Zurn Elkay Water Solutions (US:ZWS)2020-08-02 06:49Financial Data and Key Metrics Changes - For the June quarter, core and reported sales were down 12% at the Rexnord level, with adjusted EBITDA at $103 million and margins growing 120 basis points year-over-year to 23% [7][8][25] - Adjusted EPS for the quarter was $0.36, with a slight increase in taxes compared to previous estimates [8] - Free cash flow tripled year-over-year to $39 million in the June quarter, with a year-to-date total of $147 million [38] Business Line Data and Key Metrics Changes - Water Management sales were down only 5% on a core basis, with adjusted EBITDA increasing by 8% and margins rising 270 basis points to 29.1% [31][32] - PMC sales declined by 15% year-over-year on a core basis, with a decremental margin of 26% despite adverse mix impacts [27][30] - The company experienced positive growth in Asia and renewable energy, but these segments accounted for only about 10% of PMC sales [28] Market Data and Key Metrics Changes - North American distribution business saw a year-over-year decline slightly above the platform average, although sell-through improved in June after a weak May [29] - Demand patterns improved in June and remained stable in July, with a focus on backlog support [29] Company Strategy and Development Direction - The company plans to resume share repurchases and M&A activities in the second half of the fiscal year, focusing on water and consumer end markets [12][13][23] - Investments in strategic areas are being increased compared to previous expectations, particularly in hygienic solutions and connected products [9][47] - The company emphasizes the importance of its culture and operational flexibility as competitive advantages during challenging times [14][15] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to perform despite the challenging environment, highlighting agility and resilience [6][10] - The outlook for the September quarter projects a revenue decline of 12% to 17%, with adjusted EBITDA margins expected between 22% and 24% [33][34] - Management noted that while the aerospace market is underperforming, other end markets are stabilizing, and they remain cautious about future demand trends [60][66] Other Important Information - The company has successfully repaid all outstanding debt borrowed during the crisis, maintaining a leverage ratio of 1.9x [11][39] - The company has been preparing for a tough environment for several years, focusing on streamlining operations and building flexible supply chains [18][19] Q&A Session Summary Question: Can you discuss the difference between the two segments in the 3Q guide? - Management indicated that the outlook for Q3 does not look significantly different from Q2, with July tracking well [44] Question: What are the drivers of the Water margins and their sustainability? - Management noted that a greater percentage of sales are in the retrofit market, which is beneficial for margins, and they are investing in hygienic solutions [46][47] Question: What is the outlook for non-residential construction in Water Management? - Management expressed uncertainty but noted that they have consistently outperformed the market and see opportunities in the retrofit segment [72]