Zurn Elkay Water Solutions (ZWS) - 2021 Q4 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Consolidated sales declined 4% year-over-year to $526 million, with a 200 basis point benefit from foreign currency translation and a 300 basis point positive contribution from acquisitions offset by an 8% decline in core sales [17] - Adjusted EBITDA was $120 million, with an adjusted EBITDA margin expanding 10 basis points year-over-year to 22.8% despite the overall decline in sales [18] Business Line Data and Key Metrics Changes - Water Management sales increased 12% year-over-year, driven by acquisitions contributing 8 points of growth and core business generating 4 points of growth [19] - PMC sales declined 12%, with a core sales decline of 13% impacted by product line simplification actions [21] Market Data and Key Metrics Changes - Aerospace operations saw a 46% year-over-year sales decrease, but demand improved significantly from the previous nine months [22] - North American distribution channel sell-through improved each month, indicating positive demand trends in non-aerospace end markets [23] Company Strategy and Development Direction - The company is focused on the upcoming RMT transaction with Regal Beloit, tracking towards completion in the fourth quarter of 2021 [13] - Plans for a stand-alone pure-play water business are in place, with a focus on eliminating stranded corporate costs and enhancing operational efficiency [14] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the second quarter and full year 2021, citing strong demand across various platforms and improved backlog [10] - The company anticipates core revenue in the Water Management platform to increase by a high-teens percentage year-over-year, while PMC platform revenue is expected to increase by mid- to high-teens percentage [25][26] Other Important Information - The company reported a reduction in net debt leverage to 2x, remaining at the low end of the targeted leverage range of 2 to 3x [24] - The sustainability report highlighted progress in environmental initiatives and the company's commitment to greenhouse gas emissions reduction [15] Q&A Session Summary Question: What is the expectation for Zurn's new construction market? - Management noted early indicators of improvement in new construction and renovation activity, suggesting a positive setup for growth in the second half of 2021 [42] Question: How should Zurn's margin progression be viewed? - Management indicated that margins would not match last year's levels but would improve over time, with expectations for Hadrian's margins to reach the high teens by the end of 2022 [44][46] Question: What is the outlook for PMC incrementals? - Management expects mid-30s incrementals in Q2, with potential for improvement in the second half of the year as aerospace growth resumes [50] Question: How is the company managing inflation and supply chain issues? - Management stated that they are effectively managing inflation and supply chain challenges, with no significant issues anticipated [52][53] Question: How will government spending on water infrastructure impact Zurn? - Management highlighted that increased funding for schools and general stimulus funding would provide tailwinds for the Water Management platform [79] Question: What is the long-term growth outlook for Zurn? - Management expressed confidence in achieving 5% to 6% compounded core growth over the next few years, with potential for better performance due to favorable market conditions [59] Question: Is there potential for Zurn to expand globally? - Management acknowledged opportunities for inorganic growth both in North America and selectively outside of it, indicating a potential for a more global business in the next five years [65]