Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Zurn Elkay Water Solutions Corp (ZWS, Financial) reported a 20% increase in adjusted EBITDA, reaching $104 million.
- The company achieved a 370 basis point expansion in adjusted EBITDA margin year-over-year, now at 25.3%.
- Free cash flow for the quarter was $80 million, with $61 million deployed to repurchase nearly 2 million shares.
- The company has raised its full-year outlook for adjusted EBITDA margin expansion to between 200 and 250 basis points.
- Zurn Elkay Water Solutions Corp (ZWS) continues to see strong performance in its sustainability initiatives, with the majority of sales coming from products with sustainable attributes.
Negative Points
- Sales to residential end markets were flat year-over-year, indicating potential stagnation in this segment.
- The commercial end market continues to face headwinds, which may persist in the near term.
- Despite overall growth, the company is experiencing some pressure in pockets of the commercial segment within non-residential markets.
- The company has noted a potential 2-point headwind to overall growth due to commercial market challenges.
- There is a slight anticipated decline in adjusted EBITDA margin for Q3, projected to be around 25%, down from 25.3% in Q2.
Q & A Highlights
Highlights from Zurn Elkay Water Solutions Corp (ZWS) Q2 2024 Earnings Call
Q: Can you offer some finer points on what your team is seeing across institutional versus commercial non-residential verticals, the residential market, and whether you anticipate any sequential change in underlying demands through the back half?
A: Todd Adams, CEO: Commercial has been weak since 2020, and we don't expect significant changes. Institutional markets continue to show strength. Within commercial, about 40-45% is retrofit, replace, break, fix, which remains steady. We are not heavily impacted by the warehousing sector. Overall, we anticipate a 2-point headwind to our growth due to commercial market conditions.
Q: Margin performance has been strong. Can you quantify the synergy realization and discuss normalized core incrementals?
A: Todd Adams, CEO: We committed to $50 million-plus in synergies from the Elkay transaction, and the work is done. Incremental margins are closer to 35% than 30% due to structural changes and mix improvements. Supply chain actions are complete, and benefits will accrue next year.
Q: You guide to 25% EBITDA margin in Q3, implying a slight tick down. Can you explain the reasons behind this?
A: Todd Adams, CEO: There is no significant reason for the slight tick down. We are guiding with less precision. Historically, Q4 margins are lower due to seasonality and lower sales volume.
Q: Can you talk about the trends you're seeing in your business divisions like water safety, flow systems, hygienic, and drinking water?
A: Dave Pauli, CFO: No substantial changes. Each business segment is performing as expected based on their participation in the build cycle. Drinking water has some seasonality based on the school year.
Q: Can you provide color on order rates and any changes throughout the quarter or in July?
A: Todd Adams, CEO: Order rates were consistent throughout the quarter and remained steady in July, aligning with our guidance and outlook.
Q: Can you discuss your capital allocation strategy, particularly regarding share repurchases?
A: Todd Adams, CEO: We repurchase shares based on intrinsic value. We are likely to continue repurchasing shares consistently. Last year, we repurchased $125 million, and we are at $80 million year-to-date.
Q: Can you talk about major growth initiatives, especially in the drinking water business?
A: Todd Adams, CEO: We have substantial growth runway in commercial brass and flow systems. Drinking water is a key focus, with double-digit growth in the installed base and legislative support in states like Michigan, Wisconsin, Minnesota, and Pennsylvania.
Q: Are you seeing any trend differences between the MRO side and the new build construction side of your portfolio?
A: Todd Adams, CEO: Retrofit, replace, or break, fix is steady. New build institutional is stronger than commercial and residential. Retrofit replace is growing steadily in the low-single digit range.
Q: How do you think about your market outgrowth longer term?
A: Todd Adams, CEO: Historically, our growth algorithm has been a couple of points of market, price, and outgrowth. Drinking water should grow faster than the market, contributing to mid-single digit growth.
Q: Can you discuss the margin outperformance and forward guide?
A: Todd Adams, CEO: Margin performance is driven by structural changes and continuous improvement activities, up 42% year-over-year. This relentless improvement will continue to drive margins.
Q: Can you level set us on your sourcing exposure to China and Mexico, and how you can modulate if tariffs step up?
A: Todd Adams, CEO: We have de-emphasized China in our supply chain since 2016. We are well-positioned to absorb potential tariff impacts due to our diversified supply chain.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
