Zurn Elkay Water Solutions Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2023

There are 10 speakers on the call.

Operator

Morning, and welcome to the Zurn LK Water Solutions Corporation Second Quarter 2023 Earnings Results Conference Call with Todd Adams, Chairman and Chief Executive Officer Mark Peterson, Senior Vice President and Chief Financial Officer and Dave Pauley, Vice President of Investor Relations for Zurn LK Water Solutions. This call is being recorded and will be available for 1 week. The phone numbers for the replay can be found in the earnings release the company filed in an 8 ks with the SEC yesterday, July 24. At this time, for opening remarks and introduction, I'll turn the call over to Dave Pauley.

Speaker 1

Good morning, everyone, and thanks for joining us on the call today. Before we begin, I'd like to remind everyone that this call contains certain forward looking statements that are subject to the Safe Harbor language contained in the press release that we issued yesterday afternoon as well as in our filings with the SEC. In addition, Some comparisons will refer to non GAAP measures. Our earnings release and SEC filings contain additional information about these non GAAP measures, why we use them and why we believe they are helpful to investors and contain reconciliations to the corresponding GAAP information. Consistent with prior quarters, we will speak to certain non GAAP metrics as we feel they provide a better understanding of our operating results.

Speaker 1

These measures are not a substitute for GAAP, and we encourage you to review the GAAP information in our earnings release and in our SEC filings. With that, I'll turn the call over to Todd Adams, Chairman and CEO of Zurn LK Water Solutions.

Speaker 2

Good morning, everyone, and thank you for calling in this morning. As Dave said, we released our earnings last night and taken as a whole, They were very much in line with our internal expectations, not only for Q2, but really for the first half. It's been 12 months since the Elkay transaction and all the work we did to accelerate the integration and simplify the business is essentially behind us And we're now beginning to see the benefits both from a growth and profitability perspective with the initiatives we've been working on. Sales in the quarter were ahead of our guidance and orders even more so with high single digit order rate growth in the quarter. Profitability of 21.6 percent showed the progression we've been talking about.

Speaker 2

And then, you'll obviously see another step change over the second half that Mark will talk about a little bit later. With our supply chain and service levels now back to pre pandemic levels And even better or shorter in many cases, our free cash flow was again very strong and it enabled us to repurchase 4,000,000 shares in the quarter, Bringing our year to date repurchases to $87,000,000 as total leverage actually ticked down to 1.5. We also Expect that to continue to decline over the second half based on the strong free cash flow expectation and end the year right around 1.2 times. With that, I'll turn it over to Mark and he'll take you through the quarter.

Speaker 3

Thanks, Todd. Please turn to Slide number 4. On a year over year basis, our 2nd quarter sales increased 42% and were above the high end of our outlook for the quarter at $403,000,000 The Elkay merger contributed 47% year over year growth and our core sales decreased 5% from the prior year. On a pro form a basis, Including Elk in the prior year Q2 and reducing those sales for the $29,000,000 impact from the product line exits that we have outlined, Core sales decreased 1% year over year. As we discussed on our call last quarter, our year over year Q2 core sales growth was impacted by the timing of orders and shipments in the prior year as we began working down an elevated backlog in the Q2 of 2022.

Speaker 3

Breaking down those pro form a core sales, sales to our residential end markets declined in the mid teens year over year As we've expected, which is substantially offset by a low single digit increase in core sales to our nonresidential end markets. While pro form a core sales modestly declined, Pro form a core orders increased at a high single digit rate as we anticipated with drinking water growth outperforming the fleet average. Turning to profitability. Our adjusted EBITDA was $87,000,000 in the 2nd quarter and our adjusted EBITDA margin was above the high end of our outlook for the quarter at 21.6%. This compares to 64,000,000 22.6 percent in the prior year Q1 Q2.

Speaker 3

The benefits of price realization and our productivity initiatives, Inclusive of the cost synergies that are a little over $6,000,000 each quarter in calendar year 2023 was more than offset by the sell through of higher cost inventory purchased last year, which was complete during the Q2, investments in our growth and supply chain initiatives as well as the impact of the Elkay merger. When looking at our margins sequentially, we stepped up 210 basis points from the Q1 of 2023. We expect further margin expansion in the second half of the fiscal year. Please turn to Slide 5, and I'll touch on some of the balance sheet and leverage highlights. With respect to our net debt leverage, we ended the quarter with leverage of 1.5 times, Inclusive of deploying $87,000,000 of cash to repurchase common stock in the first half of twenty twenty three $112,000,000 since we started repurchasing shares in the Q4 of 2022.

Speaker 3

With that, I'll turn the call back to Todd.

Speaker 2

Thanks, Mark. We continue to prioritize drinking water and filtration growth based on the massive opportunity We've been investing in an awareness campaign, adding commercial resources, top grading our product offering for simpler installation and maintenance and also advancing the filtration aspect of drinking water with the addition of a PFAS filter that we expect to begin selling sometime in Q4. In the last 90 days, we spent time doing 3 blitzes across states We have advanced legislation that will require more access, reporting on water quality, as well as mandating filtration. K-twelve is a school by school or district by district game where we're engaging with administrators, faculty teams, educators and parents, And we'll continue to do that as Hello. We'll continue to do that as we continue to work at that.

Speaker 2

At the higher end level, we're seeing tremendous traction As both public and private universities prioritize sustainability in their master plans. We saw our funnel For Higher Ed, grow by over $20,000,000 in Higher Ed alone and we hope we continue to see that that will be a significant growth opportunity for us, not only this year, but for several years to come. As we continue to keep sustainability, in front and center in front of all of our stakeholders, Customers, employees, suppliers and shareholders as well as the compounding benefits of all the products. Sustainalytics Just issued a report that rated us in the top 7% of all companies they rate. That's over 15,000 companies and 2 in the top 2% within our end markets.

Speaker 2

As I've said before, this isn't born out of any target to go through the motions. It's fundamental to our business, He's integrated into every asset every facet of our business and our business system, and we truly believe that's adding a competitive advantage to us in the marketplace. With that, I'll turn it back over to Mark, who will take you through our outlook.

Speaker 3

Thanks, Todd. Please turn to Slide 8, and I'll cover the highlights of our outlook for the Q3. For the Q3 of 2023, we are projecting sales in the range of $390,000,000 to $400,000,000 and our adjusted EBITDA margin to be in the range of 23.5 percent Like last quarter, to help better understand the growth trends in the business in 2023, on the right side of the chart, we have presented Zurn allocate pro form a sales The Q3 of last year, which takes our reported sales for the Q3 of 2022, plus the year over year impact of the eightytwenty product line exits we've executed. With respect to the sales outlook, you can see on the page our assumptions for year over year pro form a growth in our nonresidential and residential end markets, which is impacted by the timing of orders and shipments last year as we continue to work down an elevated backlog in the Q3 of 2022. We anticipate pro form a orders in the Q3 to expand in the mid to high single digit range year over year with non residential end market growth above the average Residential end market growth is below the average for the quarter.

Speaker 3

Turning to profitability, our 3rd quarter margin is expected to expand 350 basis points to 400 basis points year over year And 190 basis points to 240 basis points sequentially from the Q2 of 2023 as we begin to fully benefit from the lower commodity and transportation costs we've been experiencing. Turning to Page 9. With half of the calendar year behind us, we've adjusted our full year outlook and now expect Sales for calendar year 2023 to be in the range of $1,525,000,000 to $1,550,000,000 and our consolidated adjusted EBITDA to Similar to the Q3 outlook, we have provided our expected full year pro form a sales growth for our non residential and residential end markets, which is calculated off the prior year reported sales plus LK sales for the first half of twenty twenty two, less the impact of the eightytwenty product line exits we have executed. In addition, we have increased our free cash flow outlook for the calendar year from approximately $200,000,000 to approximately $215,000,000 Before we open the call for questions, just a reminder that we have included on Page 89 our 3rd quarter and full year outlook assumptions respectively for interest expense, non cash stock comp expense, depreciation and amortization, our adjusted tax rate and diluted shares outstanding.

Speaker 3

We'll now open the call up for questions.

Operator

We'll now take a moment to compile our roster. Our first question comes from the line of Brian Blair from Oppenheimer. Please go ahead.

Speaker 4

Thank you. Good morning, guys. Solid quarter.

Speaker 3

Good morning, Brian.

Speaker 4

With regard to your Q3 revenue guidance, I was hoping you could parse that out a little bit more. I know there's a lot of year on year noise, But it seems like there's a fair amount of conservatism baked in if we think about the sequential trend. Most difficult stacked comp in Q2 To typically some seasonal lift in Q3, you noted solid pro form a order growth. I know the backlog unwind is a little more challenging year on year, but perhaps walk us through how you're thinking about the sequential revenue progression.

Speaker 3

Yes. Look, Brian, I think as we've kind of been all year long, We've been a little more conservative with our outlook going into the next 90 days across the board. So I think everything you said is accurate. If you look back Historically, yes, our Q3 tends to be similar to the Q2 from a revenue standpoint, could be a little bit up, could be a little bit down, could be on par. I think as you see in the guide, yes, there's a bit of conservatism that's been our practice this year.

Speaker 3

So nothing different there. I think you're right on the order trends. We expect those to continue like we saw in the Q3. The revenue growth, as you pointed out, clearly is impacted By the backlog, work down that we had last year, so I think the orders are a better proxy of what we're seeing from a demand standpoint. But yes, I think the sequential trends that you've laid out of what you historically see and there's not anything that's imminent that we see that would change that.

Speaker 3

But as you know, we've just taken more of a cautious approach to our outlook this year.

Speaker 4

Okay, understood. And Perhaps provide a little more color on what your team is seeing in your key institutional verticals, current pace of activity, how the project pipeline has developed year to date and specific to Zurn LK, how your The commercial drinking water platform has influenced the pipeline and your forward opportunity.

Speaker 2

Yes, Brian. So institutional is notionally half of our total revenues split primarily between education and healthcare. So I think From a current state perspective, backlogs really across the country in those two verticals continue to be very high. And if you follow some of the leading indicators in that in the institutional end market, they've been quite positive. So obviously, We continue to think that the diversity of the business, adding drinking water specifically, Adding filtration into the educational vertical provides us, I think, a lot of comfort that This is something that we can grow sustainably for a pretty long time.

Speaker 2

There's pockets of strength when you go throughout the country, obviously. And then there's pockets of where there's just less activity, but it's nothing unusual in that institutional end market really since The beginning of the year, so very much on track. Drinking water is certainly helping our value proposition when we're talking to K-twelve schools And colleges and universities because as I said in my comments, sustainability at the university level is increasingly important. K through 12, we're getting solid traction with a combination of legislation and then really just going out School by school and district by district, and communicating what we're doing, which is essentially we can provide clean drinking water to students For $1 per student per year, which is an amazing value prop that we think is going to resonate for a really long time.

Speaker 4

Absolutely. And one last one, I know you're not providing 2024 guidance, But you had put out the $25,000,000 in incremental synergy guide before. Is there any shift to that at this point?

Speaker 2

No, I think it's very much on track. I think the majority of the work is behind us. There's some things that we're wrapping up over the course of The next 2 to 3 months, we have obviously announced the closure of 1 of our facilities and consolidation of that into 2 different LK facilities that's primarily around zinc manufacturing. So that work is underway. And so we'll hit the ground running On Oneonetwenty 4 with another $25,000,000 into our earnings run rate.

Speaker 4

Understood.

Operator

Our next question comes from the line of Jeff Hammond from KeyBanc. Please go ahead.

Speaker 5

Hey, good morning guys.

Speaker 6

Good morning, Jeff.

Speaker 3

Good morning, Jeff.

Speaker 5

Hey, so it sounds like the order rates were maybe a little bit better than you expected. Can you just speak to what's coming in better? And then just within the different product categories, is it pretty broad based or are there Outliers, good or bad?

Speaker 2

Yes. I think that the 2 sort of outperformance areas for us were a combination of residential Improving. We started to see resi deteriorate a little bit in the Q3 and more into the Q4. We've seen that begin to snap back. I think as housing starts begin to stabilize and improve, we're seeing a little bit of traction there.

Speaker 2

And then obviously drinking water, The comparable is easy given the backlog reduction, but we're seeing significant order growth In both the bottle filling units as well as filtration. So those are the two outliers. Everything else is sort of around Sort of the fleet average. We saw some strength in our flow systems business, which is very encouraging. And then we continue to do just a great job in water safety and control.

Speaker 2

So it was relatively broad based, but Combination of residential and then drinking water were the two areas of sort of outperformance.

Speaker 5

Okay. Just on the Clean Water kind of initiative, can you just talk about Momentum versus expectation and just what you typically see from a sales cycle given It seems very kind of local regional.

Speaker 2

It is, particularly on the K-twelve Site of Life, obviously, our specification share across the country is significant. And so as Schools get built or retrofit. We start the game in a really good place. I think what we're trying to do is drive More access points inside of these particular schools, obviously getting them to understand the benefits of locking in A filtration solution over a period of time, but you are correct. I mean, it is a school by school, district by district.

Speaker 2

There's not a Overarching sort of mandate of when to do it and how to do it. And so that's where Partnering with the commercial resources we've added internally along with our 3rd party reps, we're able to go out and really understand where are the Big school districts, what are the influencers? What's our competitive position? And then how do we sort of get that work done for them Over the time period that works for them. I think that is the one thing in K-twelve that's a little bit unique relative to higher ed, Which is students are not there in the summer.

Speaker 2

So the vast majority of the work gets planned, I would say, late winter into spring so that it's done Over the summer, and then it gets a little bit quiet as kids are back in school. I think universities, that's obviously sort of a living, breathing thing almost every day of the year. So that work gets done over time. So I think from a school perspective, particularly on K-twelve, I think the momentum that we're building this year will benefit us even greater into next year, right, as they begin to do some more long range planning on what they're doing. I'd also say, Jeff, that in a case where a school district may have 500 units, They're not going to replace or upgrade these all at one time.

Speaker 2

They're going to do school A, B and C and then they're going to do the remainder over time. So It's really one of those things where the business and the opportunity given the 131,000 schools, It's just huge. And when you get to the end, we'll be ready to retrofit and replace the others. So It's a longer process, but one that I think has far more durability over a really, really long period of time.

Speaker 5

Okay, great. Last one on buyback. You guys seem to be running ahead Kind of the pace for the $100,000,000 Just wondering if you're thinking same or different around buyback just given the stock move?

Speaker 3

Thanks. Yes, I think we're sticking to that at least $100,000,000 We're not I'll put a new number on at this point in time, but I think it's been for us the time was really positive for us with the first half and the To buy the stock at the prices that we did, we'll continue to keep a balanced capital allocation strategy in place over not just this year, but going to next year as well.

Speaker 5

Okay. Thanks guys.

Operator

Our next question comes from the line of Andrew Krill from Deutsche Bank. Please go ahead.

Speaker 7

Thanks. Good morning, everyone. I wanted to ask on free cash flow. I think it was nicely above what we were That thing this quarter, I want to see, I guess, any of like the big drivers of that strong free cash flow. It seems like inventories helped, and maybe just how you're thinking about that for the rest of the year?

Speaker 2

Yes. I think for us free cash flow

Speaker 3

has been a positive this year. The team has done a really nice job with managing the trade working capital in the business This year working down the inventories from the elevated levels last year. So I think as we look at the balance of the year, I think from a timing standpoint, We'll probably it will probably reduce a bit in the 3rd quarter and then uptick again in the 4th quarter from a phasing standpoint based on timing of some payments. But at the end of the day, as you know, we took our outlook up $200,000,000 to $215,000,000 so good momentum, That will be a strong year of cash flow and we see a lot of good momentum going into next year as

Speaker 2

well. Andrew, I think the one point to make is Our overall lead times in our supply chain are roughly half of what they were a year ago. So obviously, We've had a view on demand and a view on that we were going to be able to get back to that. And obviously, A function of that is then selling through that high cost inventory that you saw us do in the first half. So it all sort of works together In terms of the demand that we are seeing sort of broadly in line with what we're expecting, maybe a little bit better.

Speaker 2

Our supply chain is back to Pre pandemic levels notionally half of what it was 12 months ago and then where our service levels are high. So the net effect of that is The margin progression that we communicated tracks very nicely with the cash flow. So from an accounting basis, Our margins were, I would say, understated relative to the current purchases that we were making. So you'll see that as Mark pointed out in the outlook that drives the vast majority of that margin step up in the second half.

Speaker 7

Okay, great. All makes sense. And for my follow-up, just on the guidance, I think maybe more for the 2023 guide, just are there what are some like the major puts and takes that would push you to like the low versus higher end of the range? Thank you.

Speaker 2

Well, I mean, I'll let Mark comment as well, but I think it's really 5 months left in the year. There is always going to be a range of outcomes. I don't think there's anything specific that would push us one way or another. I think the order trends that we've seen through July here would definitely give us confidence that the range is appropriate given the length of time

Speaker 3

Yes, I would agree. We just the portion you've taken us earlier, just accommodating a broader range of outcomes and the outlook. So we're staying consistent with what we've been doing through the 1st several quarters. But as Todd pointed out, order rates remain In a good spot early in July, that is the case and we'll be back in October to report.

Speaker 8

Thank you.

Operator

Our next question comes from the line of Joe Ritchie from Goldman Sachs. Please go ahead.

Speaker 8

Thanks. Good morning, everybody. Good

Speaker 3

morning, Joe.

Speaker 8

So my first question, maybe just on that backlog comp issue that you guys referenced last quarter. I'm just curious, like what kind of impact Do you have baked in for the rest of the year on just tougher comps in the backlog and what you experienced from a growth standpoint last year?

Speaker 3

Yes. So in the back if you went back and looked at our 10 Qs last year, the backlog reduction And the core business was over $20,000,000 in the Q3, call it closer to $25,000,000 And another $20,000,000 in the 4th quarter. So from a sales standpoint, that's the kind of backlog reduction That we were working through last year.

Speaker 2

I think Joe that to answer maybe the question, I think our Order book to bill, if you will, over the next 6 months is always going to be somewhere around 1. I think we saw As lead times extended through a couple of years post pandemic, that forced different order behavior. I think when you get to where we are today, the backlog sort of sits at the traditional sort of relatively low levels. And the second half would imply a book to bill right around 1, maybe just a touch better.

Speaker 8

Okay, great. That's helpful. And then I heard your comments earlier around margins accelerating into the back I was really curious around 4Q specifically because historically what we've experienced is a sequential downtick And margins in 4Q versus 3Q, but it seems like the guidance implies something better at this point. So just maybe some thoughts around that, the margin kind of exiting the year and what's driving that?

Speaker 3

Yes. Joe, I would say, I think you will we would still expect a modest margin decline in the 4th quarter versus the 3rd, just to your point as those Seasonally, as those sales sequentially decline, that will put a little bit of pressure on the margin. But I think you'd expect to see A decremental margin or an earnings fall that would be generally better than what you would normally see Because of the cost environment, but I think from a modeling standpoint, I would still anticipate a modest step down in that margin from where we'll see They're just based on the client sales that we always traditionally see seasonally.

Speaker 8

Got it. Yes, that makes sense. Maybe if I could squeeze in one more just on LK. So it seems like clearly you guys are going through some product line simplification on that business. I'm just curious just As you kind of now look at the what's left in LK and the margin profile of that business, Maybe just kind of some thoughts around that profile and how that's changing with the product line exits that you guys are doing?

Speaker 2

Well, I think if you I think the cleanest way to observe it is really look at the gross profit margins Year to year and then obviously with what our guidance implies. And so in aggregate, we're approaching 46%, somewhere in that range over the back half. And obviously, we've got synergies into next year. And so I think Obviously, the business has improved materially from a profitability standpoint from 12 months ago. And the simplification is driving that gross profit improvement across the existing and remaining Part of Elkay, which we went to great lengths to try to communicate over the course of the last year.

Speaker 2

But obviously, when you look at that overall company gross profit margin At that sort of level, I think it speaks to the simplification work that was done is having quite a dramatic impact.

Speaker 8

That's great to hear. Thank you.

Operator

Our next question comes from the line of Mike Hollerin from Baird. Please go ahead.

Speaker 6

Hey, good morning, everyone. So just a couple of questions here. First, how How are you guys thinking about the M and A funnel pipeline? Obviously, you feel very comfortable with where the LK business is from an integration perspective or at least Getting the simplification efforts well underway, I'm guessing there's a lot of willingness to bring smaller things in. Just curious how that pipeline looks And then how you think actionability looks?

Speaker 2

Yes. I think Mike, like always, I think we take the long view on M and A and Spend a great deal of time cultivating things over years. And so I think that from a funnel standpoint, I don't think that there's anything Materially new in. I don't think anything has changed from transactions that have occurred that would have Taking things off the Board. And so I think it's just a matter of continuing to develop those relationships, I think over the course of the next 12 months, which is probably a better horizon than the last the remainder of the year to think about.

Speaker 2

We certainly think that We're going to have several opportunities to bring things in that are complementary to what we do, fill some product areas And maybe strengthen us in some of our existing categories.

Speaker 6

Makes sense. And then in the prepared remarks, you briefly mentioned A PFAS filter, just a little bit more context there, it seems a little bit more, I don't know, manageable relative to a lot of the remediation Efforts in product categories and services we've seen for PFAS so far. So just some thoughts there, please.

Speaker 2

Yes. I think we've been working internally and then some with some third party partners to develop the kind of filter that can be integrated into a bottle fill that will eliminate PFAS. We've been through the pilots. We're sort of ramping production and something will be beginning in the market in the Q4. And so I think it's just one of those things where For a relatively low amount of money, if you can eliminate lead and PFAS into drinking water, for kids at school, it seems like a pretty good idea.

Speaker 2

So I think our team is, I would say, making great strides on the filtration side of things. And We're seeing it resonate when you actually sit in front of administrators, facilities people, and all the things we're also doing with the product To make it easier and quicker to install, gain an understanding of the life of the filter and ensure that it's done on time, All things that are incremental value add to these schools that have 1,000,001 things going on every day. And if you can Ensure that the water that the kids are drinking is lead free and PFAS free, It's a pretty good value proposition and one we're excited to bring to the market. Makes sense. Thanks guys.

Speaker 2

Appreciate it.

Operator

Our next question comes from the line of Brett Linzey from Mizuho Americas. Please go ahead.

Speaker 2

Hi, good morning all. Congrats on another good quarter.

Speaker 7

Thanks, Todd.

Speaker 3

Good morning. Thank you.

Speaker 2

Yes. Just want to come back to price. Curious what your assessment is on the state of pricing? Are your competitors taking actions this year? Are you on hold?

Speaker 2

Just curious what You're expecting and seeing out there in terms of price and the contribution for this year?

Speaker 3

Yes. I think the pricing environment has been very stable this year. There's been some modest pricing actions taken in certain pockets across The industry, but nothing remotely close to what we've seen over the past several years. So I would characterize it as a very, very stable environment back to sort of normalizing the pricing environment That's continued to stick. There's not been price giveback in this environment.

Speaker 3

So I think I'd call it stable only going into next year and beyond. It kind of looks like it's getting back from a normal range where we've always historically generated 1.5 to 2.5 points of price in a given year. And we think It feels like it's back to normal trends on a go forward basis, Brett.

Speaker 2

Okay. Yes, thanks for that. And maybe just shifting to the synergy cost actions, I believe Originally, you were looking to achieve the $50,000,000 over a 2 year period, but just curious how the integration has progressed relative to the original timeframe. It does sound like the consolidation efforts or at least versus my expectation are a little ahead of schedule, but curious your thoughts there. I think in aggregate, Brett, when we announced the transaction a year ago, we outlined 50,000,000 We obviously got a running start over the back half of last year.

Speaker 2

We got 25 Plus this year, and we're targeting another 25. So in aggregate, it will probably end up being a little bit more than the 50 that we originally contemplated, But it's essentially on the same timeline. I think the only acceleration was some of the Simplification work that we did really from July through December, because we just felt like Getting that piece behind us quicker, sooner would aid everything else, whether that was supply chain, whether that was Organization, whatever it might be, we sort of got ahead of it early, but since then we've been hitting our marks Sean, whether it be an announcement or internal work that needed to get done to facilitate a next set of moves. So very much on track, taken as a whole, probably a little bit ahead early, the last 6 months of last year. Yes, got it.

Speaker 2

Thanks a lot. Best of luck. Thanks. Thanks.

Operator

Our final question comes from the line of Nathan Johns from Stifel. Please go ahead.

Speaker 2

Good morning, everyone.

Speaker 6

Good morning. Good morning.

Speaker 9

Follow-up question on margins here. Guidance for the back half of the year, 23.5 percent plus. Obviously, there's been a lot of disruptions over the last 12 months with Supply chain and high priced inventory and freight and logistics and integrating okay and all that kind of stuff. Are we through all of those meaningful Hits to cost, is this are we looking at what is basically a normalized environment in the back half of the year? Or are there transient costs or benefits in the back half of twenty twenty three still there that we should be thinking about going away in 2024?

Speaker 3

I don't know, Nathan. There really is nothing that's a material transient cost. I think you are starting to see Margins getting into that normalized run rate in the back half of the year. As you want to make sure, obviously, there's always Investment in our business and things that we're doing to grow the business and invest in our supply chain initiatives as well as growth initiatives. But there's nothing to point to In the back half of our year, there's an outsized unusual cost that would go away next year or an outside benefit that doesn't repeat.

Speaker 3

We talked about the synergies we have next year, going into the $25,000,000 So I'd say no, nothing unusual non recurring in the back half that would impact the next year.

Speaker 2

Nathan, the only thing I would say is based on what we know today, obviously, nobody Envision container costs going from a couple of $1,000 to $22,000 and now round tripped. So I think given what we see, and assuming no event specific challenges, I think Mark's comments are right. I think the run rate is sort of the run rate. And we've got synergies that We have a high degree of confidence in. And obviously, it assumes sort of a muted inflationary environment, Which is also reflected in a relatively muted pricing environment.

Speaker 2

So all things considered, I think if we can Deliver the second half like we were projecting. I think it bodes well heading into

Speaker 9

For 2024 then is, if we're expecting another $25,000,000 of synergies next year, which is about 150 basis points On a 23.5 percent plus, is there any reason why we should not be expecting 2024 margins to be 25% plus?

Speaker 2

Well, we will talk about 2024 in 2024, but I think your thesis Should we continue to see margin growth into the future? I think the answer is yes. We're obviously going to continue to make growth investments, but taken as a whole, that is the right sort of algorithm With obvious puts and takes given comparables and whatnot and the environment. So we're not going to guide for 2024. We're going to deliver Q3 and we'll come back and talk about Q4 in October.

Speaker 9

Fair enough. I just wanted to one final one, a follow-up on one of Brian's questions. He asked about institutional backlogs and the market I just wonder if you could comment on the commercial side.

Speaker 2

I think the It's been an interesting year. We started the year and the world was falling apart as a function of the regional banking crisis and the downstream or collateral impact on the commercial markets. I would tell you that the commercial Specific commercial office end market is a very, very small percentage of our business. Embedded in there are things like retail, amusement, hospitality and other things. And so, I wouldn't say it's An outsized drag by any stretch of the imagination.

Speaker 2

Obviously, it's something we continue to watch. But I think the hyper local nature of what we're doing sort of absorbs a lot of that risk Because there are pockets of activity, there are always going to be pockets of activity across the country. So we're not particularly worried about Office vacancies in Chicago as a specific example. So it's really spreading the risk Across the country, across a whole bunch of different verticals. And then there's always the MRO aspect of what it is we're doing.

Speaker 2

And so Nothing specific to really call out there other than I think there's now a better appreciation that our business is not Particularly exposed to commercial office, and therefore, we'll look for the next opportunity to fill the divot if that happens.

Speaker 9

Thanks very much for taking my questions.

Operator

I would now like to turn the call over to Dave Polly for closing remarks.

Speaker 1

Thanks everyone for joining us on the call today. We appreciate your interest in Juren L. K. Water Solutions and look forward to providing our next update when we announce

Operator

Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now

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Earnings Conference Call
Zurn Elkay Water Solutions Q2 2023
00:00 / 00:00
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