Zurn Elkay Water Solutions (ZWS) - 2023 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Q3 2023 sales were $398 million, with a proforma increase of 100 basis points year-over-year [12] - Adjusted EBITDA increased 15% year-over-year to $96 million, with an adjusted EBITDA margin of 24.1%, up 410 basis points from the prior year [14] - Record free cash flow of almost $100 million was achieved in the quarter, with a net debt leverage of 1.2 times [7][15] Business Line Data and Key Metrics Changes - Core sales growth in non-residential markets saw a mid-single digit increase, while residential markets experienced a mid-teens decline [13] - Proforma orders increased high single digits year-over-year, with non-residential order growth above the fleet average [13] Market Data and Key Metrics Changes - The company expects mid-teens organic growth for drinking water in 2023, despite some market uncertainty [10] - The non-residential construction market is projected to remain steady, with institutional starts averaging 80 to 90 million square feet per quarter over the past five years [29] Company Strategy and Development Direction - The company plans to introduce more new products in the drinking water category over the next 12 months than in the past decade [9] - Focus on sustainability and addressing climate risks related to water scarcity is a core part of the business strategy [20][21] Management's Comments on Operating Environment and Future Outlook - Management acknowledges increased market uncertainty but does not foresee it as a significant issue for 2024 and 2025 [11] - The company is confident in its ability to maintain high growth rates in drinking water and filtration despite potential market challenges [48] Other Important Information - The company has received high sustainability ratings from various agencies, ranking in the top percentages of its industry [19] - A new PFAS filter has been launched, enhancing the company's product offerings in response to regulatory changes [24] Q&A Session Summary Question: What prevents continued growth in drinking water for 2024? - Management sees no significant challenges to growth in drinking water, expecting high confidence in continued growth [48] Question: What are the impacts of new institutional versus commercial non-residential exposures? - Management anticipates a slight decline in commercial construction but sees potential for growth in other areas [50] Question: What caused September's performance to be below expectations? - The decline was attributed to retrofit and replacement business, particularly in the Northwest and New England [55] Question: What is the expected impact of SKU rationalization on organic growth in 2024? - The impact is expected to be modest, around $9 to $12 million for the year [83] Question: How does the company view pricing in a slower growth environment? - Management expects to maintain pricing power and sees opportunities for modest price increases in 2024 [88]