Zurn Elkay Water Solutions (ZWS) 1 Nov 232023 Q3 Earnings call transcript

Good morning, and welcome to the Zurn Elkay Water Solutions Corporation Third 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 1 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, October 31.At this time, for opening remarks and introduction, I'll turn it over to Dave Pauli.

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

Before we begin, I would like to remind everyone that this call contains certain forward-looking statements that are subject to the safe harbor language contained in the press release that we issued yesterday afternoon as well as in our filings with the SEC.In addition, some comparisons will refer to non-GAAP measures.

contain SEC we additional we use helpful investors, and non-GAAP about believe release corresponding to why the measures, them and earnings filings information contain these they're GAAP Our information. to reconciliations and why to quarters, feel as a understanding speak provide results. operating non-GAAP of metrics Consistent with our will certain prior better we we they our I'll in These to review you the measures we our release to Chairman and earnings encourage Todd are that, not Zurn and GAAP, a SEC and over call CEO in GAAP turn Elkay. substitute information filings.With for Adams, the of

Thanks, to Dave, To time jump everyone. up over points XX.X%, operating a year. for morning. to it, to taking QX we had XXX basis and the good prior morning, right really the this improved join Margins us strong Thanks performance.

we're We XX%.As cash also quarter increased Zurn the in both $XXX million, benefits in in shares highlighted savings secular from terms filtered back the X of into we growth see water. our really clean release, of opportunity as in almost enormous drinking transaction, the and delivered another earnings year a synergy we XXX,XXX from free stride bought the hitting dividend combination, Elkay flow record as well capturing our the our

our organic growth One to we've market, for expecting traction good and momentum of better so-so were This drinking in all hard underlying later. we've will as the as year offset I'll see seeing terms grow cover from how water growth Elkay the on What the expect we see made that not from XXXX.In the some is this water guidance, as developed into both pretty 'XX.Now of the all as to Over the by in this front apocalyptic in is in the a has internal the we a that legislative QX sort we mid-teens perspective to little category than line after it July side.And the our as market as dive year. well than external for category. I'll positive more since now over the investments bit to and we a is the market drinking point internal a of next side the a 'XX has we're internally turn in also as But just any believe we XX as little what new be data September. ago. year is with issue products it from accelerated while more we unfolded, August, decade category introducing growth to rate point Mark. look end, and uncertainty filtration any which a data last at grew months, overall the continued the don't drinking well at well -- was over over happening filler on start drive it's I'll water significant

to turn #X. Please Todd. Thanks, Slide

a on million, XXX forma sales pro points third quarter increased and year-over-year. Our were $XXX basis basis,

fleet fleet growth a digits in our growth above sales mid-single year-over-year. mid-teens core quarter, Nonresidential was XXXX. our in a shipments down residential our average.Turning orders growth of we were decline the end backlog core sales drinking to prior markets discussed as increased the and percentage offset average respect the by during to and working through market.With order end our increase below the pro partially of hygienic pro control, control, environmental, growth in and forma year-over-year growth market with orders while last water, sales elevated third impacted residential forma As year-over-year to flow timing balanced profitability. core the quarter we was our order safety our down growth nonresidential in in Breaking quarter by and growth our year was sales was across digit third an orders, water bit, high-single a end

Our prior year our million, margin year-over-year increased the third points quarter XXX to in and XX% EBITDA quarter adjusted from $XX XX.X% quarter. third the basis expanded EBITDA to adjusted

In are initiatives, fully at I'll the of of XXXX. turn sheet to synergies with going leverage loan, some second leverage impact been down completely and year the have the sell-through inclusive paid million margins of $XX respect We and XXXX. we our over principal quarter sequentially. our in Looking XXXX, touch XXX little higher the term savings million us.Please on price $X year, of stock calendar as October, highlights. million deploying all basis that X, debt from realization the net cost leverage, forward. million inventory Slide each our of all required early our of the the through approximately future and benefits we to during payments a generating repurchase stepped quarter annual ended points behind eliminating first balance up cost discussing at months read common expense cash and third inclusive quarter $XXX quarter interest in our we With with of And $X.X X X.Xx, productivity of of of to the

have position turn and generation, flow capital sheet back good Todd. our going call strong the balance we free optionality cash allocation to the forward.I'll Given

X. on I'm Thanks, Mark. And page

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our Thanks, for Slide Todd. to the outlook I'll of fourth turn Please highlights the cover #XX. quarter.

for to quarter outlook the outlook. and be the to highlights fourth approximately $XXX outlook related for of which the million few full the to sales to the which at We we the free flow, translates year. margin ago.A to to our the range $XXX for our million increasing end million to million, of initial around With cash gets days projecting we For $XXX EBITDA our to year we respect are XX million quarter, highlighted $XXX approximately be year $XXX adjusted of to in point $X.XXX our XX.X% XXXX, anticipate are billion. you XX%

line reflects the and October the decline in well best quarter quarter cut market the the our in going into as profitability the us. fewer sales negotiations, completed quarter.Next, recently of residential traditional to in with extensive fourth the level seasonal sink saw a our fourth shipping After third not later the as quarter in we based and on outlook what third be customer. to was product to days at a First, review acceptable we compared quarter fourth

to residential decided phase So supply to customer. this of we certain sinks out our

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Instructions] from [Operator Oppenheimer. first Blair Bryan of comes question with line the Our

It's about water encouraging hear the core the drinking year. for mid-teens to in growth

achieved position. As should sales, And time, prevent look over you're will you we I there? would less to for margin the cost that the assume where years? rate that drinking we certain be as of market coming environment 'XX which What seeing next given more accretive be assume that have profile and into margin in the and margin anything there year, is forward is I run And look the continued momentum filtration include favorable year, ramp overall, growth water? this the growth

arrest Yes. slow that I would down think it mean, piece is see by don't piece, take or drinking we sort to in the that I of anything that growth there water.

the to the we've making investments over I the around next continue think confidence Bryan. could units, very beneficial we algorithm that at in a fact, think, higher that all that's rate, attachment compounds high give and year. work high In clip drinking Obviously, more I us, we're grow all water time, and done

see is, either. we but feel don't not to good And the fleet margins, challenge any we We're that average. average. relates think really what that risk to about.As above obviously, is the fleet So that above I that the or it that going exactly to one decipher

feel good really last So about we the XX months. I think

of new over we've pipeline ever introduction As going we've I standpoint. got is to mentioned, next that XX months that anything an from products the dwarf a done

the year. spent we momentum and we've think have the year first think And and beyond. reading into last out I 'XX where that's I a it's in strong So nicely that heading

team That's Confidence had helpful. I the you've looking positioning, and finer was for more historically. nonres resilience your is and -- and a exposures about price institutional resi And forward. hoping you as puts you portfolio growth? prospects the of exposures, your takes follow-on some thinking synergies cost, through could versus if commercial on offer XXXX we detail, points think how the walked about earnings little

we've mean at a I Yes. next highlighted, very water case think, for drinking the I growth high compelling margins. year around

we'll of million We through. $XX have synergies that read

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pretty going be in over we're I and to to cautious continue flows profitability 'XX mean, have the taken resilience we're like that's we'll think see fix. to when the we about our we the the providing whole, But feel where where year think the X cash looks with exceptional. And into we're key I break And proven as we I and we So, are get a I portfolio feel at. itself good I game.So the invest I we're to good of way think outlook. combination, what just the pretty trying the be at there. has time. really think about think But

next the with line KeyBanc Jeffrey And from comes of question the Hammond Capital Markets.

-- relative to thought? coming on seeing below, you're maybe and softness what some Maybe September unpack more a that little where maybe you in where

Yes.

at sort and aggregate, look it QX, resi I little would the that started the when ways, that and less that last forma as begin seeing last structured had than number And at $X is we that, probably think had to inflect had our towards stuff, it hasn't reality of obviously, see business, we Northwest a sharply was distill to down, thought year sort year. it organic we retrofit/replace, fell end I at maybe $X a it how probably bit. ordinary deteriorate England. the I the to assume of think And to look that New of flow inflected we to into across in X% of up given if the degree any of think I I that, different these whole, Jeff. imagination. It knives a we of more a none growth. had would what the But targeted I But it look pro break-fix course core say the by things falling in are up we're you we view specifically had a taken was maybe quarter.And we in million when bit to million I think little heading -- really think

what maybe bit were just good. So it's we less a assuming, a as than whole, but pretty taken little still

Okay. That's great color.

Just on feel the the 'XX into good synergies. the profit I incremental guess, takes you puts about 'XX, side on pretty and

cost inventory. might higher $XX $XX headwinds Any to that about I about bridge, what think think outside absence think of as million, the profit of growth to kind other obviously, got you tailwinds or million you of be?

No.

I highly variable. think you take the look at overall model, when that a it's

lower all So We of benefit we're input only capturing costs. employees. the have X,XXX

So, wage perspective, insulated. from a well inflation we're

sort drinking so, specifically place. deflation. certain a think opportunities We'll there in capture think price is we're And categories, some that in around any and in We that I of modest water. great

so, supply the we probably be no is 'XX. on parts cost that into working significant excess think of worth are $XX to relates see chain 'XX one emerging that million course big over as in And it some that we'll 'XX structure.I in opportunities moving is of our that

got So a into we've margin little I that think path for gives and good 'XX. a got tailwind in more we've some 'XX follow-on us expansion that

unusual or we've about. in of talked tailwinds what terms nothing headwinds beyond So

big neutral? in kind 'XX see one. working be Then kind of been and or of has think Okay. of another that supply Cash of But in was balance. chain last supply great. chain into tightness, you "normal" coming know capital back I and to through a I'm as capital just back tailwind terms wondering use where it that to flow is kind working seems whether big you

think continue that know to will capital don't very 'XX. be efficient. it's tailwind that into I a our I just working big

I highlight supply collapsing that the some of benefits -- of save by the to and 'XX -- comes incremental chain. think capital I overall cost length the working with in

really always from again, lead flow model where think where we'll the frankly, think turn just sort strong really to positioned times freight where I year time, really, are, costs levels do. well of there. are, cost when I transportation look and where be is, up service that primarily users we're think at are, I in I sort out efficient have. over another I continue cash So flow the to 'XX.And because cash in year year we shows in always think and of you like of mean, we business But

the So generate whatever about our [ free if flow there's ]. we're not cash good number really, one really environment ability concerned to is in particularly is

the comes of with question next Krill the Bank. And Deutsche line from Andrew

a the And in be of like at a you with rate? the maybe then medium to products. new to, for I I do back that index? much to it can all you're circle prior tailwind things like that the compares might to Wanted XXXX products or kind how just vitality if And like you quantify guess, term? -- measuring run of new just think all want how

points the wanting. have don't is targeted past from I the what people very the be Yes. on that It's our on really going the be higher Andrew, don't to of based lot you. really is know elementary exactly and looking what new And way lot that in we of evolving we've is for? will these those last going enormous a the know But penetration amount much we're us what how only it's I to the use, than and adoption is leading understanding done that's ed point the gone next customers needs say ideas ton over other think of over want.So what learned, of of years. hope.And at on really What's voice I What it going and done to -- product that's think fillers the the developed at an quantify about evolution work customers customer. the to the a quantify are unmet it, of and of market this I of the out category a are I rate all think mean, needs to of are of use spot course XX it for of we looking levels. increase to of cases, And for? we're schools launches going enhance that to a be can so, bottle year

this base. change of category that's embedded high opportunities you having create a I frequently. that, the a it. and And to to when And change in share to and filtration continue going for we're filters installed more and it's notion things in the also comes improving access the do ability behind right like grow obviously, growing, very it's to think ourselves that filters

all that are are forward. and the we see growth part things that those of overall So trajectory going

And follow-up. my then

for just benefits fourth more any can detail guess, are from out the confirm the expect investments the were? them? you then they a quarter? like confined on those fourth And can to you you Just give on called quarter, like I little what

Yes.

we intel benefits $X quarter If continue invest and took some we we or going to fourth The some some whether next that plus of so the get personnel, at let's the that, the of it at the over "Well, and we magnitude are I rate to expand think some of we into when were is really the what marketing looked channel, growing are at minus a we just pull sooner." believe the pull year, order let's that's and work, of look can we million. of that upon said, it forward.

anything crazy, but else. of is not more really So than it a it's pull-forward

the year. spend the would to XX perhaps million of amount roughly we $X months, over So next same less But money. expect

your with the comes line from question And Baird. Mike of Halloran next

So a couple of questions here.

your on words, really side color in is the side look the context those the Slide commercial other Could in? appreciate on for risk In when on the you put what's a that X, context on And institutional numbers? more cancellations? high great. but side far what and lag to be content versus institutional been First, variable maybe the it you and commercial little I'm help how the I the there. typical both for and any start historically, take back guessing out side, you not does for would profile get the

It's a good Mike. question,

start, a school, it's it's about building, think a care a it's institutional facility. hospital, an university you in embedded health when think a what's it's I

start X/X. little or ratably from our a way take build I to some almost months somewhere right universities finish X/X, XX is bit Maybe And it.And about complicated XX longer, XX on X/X, right? or the XX to cycle to occupancy content think but is months, hospitals so think the spread is to average

you when build ratably. really So think cycle XX-month about that, over we that participate somewhat

we're to X/X the months, X and the will $XXX -- the content come it's to and of first to into in second the if that, X end. come spend X towards months, So will X/X X going in if remainder will come

So build it's XX the build that ratable -- course over that XX-month cycle. fairly of to

cancellation low, the institutional? then on so? risk, right, the Commercial, less And pretty

in facilities, again, true example, of education, perfect hospitals, that virtually gets the Yes. particularly referendum canceled. usually as you these like. health never that's about a when I with things mean, sort Same things, some care, care is health of think

scenario start worked lying sort So say the can I'd like a be I something where to of process. canceled way once its that recall that it's has been through

thinking M&A a got on Jeff there? aggressive how thoughts a leaning And your How authorization you willingness you're look good As on are large bit the is? buyback more to the What it are little You've in on on actionable more cash year? a looking side. sheet. said, flow, that strong then obviously, as you be at about balance thoughts funnel and at any next how

mean, proprietary I first. to I'll hit we continue Yes. Obviously, M&A cultivate ideas.

at take value We of confidence we of intrinsic And some see course the We do the where the as sort very months we're the aggressive relates obviously, we we want conversion dislocation stock sheet. continue think in pragmatic a and of have that the balance flow categories advantage are I what close look price to. the we'll cash any and more some as think projections at take take to we'll of.And over we to think be is. we that that, the pretty to approach. And there flow as the to next if well that is look, cash look in things it a and XX our that buyback, think

we'll So see.

stock a we've the pattern we think $XX, but less. $XX look bit at to when recognition, a bought been it lot. we was When some, bought -- we bought $XX little I or if was you $XX,

think continue I forward. follow absolutely to so, we that will going And philosophy

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

little about model to a how business the more protect that's I'd and bit like the margins. to likely talk

of to heavy more your us a fair are used model. probably I the is kind different bit companies, design business with and most source here manufacturing model business think of

you XXXX, the decremental variable let's margins just that, revenue expected that talk more of in expect for is business in should model on that margins, what downturn, kind down is say, we could about kind given of than more potential you? So flexible for a what

Yes.

out, point highly as terms think, we is employees, is From -- I of have or X,XXX in think you I model employee plus minus. which -- our per employee, an so variable. about, $XXX,XXX standpoint,

So reps very to and through are that We commission based. efficient. XXX% productive market third-party go

side, think agility bit same on downside, and is we're the obviously, sales capital. degree of the the decline, on So flex out I to design, And see we capacity for and having the on in on not on growth we're a true I a created upside is perfect. of we whole spending fixed we've see think our to business penny requirements the a when selling little And the not uncertainty built the costs.So expense the flex bunch that downside. by a cultivated is model the

And depend on so, on again, We downside. high We'll be have category. just say, our obviously let's -- they'll margins the efficient and I think decremental margins. the very, product

we something not will scenario the efficient see in I But very avoid. we that's think that where So can it without declines, be and question. that's

you of make. reshoring of up some the some important about want $XX chain. chain million on to savings I to supply comment Maybe Yes, to that's think up point And then follow to there's made an Mexico, move XXXX. I supply into

on and some color what looking savings to those could generated? there how at be provide If you doing are you're

Yes. resilience a I lead rate the probably outsourcing are some that a we've closer currently that more and repositioning little to well at well model. that, X certain are, in into a again, tariff business a see of we as mean, That's vertically our more we're we suppliers incremental from for $XX favorable those combination from just to perhaps from to go X excess beginning position I been as perspective.So in months, as in think, working perspective, of integrated now bit benefit regions things building of digital categories see a run it today as that time relatively perspective in are 'XX. large level in a into million of some

$XX from we've But think to in things activity about XXXX, So those of plus of way on. of are it $XX it some an think through chance got the the in and a get million we've There's is are million that well end we synergies XXXX. 'XX. coming we chain got rolling incremental I the supply underway at

And Ritchie Joe your of from Goldman Sachs. the next question line comes with

for impact on the to SKU going looks X-point touch we it in fourth rationalization a it's Can the X be second? about a So just maybe quarter. like to

As what's kind right of think impacting you XXXX? the in about kind potentially growth XXXX, piece that of organic framework for

this Joe, Mark. is Yes,

modest. I think next the impact be will year in

to X this said X You quarter.

next year. about -- million that $X think to $XX million it's year range I next in

it of sort it X/X hitting about of it So think this as and next year. X/X of year

So growth a next of overall, point under year. impact

And question. Great. guess follow-up my quick All I just right. Okay. then

So clip business seems been nice has a it for like you. the at water growing clearly,

in the level sound I the thinking happy at this of how think about, XXXX? for -- business, guys what's XXXX? point. kind of you exiting you pretty kind regarding you are of growth framework kind of help what's guess, integration set revenue kind I Elkay And are again, the Elkay baseline can you for Elkay the guys

this the going to turned But a business business, in range months I the benefit it XX% we've XX% of in a you growth the franchise Elkay that would realize part forward. anybody think say, water or stand-alone that point been essentially a XX% in the good. I past the organic piece like merger it ton secular lost something -- the we the with, that that that's environments taken being on But and fully change result getting an was don't identify massive category a of what on was basis we've at Yes. the on integration, obviously business things commercial say at we've running the And grow on that the have of was margins legacy our I and the we owning and XX better of be well sink out business in overall wanting as even are we're in average highly been a to a want point. already I time around line done business true profile basis at into this protect the from plus -- which exits profitable growth that's that that's and of above able think for backs that was business, the category fleet somewhere the about we've have roughly top is for the drinking all 'XX.So it mean, in over of a investments that and the drinking doing.So it think invest water it's of work things the or shouldn't synergy to in made at a you don't when a water suffice and when in particularly it don't that time growth, acquisition in discretely this people that can today drinking to Elkay, opportunity Zurn why of because going the so the investing what the grow and aggressive way was in time. frankly, way we've meaningful or

answer didn't question think it. about specifically, feel I your really but we I good So

Okay. No, that's helfpful. super

don't in If going more I'm you here. sneak to to mind, try one

expect you a of get some the you what environment, lot does a are business today, what in questions bit environment, negative where and already of next do in the know we the costs potentially a of be one growth on Just pricing like year? XXXX? get your pricing context what Given would material slower could a for volume raw to

will be see that shares, that giving it be think we leading back a innovation, we products, where have will I scenario some. opportunities ton, like that. we strong it And specifications, don't are new price. know don't but there a see I will price. I that things some Particularly, are

our a price. positions I take so, allow that passed small you and in But they in we're modest and is increases grand think leadership a standpoint value pricing look we've specifications over don't are that the good to us giving price. place. some have unique I back We things.And at scheme time, overall scenario along when anything, were the see where market to of a some going that relatively if high props from obviously

sure. I incremental some So But about environment I think for with XXXX. good are into feel a we where opportunity we it's unique think

Dave There to time. at I'll call the you. are questions Pauli, over further back turn no this

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

concludes today's this call. And conference

now may disconnect. You