Zurn Elkay Water Solutions (ZWS) - 2022 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The second quarter sales increased by 17% year-over-year to $284 million, with core business growth contributing 15% and the Wade Drains acquisition accounting for 2% [15] - Adjusted EBITDA was $71 million, with an adjusted EBITDA margin of 25.1%, reflecting a 60 basis point improvement sequentially from the first quarter of 2022 [15][11] - Free cash flow for the quarter was reported at $41 million, with net debt leverage at 1.9 times [11][16] Business Line Data and Key Metrics Changes - Core sales growth was balanced across water safety and control, hygienic and environmental, and flow control product categories [15] - The company experienced significant share gains in water safety and control, with a focus on backflow prevention and pressure relief valves [19] - The hygienic and environmental sector is seeing strong demand for touch sensor products and solutions for commercial restrooms [20] Market Data and Key Metrics Changes - Over 70% of revenues are derived from institutional and commercial markets, with healthcare and education being the largest segments [22] - The Dodge Momentum Index, an indicator of non-residential construction strength, reached a 14-year high, suggesting robust market conditions despite economic uncertainties [22] Company Strategy and Development Direction - The merger with Elkay is expected to create significant operational and commercial synergies, with a target of $50 million in savings across SG&A, manufacturing, and supply chain [25][26] - The company aims to be the leading pure-play water solutions business, focusing on sustainability and water stewardship [27][28] - The integration of sales and marketing organizations is a priority to present a unified front to the marketplace [25] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to continue growing despite recession fears, citing a strong demand creation process [50] - The company anticipates Elkay-related sales to be between $145 million and $155 million in the third quarter, with adjusted EBITDA margins expected to expand [31] - Supply chain conditions are normalizing, with expectations for inventory reduction and improved cost environments in the second half of the year [12][13] Other Important Information - The Elkay transaction closed on July 1, 2022, and the combined results will be reported starting in the third quarter [5] - The company has implemented a common business system to enhance operational efficiency and performance [27] Q&A Session Summary Question: Can you provide insights on core growth and any outperforming end-markets? - Management noted strong order rates across all sectors, with no specific outlier, and indicated a consistent high single-digit price growth expectation [45][46] Question: What are the growth dynamics for the drinking water side versus sinks and faucets? - Management highlighted that both categories faced challenges, particularly in lead times for drinking water products, but overall growth remains meaningful [47] Question: Are there concerns about a pullback in business due to recession fears? - Management remains optimistic, citing a strong track record of growth and the potential for double-digit growth in 2023 [50] Question: What is the expected EBITDA run rate for Elkay in the second half? - Management indicated an EBITDA run rate of $85 million to $90 million for Elkay, with adjustments for backlog reductions [56][58] Question: What are the opportunities for free cash flow improvement in Elkay? - Management identified working capital management and capital intensity reduction as key areas for cash flow improvement [91] Question: How is the supply chain evolving, particularly regarding regional concentration? - Management noted a shift away from reliance on China, with plans to continue diversifying supply chain sources [99][100]