, synergies play think consistently out Yes, quarter. across the the

each So, step was of synergy little frontend modest from matters no HX the structure. the a quarter. versus HX a that benefit the inventory is really weighted that big but Yes, more of the most really cost in some that's playing the down investments out consistent bit thing a

as the impact a we were That in said QX, at be of experiencing we've at as as lower transportation bit lower then cost a of its first way back impacting being time part standpoint. worked costs levels well commodity, buying the in from P&L. going big that QX the for inventory QX half through it's the the QX to So, into XXXX But period we've and a difference is elevated QX. here little us of we'll

the So anything QX. piece third because were puzzle it really -- is that's not of you'll really really Jeff in in in that's biggest the the different see quarter

decline reduction QX will in the QX you'll margin in a in the that decremental then expect QX a a And improvement QX. So see just margin. meaningful based normal upon seasonal in in bit margin sales

and the those QX lower transportation the you'll P&L. costs point see of run So at full rate impacting that is commodity

Jeff Hammond

size and just how funnel just you of just drive versus it clean for And can is more regulation important penetration? perfect. to think what additional states and is Okay, on this then opportunities opportunity, it maybe organic the water you just

Todd Adams

well opportunity is in look Hey, regular of a when to it long combination core has as Jeff, work, it at The to as way for broader some identify grow we millions we've construction is of relates retrofit that And most aftermarket to is to new how going time. we on begin our we can of campaign What's then, key filtration. that and filtration measured this in a state-by-state problem that by And do continue basis? a to targeted that pretty hundreds school where awareness to been as accelerate think acute? replace obviously period district school states, the installed? can replace? What district as initiatives provide and going got we we're obviously, the recurring

there. opportunity And continues the be to so think I

awareness legislation this the and bringing and closer think is it impact. I to just campaign closer

identified hundreds a so think And as we addressing And growth I got qualify would we in next millions obviously, see it continue building But funnel four We're, particularly the from. we the long these this as that incremental to that three over the ones of first. states we tail. something speak. to business to core measured of years, the we're very dollars has nice

Jeff Hammond

filtration. you opportunity the reassess as to initially? see And then thought of, you just, today you've in dug the filtration maybe you relative mentioned integration kind where what you Can on

Todd Adams

Well, it's identified. we different not much than

you time about and filtered the through replacement a event. the would drive Elkay really strategic it the that services the of our think that to ability and capture units provide filters spent obviously We on. ensuring non-filter this lot installed you really rate through a replacement size continually had with was or attachment to focus identified and If not conversion base, that we of then think from other the things the about subscription

years. identifiable we to a it's not opportunity and two as think million in to we crazy the And size but broadly about is thought $XXX this clearly think next three so this same the

Jeff Hammond

guys. Thanks Okay.

Operator

Baird. ahead. from come Halloran line go the Please with will question next Your Mike of

Mike Halloran

morning Hey, everyone. good

the seasonality? for realize the stable stable year. you it's different? the the you residential just the and side -- and on equal demand for all else last When you or Bryan's the assuming normal to a relative for normalize there year, assuming backdrop on of other unchanged when back But you side pattern a relatively are guidance half is think things? just certainly Are it there. is the the something for all inventory Is about the assumption non-residential what demand machinations underneath any Following up question full

Mark Peterson

of I days non-res the modestly, course think a are, modestly yeah. and half sequentially When a end today. -- the over residential I to that if assuming we offset the think contractors in pulsing about not course over We're regions, good back better we contractor pretty XX you not thought, stable you feel the say still see fourth XXXX year, go at bit back a the the slowdown We could the material market ago we get year. in quarter. that of other think look, But little impact may when of across I now right reasonably thing people backlogs, look the the

The we out. one only this in some main visibility with no now appreciate think the our what all at in year have contractors and coming far the But that can reps, on to as that pointed back see. cliff so you is data right the time can point points has everyone I we of half

Mike Halloran

working about year? how how talk the sense. you own and as maybe And the inventory then side, feel channel inventories, well you out That about your you makes to see as that through inventory just feel on how levels,

Todd Adams

Yes.

that We don't the a specific there's channel we see elevated perspective, the in future see. from wholesale it think I really for of any levels demand right categories. inventory inventory

times XXXX been whole, today our based taken the are they XXXX. sort that where rightsizing maybe had I through of we're a and to as course of on relative lead over more where So think,

very So feels that normal.

inventories, that that. obviously, essentially got In half. we've the the second requirements met dialed that We've terms on our we purchase see an outlook in of

as And year, so to inventory course over down come you'll the lead from suppliers see times continue our normalized. of sort of the have

behind a of our times inventory suppliers as taken So the for and think, is us. jockeying largely whole, in lead us I

that's nice locked the of purchases rate identified we've cost state So and see of much we feel steady where we've in. sort into is sort lower We margin tailwind that as cost second current at the heading a got Mark half. spot

Mike Halloran

Appreciate everyone. Thanks. gentlemen

Todd Adams

Thanks.

Operator

comes Your from Goldman with of question line next Joe the Ritchie ahead. Please Sachs. go

Joe Ritchie

Hey, good guys. morning

Todd Adams

morning. Good

Joe Ritchie

non-res bit single be So looks it this in up just Back it is I'm now second trying your quarter. modestly like the just channel high I and there to envelope dynamics? know commentary. cancellations inventory the non-res any digits And backlog? this in trying little of to your I'm that better. probably is quarter understand wondering just Were don't we're negative to square I'm like mostly expecting a

Todd Adams

sales think would we little it in reduction on QX year. and impacted The QX I growth be earlier. a touched by bit backlog Joe, last

and working market. that both the in significant positive of through but be necessarily and It's at as QX projecting the in reduction of not daily sort result year's headwind, see last obviously, growth look of QX, for rates we're Zurn non-res or what would we're for would order pretty have the that So, we a QX, a rates those function comparable if quarters. Elkay. order And from a the two order QX backlog and

Remember first lead were supply last chains were the in year long. times extended quarter

so we and then backlog QX And reducing spent that. and QX built

say we comparable to reduced last backlog. more that is function the our of different year So any from wouldn't QX a as QX. on the really It's outlook market I

Joe Ritchie

going through in And can guess, I you've know quantification should second the to the the mean we on curious Okay. don't margins given across sector dollar that some a a this if impact I'm lower I I you're standpoint? pricing, Just that I'm cost Got as the does P&L, lot half? typically price we're at just it. you point That's seeing cost. third from really progressing maybe year your what quarter. trying color at from wondering -- maybe the you helpful. us that good guess least ultimately see give but particularly I And the guys with through on of in inventories know some understand give improving tailwinds just

Mark Peterson

for We'll get to the not at the report of third the July. in our at again we of quarter. -- the We're to into outlook giving get dollars quarter going end end this the when actual Yes.

think you think effectively price no we've that If about back continues we talking walking the balance all year. getting anticipated been this basis year-over-year sticking. year. about a been cost, of pricing low realization as price at for single-digit we That's the a been There's on and and

From a cost the to XXX first we in in about standpoint, then basis obviously second said, there's disappears. headwind the that in quarter down closer a quarter that year-over-year headwind basis XXX moves to points point

So the XX benefit that really the the back our in outlook is out that, we third get we been years and to really margin that in in about from talking lower place now. half, when stays you'll cost stand give structure yet we've price see quarter the

Joe Ritchie

you. Okay. Thank

Operator

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

Nathan Jones

Good morning, everyone.

Todd Adams

morning, Good Nathan.

Nathan Jones

look little into the I further a maybe want take a to future.

non-res have these guys about talked you're You aware projects that new some of. of

on even into at for of more XXXX, track out about and opportunity? you're side are funnel sales distant into in you two further gives you is out but that into commercial change years up that least turn think people to the more talk I You whether kind of Can probably you the visibility much before maybe not XXXX, concerned future that seeing which track only into some they non-res where construction. revenue which

Todd Adams

Yeah.

as result a in would Nathan. be, last XXXX what's look short and happened its of days. meaningful way be at change us for would The answer notice too early, unidentifiable XX I it and a to the think XXXX

or significant no would expect what beyond been normally cancellations. we adds there's So

not taken banking of function of where on as a seeing or so the project two-year dramatically are, we're and out is interest particularly crisis. activity level that And changing side whole the institutional rates a as the market the one-year,

our mix commercial a office retail hospitality I would things. and look of it's say other warehouse when at you exposure

could think, probably XXXX our And answer that But beyond be hey, as where would be outlook we I a specific as so are say maybe rates get any good today. of anything project you're think that change seen going to not qualitatively disingenuous it'd as function don't I we've in at. to it's saying, trying to what identify that, XXXX in

Nathan Jones

higher on the than for Okay. Fair enough. Maybe repurchase quarter. average first just share the the

the the up bolt-ons about like other here capital where on how XXXX that? opportunities price that share any share on for repurchase number might having second anything more is talked You for you the in you Just quarter done year? execute end in deployment dependent much more find color on

Todd Adams

minimum strong maybe against Well, communicated very stock like. flow. to $XXX has executing obviously that on free lower start would a price of We're the off I think little been a million. than We're we projections all obviously cash we a we The had. bit

so work identifying And just and we'll million, and there's year. think we throughout $XXX upside to that much that I executed to at the we continue how do how

Nathan Jones

taking Thanks questions. I'll Okay. my for it on. pass

Operator

remarks. back turn now to further Dave will I any over for the call

Dave Pauli

announce our quarter late Thanks to in everyone update We we our forward June us we look providing for results in a day our next joining on today. call when good July. appreciate everyone. your interest Have Zurn Elkay, and

Operator

gentlemen, conclude Thank that meeting. joining. and today's will Ladies for all you

may now disconnect. You

Zurn Elkay Water Solutions (ZWS) 26 Apr 232023 Q1 Earnings call transcript