Zurn Elkay Water Solutions Q1 2025 Earnings Call Transcript

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Provided by Quartr
April 23, 2025
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Operator

Good morning, and welcome to the Zurn L. K. Water Solutions Corporation First Quarter twenty twenty five Earnings Results Conference Call with Todd Adams, Chairman and Chief Executive Officer David Polly, Chief Financial Officer and Brian Wendland, Director of FP and A for Zurn L. K. Water Solutions.

Operator

A replay of the conference call will be available as a webcast on the company's Investor Relations website. At this time, for opening remarks and introduction, I'll turn the call over to Brian Wendland. Please go ahead.

Bryan Wendlandt
Bryan Wendlandt
Director, Corporate FP&A & Treasury at Zurn Elkay Water Solutions

Good morning, everyone, and thanks for joining 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. This 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. As discussed with prior quarters, we will speak to certain non GAAP metrics as we feel they provide a better understanding of our operating results.

Bryan Wendlandt
Bryan Wendlandt
Director, Corporate FP&A & Treasury at Zurn Elkay Water Solutions

These measures are not a substitute for GAAP. 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 Zurin L. K. Water Solutions.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

Thanks, Brian, and good morning, everyone. Hopefully, everyone's had a chance to read through the release and the charts from last night, so I'll get right to it on page three. We had a solid Q1, '5 percent organic growth, 110 basis points of year over year improvement in EBITDA margins and cash flow ahead of our expectations. I think it's important to point out that there is little to no impact on the Q1 results from the implementation of tariffs, either in terms of additional costs arising from the tariffs and certainly no realization yet from the new price increases we've announced that will be effective as we get into Q2. We're going to get into the details regarding the impact of tariffs in just a few minutes and share what it means to us from both a supply chain strategy perspective as well as from a pricing standpoint, but I'll give you the punchline ahead of time.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

First, we have high confidence we will be price cost positive based on the work and actions we've already implemented and will continue to optimize. Second, which is really important because there's been some confusion by the sell side on this, by the end of twenty twenty six, only 2% to 3% of our COGS will be coming from China based on a glide path that Dave will share in a bit. Before I turn it over to Dave, I think perhaps the most important takeaway this morning is that organizationally, our deep expertise and track record going back decades and tested throughout the initial tariff environment in 2017 and 2018 and again during the pandemic, has only been enhanced through the breakthrough work we've been at for years now. That breakthrough work is us spending the last four to five years to restructure our supply chain towards a scenario where we are sourcing as close to zero as possible from China in the medium term. And as you'll see and hear this morning, we come very close to that by the end of twenty twenty six.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

While our supply chain exposure gets smaller by the day, it's also likely that we may end up with some level of new tariffs from non China sources moving forward. Even with that understanding, we believe we have repositioned our supply chain to be both competitively advantaged relative to our industry and with the lowest total cost supply chain in whatever the new world might look like, along with being dual sourced. For the time being, we're accelerating everything that can be accelerated and like everyone else hoping for a little more clarity and certainty on what this ultimately looks like over the coming months. Now I'll hand it over to Dave to take you through some more color on the quarter.

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

Thanks, Todd. Please turn to slide number four. Our first quarter sales totaled $389,000,000 which represents 5% core growth. Our reported growth was 4% and impacted by one point of currency. In the first quarter, we generally saw our end markets perform in line with the guidance we provided ninety days ago.

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

Mid single digit core sales growth in our nonresidential end markets were partially offset by softness in residential and pockets of the commercial segment within nonresidential. Solid execution on our growth initiatives drove our sales performance to the higher end of the outlook we provided ninety days ago as our first quarter results were volume driven and as Todd said not impacted by the announced tariff related price increases as those start in the second quarter. Turning to profitability. Our first quarter adjusted EBITDA was $98,000,000 and our adjusted EBITDA margin expanded 110 basis points year over year to 25.2% in the quarter. The strong margin and year over year expansion was driven by the benefits of our productivity initiatives leveraging our Zurn LK business system and continuous improvement activities across the organization as well as some carryover benefits of the synergy actions we took last year.

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

Please turn to slide five and I'll touch on some balance sheet and leverage highlights. Back to our net debt leverage, we ended the quarter with leverage below one at 0.9 times. Our 0.9 times leverage is inclusive of the $77,000,000 we deployed to repurchase shares in the quarter. Dollars 55,000,000 of our share repurchases were part of the share offering executed in mid February. Our balance sheet, leverage and cash flow generation are in a good spot as we continue to evaluate our funnel of M and A opportunities.

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

I'll turn the call back over to Todd.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

Thanks, Dave, and I'm back on page six. Here's a glimpse at our Q1 sustainability performance. We've certainly not lost any focus on delivering amazing sustainability outcomes for our customers amidst everything that's going on. And in the past few weeks, we've been recognized for those efforts, including winning a Best Sustainability Reporting Award from IR Magazine as well as being recognized as one of America's climate leaders, number one in Wisconsin, number 55 out of the top five one hundred and number three in the capital goods industry. I'll highlight just one thing here and that's the 600,000,000 gallons of filtered water delivered in Q1.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

That's up 33% over the prior year Q1, driven both by the growth in the installed base of filtered units and improved filtration attachment rates that we've been driving. Lots of things happening in and around drinking water and filtration with new products and traction in new markets and more to come on that over the course of the year, but I'll get at it on Page seven. The purpose of the next several pages is to give everyone a sense of the current state of our spend, split out to identify the tariff impact by geography, what it looks like throughout the balance of 2025 and directionally into 2026. Finally, to give you a sense of the price impact necessary to recover the incremental costs as well as other things we're doing to mitigate the impact of tariffs. As I mentioned earlier, we've been driving a multiyear change to our supply chain strategy, which has been guided by two fundamental principles: number one, minimize our exposure to China and two, competitively advantage ourselves from a cost, lead time, quality and dual sourcing perspective while leveraging third parties, both domestically and internationally.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

Some of the constraints or I guess realities are is, as an industry, there is minimal to no available domestic capacity for significant portions of what we source. That's before taking into consideration the cost based on things like material costs, labor availability as well as capital expenditures required to scale to the levels we and other industry participants would require to meet the market demand. But the thing everyone is gaining a better understanding of in the recent months is that the lead time to make the kind of sophisticated changes we've made to our supply chain is measured in years. As a result of just basic things like equipment lead times, product quality protocols and processes and not to mention building relationships and trust with our supply chain partners. Given our decades of experience with this type of supply chain model, we've been very intentional and measured in our approach to assure that we can scale all these new or duplicate capabilities without impacting our customers.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

And finally, we and virtually every other industry participant and competitor has responded with price increases above and beyond the normal annual price increases to reflect and offset the cost increases we're all seeing if and when these tariffs get implemented. On the next page, Dave will take everyone through some of the initial details to ground everyone on the numbers, and I'll come back with a wrap up. Go ahead, Dave.

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

Thanks, Todd. I'm on Slide eight and want to spend some time on our supply chain related cost structure. As you can imagine, we've had a number of questions on our supply chain, where direct material is coming from and how tariffs will ultimately impact Starting

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

with

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

the box in the upper left hand corner of the slide, we provide a breakdown of the $860,000,000 of 2024 actual cost of goods sold. Dollars $5.00 7,000,000 of our cost of goods sold relates to direct material spend and the remainder roughly $350,000,000 relates to all other cost of goods sold. So 59% of our COGS relates to direct material spend and the remaining 41% labeled as all other cost of goods sold relates to everything else, items like freight, direct labor and overhead. At the center of the tariff discussion is where goods are being sourced and the box on the bottom left of the page helps to clarify what that looks like for Zurn LK. Of the total twenty twenty four direct material spend, 44% of that spend or $222,000,000 came from North America.

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

North America represents our largest concentration of both COGS and direct material. Our 2024 direct material spend out of China was $127,000,000 or 25% of our total direct material spend. And finally on this box, our 2024 spend coming from countries outside of China and North America is roughly $158,000,000 or 31% of our direct material spend. Shifting to the box in the upper right corner, approximately $285,000,000 or 33% of our cost of goods sold are on the surface subject to some level of tariffs. That $285,000,000 is divided up into two buckets, products sourced from China of $127,000,000 and products sourced from all other countries of $158,000,000 With the tariffs in place today, most material purchases coming from China are subject to a tariff as high as 145,000,000 However, there are some exclusions like products that is primarily iron, steel or aluminum that result in a tariff significantly lower than the 145,000,000 The $158,000,000 of product being sourced in all other countries outside of North America and China, there's generally a 10% reciprocal tariff in place, again with some exception.

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

When we add up everything for Zurn LK with the tariff environment in place today, we expect our tariff cost impact before any price for 2025 to be between $45,000,000 and 55,000,000 Todd will cover our response to the tariffs and pricing in a bit. But before we get to that, I want to cover the last box on the slide. As a business, we navigated the initial tariffs that were put in place several years ago very well. While successfully managed the day to day impact of those first tariffs, we also implemented a multiyear strategy to significantly reduce our exposure to China that we are now seeing the benefits of. China is at the center of the tariff conversation today and the last box in the lower right hand side illustrates the work we have done and are currently doing to substantially reduce our exposure to China over the coming quarters.

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

As you can see, our direct material spend from China will be under $30,000,000 by the end of twenty twenty six and significantly reduces each quarter as we move forward. This has been an intentional project over the past several years and we have an exceptional supply chain team both here and in Southeast Asia managing the process. As we continue to gain clarity on the tariff environment this chart will evolve as we accelerate moves out of China, shift production to dual sources and respond to the latest set of rules around tariffs. In the end, what this all means is that by the end of twenty twenty six, we are looking at a combined Zurnalke business that has less than 2% to 3% of COGS coming from China. I'll turn the call back over to Todd to wrap up the tariff discussion.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

Thanks, Dave. And just to wrap it up on supply chain and price cost, and I'm sure there'll be some questions. Our response to the tariff situation or other derivatives of it is grounded in finding the best combination of highest quality, most reliable and best cost supply chain we can. It feels like there'll be multiple episodes or layers to how tariffs will unfold moving forward. However, it does feel like we're going to be in an operating environment with some level of new tariff or added cost for at least the foreseeable future.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

Based on our response to the situation, both through our supply chain actions and selective price increases, we have high confidence in our ability to manage above it and stay in front of it. As Dave said, our China spend gets smaller each and every day. And by the end of twenty twenty six, we'll represent only two to three points of COGS, which means as we cover the costs in 2025, it actually gets easier to cover those costs into 2026. In the meantime, we're going to continue to do what we have been doing, which is managing this on a SKU by SKU basis, supplier by supplier, country by country, and we've got the experience and track record to make it happen. And just to clarify, what we're outlining this morning is based on the scenario in place as of last night.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

As things change, we'll adjust and adapt accordingly. But in any event, our hope is that we give you a better sense of how well positioned we are to manage in this environment. So that's what we know at this point. And I'll turn it to Dave for the Q2 outlook.

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

Thanks, Todd. Before I jump into guidance, I wanted to take a minute to give an update on our CI projects. As you recall from our last earnings call, these are projects submitted by our associates and aimed at getting incrementally better each and every day. We challenged our team at the start of the year to have a substantial increase in the CI submissions and through the first quarter our associates have responded. Year over year the submitted CI projects are up 60%.

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

These are items that save time, eliminate waste and improve day to day processes and are then shared across the organization. Now to the guidance. For the second quarter of twenty twenty five, we are projecting core sales growth to increase in the low to mid single digits over the prior year and we anticipate our adjusted EBITDA margin to be in the range of 25.5% to 26%, which is 20 to 70 basis point margin expansion over the prior year. Within slide 10, we've included our second quarter outlook assumptions for interest expense, non cash stock compensation expense, depreciation and amortization, adjusted tax rate and diluted shares outstanding. Our first quarter actual results and second quarter guidance puts us well on track with the first pace with the first half pace needed to deliver the full year guidance we provided ninety days ago and we are affirming our original full year guidance.

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

We'll now open the call up for questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. As we enter into the Q and A session, we ask that you please limit your input to one question and one follow-up. Your first question comes from the line of Brian Blair of Oppenheimer. Please go ahead.

Bryan Blair
Managing Director & Senior Research Analyst at Oppenheimer & Co. Inc.

Thank you. Good morning, guys. Good morning, morning. Nice start to the year. Kind of goes without saying that a lot has changed since early February when you initiated the know, 2025 guidance.

Bryan Blair
Managing Director & Senior Research Analyst at Oppenheimer & Co. Inc.

But it's encouraging that you've you've maintained your outlook for for core growth, margin expansions. But I I imagine the the bridge looks quite a bit different from from the original framework. I apologize if I I missed some of this detail. I had some technical difficulty at at the outset. But I mean, relative to the, you know, roughly three points of volume, one point of price that you had discussed previously, What's your team now contemplating for volume and price contribution for the year?

Bryan Blair
Managing Director & Senior Research Analyst at Oppenheimer & Co. Inc.

And then beyond pricing, maybe you can offer a little more color on some of the operating adjustments repositioning that will help your team to navigate the uniqueness of this backdrop?

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

Yes, Brian. I think I'll answer it this way, which is I would say separate for a moment what our current outlook is versus what we expect to achieve. I think we've got eight months left in 2025. And as you point out, there's been a lot of moving parts. So there's a premium on being both agile and experienced.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

And so I think the price increases that we've announced into the market would generate price well above the 1% that we're talking about. But we also have eight months to go. And I think it wouldn't be prudent to identify what would be the incremental change to our guidance from a price perspective without sort of contemplating what would be the impact to the end markets over the course of the next eight months, which nobody knows. So I think what we're saying to tell you this morning is our initial framework contemplated a wide range of scenarios. Our response, both from a supply chain perspective and a price increase, gives us great comfort that we can manage to at a minimum the guidance that we had in February and are reiterating this morning.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

And as this thing unfolds over the course of the balance of the second quarter and potentially longer, we'll update accordingly. But I think as Dave shared, we've got, I think, a really solid view on Q2. We think we're really well positioned from the work we're doing on the supply chain front. And obviously, we've announced some price increases as well as the entire industry. And we're all sort of managing this sort of week by week.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

But I think the guidance that we put out is very durable regardless of the environment, but that's the way to think about it.

Bryan Blair
Managing Director & Senior Research Analyst at Oppenheimer & Co. Inc.

Okay. I appreciate the color. And that does make sense. And appreciating that we are early days here, is there anything that you can speak to in terms of impact to project timing or phasing or any notable change in MRO order trends over the last few weeks since the industry has had I would say from clear understanding that pricing was really going to go up materially over the near term.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

Yes. So we pointed out that we really had no revenue impact in the first quarter from it. We did see orders accelerate maybe the last seven to ten days of March and into the first couple of weeks of April, ahead of our $415 price increase. But notably, nothing has been at least that I know of has been pushed, moved or changed. I think that these are buildings that are likely going to be built on the new construction side and really no notable change in the MRO activity at least from what we've seen so far.

Bryan Blair
Managing Director & Senior Research Analyst at Oppenheimer & Co. Inc.

Okay. That is encouraging. I'll leave it there. Thanks again.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

Thank you.

Operator

Your next question comes from the line of Nathan Jones of Stifel. Please go ahead.

Nathan Jones
Nathan Jones
Managing Director at Stifel Financial Corp

Good morning, everyone.

Bryan Blair
Managing Director & Senior Research Analyst at Oppenheimer & Co. Inc.

Good morning.

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

Good morning.

Nathan Jones
Nathan Jones
Managing Director at Stifel Financial Corp

I guess I'll talk a little bit about tariffs and price. I'm sure I'm sure that's all we're gonna talk about today.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

That's shocking. That's shocking.

Nathan Jones
Nathan Jones
Managing Director at Stifel Financial Corp

No.

Nathan Jones
Nathan Jones
Managing Director at Stifel Financial Corp

I know. I'm sure you're shocked. About $50,000,000 of overall cost increase here implies that you probably need, you know, mid single digit pricing to cover that. So first, a clarification. When you say price cost neutral, are you talking on a dollar basis or at the margin line?

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

I think what we're trying to highlight, Nathan, is at a minimum at the dollar level based on the the scenario that we've laid out.

Nathan Jones
Nathan Jones
Managing Director at Stifel Financial Corp

Fair enough. And I guess, I know it's very difficult to to kind of speculate on what these price impact the price increases will have on demand. But you guys kind of reaffirmed the full year guidance. Obviously, price is going be a fair bit higher. Do you just assume that there's some demand destruction that goes along with that and you kind of end up at the same place at the end of the year?

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

I don't think that's the way we've constructed it. I think the perspective I would offer is there could be some demand destruction, but we don't know to the degree what that is at this point. So I think the way to think about it is it's not going to foot across. Old guidance plus price minus something doesn't equal where we are today. I think we're putting it as a placeholder for the time being.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

And as things become a little bit more clear over the course of the quarter, we'll update people as we can. But I think our if I had to call it now, I think that we would benefit from the net price increases on our top line guide for the course of the year. And obviously, that would probably have at a minimum some relatively positive EBITDA impact. But I think it's a little bit too early to make any of those calls at this juncture.

Nathan Jones
Nathan Jones
Managing Director at Stifel Financial Corp

Okay.

Nathan Jones
Nathan Jones
Managing Director at Stifel Financial Corp

I have one hypothetical question for you. I expect that you guys are raising price to cover what the current tariff environment will be. Over the next year and a half, you're going to significantly decrease the amount of product that you're importing from China, which shouldn't decrease your costs. And then you have the potential, and Trump was out yesterday saying tariffs on China are gonna come down a significant amount. If this price goes through and then you start reducing the cost and then potentially the US administration starts reducing the cost, do prices go down or does zone hold the line on that pricing?

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

Well, I think it's it it is very hypothetical. There's only about six nested questions in there. The way to think about it is, Nathan, the normal price increases that we put in for decades, we've never retraced price. I think this sort of feels like a little bit of an unusual environment. And I think we'll have to be smart about it to support the industry and support our customers.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

I will tell you that we monitor all competitive price increases and we're all sort of grouped at the same level. And so I think being advantaged from a supply chain perspective in whatever the environment going forward is will ultimately benefit our profitability. But I think those are a lot of nested hypotheticals. And I think as things clarify, we'll clarify it for you.

Nathan Jones
Nathan Jones
Managing Director at Stifel Financial Corp

I think that answers the question. Thanks very much.

Operator

The next question comes from the line of Andrew Creel of Deutsche Bank. Please go ahead.

Andrew Krill
Andrew Krill
Director at Deutsche Bank

Hi, thanks. Good morning, everyone. I wanted to ask on like your education vertical. Obviously, that's one of your biggest, most important verticals. So have you seen any slowing there or, like, increased hesitancy from customers on the spend?

Andrew Krill
Andrew Krill
Director at Deutsche Bank

And I think the spirit of the question is if, you know, Doge and the Trump administration, you know, cut some spending or have any, any impact there? Thanks.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

We have not.

Nathan Jones
Nathan Jones
Managing Director at Stifel Financial Corp

Okay.

Andrew Krill
Andrew Krill
Director at Deutsche Bank

Great. That is good. And then one more on the, for your guide and and going back to tariffs, just I think seems like one of the bigger potential risks is that this rest of world tariff right now that's at 10% assumed in the guide, you know, goes back or goes up to a, you know, 40% plus type of number. And, you know, this does seem to impact where you have been moving, you know, the supply chain to. So, like, if that were to happen, you know, what's your level of confidence that you can quickly react to that?

Andrew Krill
Andrew Krill
Director at Deutsche Bank

And, you know, can you still affirm this full year guide if that were to happen?

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

Well, I guess, Andrew, I've tried to answer it, I think, at least a couple of times. I think that we believe we have the best cost supply chain in the industry. We are clearly a market leader. If we look at the competitive responses and basically the competitive manufacturing footprints, we feel very comfortable with how we positioned ourselves. In terms of affirming a hypothetical guide based upon a hypothetical tariff increase, I don't think that that would be very wise to do in this moment other than to say, you amongst others thought that we had a big problem heading into this quarter.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

Here is here are the facts as we know them today. Hopefully, the takeaway is that, you know, we're managing it really effectively. And I think whatever the change ultimately turns out to be and it may be multiple twists and turns, I think you can count on us managing it very effectively.

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

Yes. I think too Andrew what I would add is just around the tariffs there's a number of actions that we can take, right? We can accelerate moves out of a certain country. There's levels of consignment inventory. There's levels of inventory that we bought ahead.

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

We can manage receipts, timing of receipts. We can shift production. We're not single sourced on any major product category, so we can shift to a different source. So whatever the ultimate tariff ends up being, I think it's going to change here, we feel like we're in a very good position to react to that and put ourselves in a favorable position.

Andrew Krill
Andrew Krill
Director at Deutsche Bank

Got it. Thanks.

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

Yes.

Operator

Your next question comes from the line of Mike Halloran of Baird. Please go ahead.

Michael Halloran
Associate Director of Research at Robert W. Baird & Co

Hey, good morning, everyone. So first question is just if look back historically and think about channel, and obviously, this is unique, but how does the the the government channel and and specifically in the drinking water side of things, how do they react on the CapEx side when you get these periods of uncertainty? Because you're kinda balancing really good seculars, a lot of need for the drinking water fountain replacement cycle, and the filtration with, you know, limitations potentially on on funding or something else. You know, historically, how does that play out in your mind?

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

Yeah. Mean, specifically the drinking water, Mike, I'm not sure that we have a long history. Do think that the government vertical for us is relatively small. And so I think when we think about drinking water and where we're investing, it's a combination of, as we've talked about, education, health care, and then a lot of other sub verticals beyond that, of which government is one. So I I don't see it as being particularly I don't I don't I don't see it creating a particular headwind, I guess, is the way to say it most most simply.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

But I guess we'll find out. But again, I think we've got enough other really good things going on in terms of product, channel, adjacency, new products, filtration, attachment, you know, that those are all things that are that we can't control or in our favor. I I don't know how to handicap the size or the impact of the government piece, but my sense is that we'll be able to outrun it without much of a problem.

Michael Halloran
Associate Director of Research at Robert W. Baird & Co

Okay. That makes sense. Thanks for that. And then and then just from a timing perspective, you know, made the point of purchasing inventory from your side to get in front of some of these headwinds. It seems if I'm thinking about the second quarter and then the back half of the year that the inventory side keeps you at a pretty good cost contained position for the second quarter and then the pricing is more of a 3Q impact.

Michael Halloran
Associate Director of Research at Robert W. Baird & Co

And so that's how the balancing works out. And I think about that timing appropriately or does that inventory stretch farther, less far in this kind of thinking about the cadence and if that makes sense.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

I think at a high level, it's a reasonable assumption, you know, taking as a whole. It obviously is the devil is in all the details in terms of what we bought ahead, what we've moved, what we're transitioning over the balance of the year. But I think in general, it's not bad way to think about it.

Michael Halloran
Associate Director of Research at Robert W. Baird & Co

Thanks guys. Appreciate it.

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

Thanks Mike.

Operator

Your next question comes from the line of Andrew Buscaglia of BNP Paribas. Please go ahead.

Andrew Buscaglia
Senior Analyst at BNP Paribas

Hey, good morning guys.

Bryan Blair
Managing Director & Senior Research Analyst at Oppenheimer & Co. Inc.

Good morning.

Andrew Buscaglia
Senior Analyst at BNP Paribas

I

Andrew Buscaglia
Senior Analyst at BNP Paribas

just wanted to ask on you're one of the first couple of companies to report so far. And you guys are doing a great job managing through this tariff environment. And I'm wondering, you know, post COVID, we saw a ton of inflation. We had to raise prices above average levels. Similarly, with tariffs, you know, we're we're taking more price.

Andrew Buscaglia
Senior Analyst at BNP Paribas

And I just wonder for yeah. This is a question maybe for all companies, but are you sort of borrowing pricing in a way from the future? And, like, does does something have to get at some point? Right? Or, like, I I understand, you you know, your your commentary on demand destruction, but at some point, you know, how does this end if if you just keep taking price to offset these costs?

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

Well, I I don't think there anyone knows the answer to that. I would tell you that if you look at our end market, which is primarily North America, you know, the there's only a handful of market participants. It's protected through highly highly specified products through reps and channels and everything else. So I think we're all sort of in the same canoe. And so to the degree there's gonna be a school built, a hospital built, a stadium built, you know, I I think that it will need the products that we sell.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

And obviously, you know, I think for for a lot of reasons, if these do go through at the levels that they're talking about, it will create inflation. That does long term, I don't know. It's probably not great. But I think for the near term, we feel very confident in our ability to navigate in front of it. And I also think it's going to be a moving target.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

I think I read some things last night and this morning around the one hundred forty five on China is too high and likely coming down, but not to zero. I think our working assumption is that that 10% sticks at a minimum and maybe goes higher. And so I think we've just got to navigate through all these moving parts for a period of time. But the thing that I think is, again, the most important aspect of this, we've operated this model for decades and navigated through a lot of different dynamics, and this is just one more. And I think that we feel very confident with the team we have, the processes we have in place, our connectivity and the way we manage it with our business system is going to keep us in great shape moving forward.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

And there's a premium on being agile and experienced in this sort of environment, and we think we like our chances.

Andrew Buscaglia
Senior Analyst at BNP Paribas

Yeah. Yeah.

Andrew Buscaglia
Senior Analyst at BNP Paribas

And and you know when I first saw, you know, press release hit and you guys grew organic 5% and made the comment not a not a lot of price in there, I thought maybe you had some pull forward, but then I see on a slide, you're managing customers ordering ahead. So so effectively, you're not really seeing, pull forward. So I'm wondering what's that dynamic like? Are you building a backlog effectively or, you know, trying to trying to control, you know, that level of pull forward in order to maintain some normalcy, I guess?

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

Well, again, I I think it comes down to a bunch of things. Right? I think, you know, just we're sort of minimizing the amount of just pure buy ahead from a price perspective because we've got other customers that need it as opposed to someone buying it and putting it on a shelf. That's for the MRO piece. I would tell you there's not a lot of people that are buying, you know, drains and large backflow forward.

Andrew Buscaglia
Senior Analyst at BNP Paribas

Yeah.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

Just based on the the size and space constraints and things like that. So we wanna maintain a high level of availability. We don't wanna get into a position where, you know, we're we're creating waste by expediting things or working overtime for something that's not really needed in the moment. So yes, we are managing that backlog to date it in ways that make sense for our customers, protect what's been bought to a degree and seek more clarity on what the rest of the year looks like. So I think we're managing it literally day to day customer by customer, SKU by SKU.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

And I think our teams are doing a really good job of that and are very experienced in doing that.

Andrew Buscaglia
Senior Analyst at BNP Paribas

Got it. Thanks, Todd.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

Yes.

Operator

Your next question comes from the line of Jeff Hammond of KeyBanc Capital Markets. Please go ahead.

Jeff Hammond
Jeff Hammond
Analyst at KeyBanc Capital Markets

Hey, good morning, guys.

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

Morning.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

Morning, Jeff.

Jeff Hammond
Jeff Hammond
Analyst at KeyBanc Capital Markets

Thanks for the color and a lot of good detail here. Just want to go back to the bottom right chart on Slide eight. As you think about the ramp down, is this kind of as it was always planned or is that an acceleration? And then two, I think the shift has been to to Southeast Asia. And I think, Todd, you mentioned, you know, there'd be some tariff.

Jeff Hammond
Jeff Hammond
Analyst at KeyBanc Capital Markets

But are you are you continuing to shift where you thought you'd shift? Or are you contemplating, you know, other other locales?

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

I think the only thing incremental, Jeff, would be, you know, we have done some work to source in The US, maybe on an accelerated basis over the course of the last three to six months. So, yes, it it Southeast Asia. Yes, it's parts of Mexico. But I think we've I think the only thing that's changed maybe from our plan is to bring some more sourcing to The U. S.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

And that's reflected, I think, in all the numbers that we're giving you.

Jeff Hammond
Jeff Hammond
Analyst at KeyBanc Capital Markets

Okay. And then, the the 45 to 55,000,000 was a little bit lower. Just kinda doing the simple math. And and I guess, one, I want to understand better the the exclusion, you know, what portion of the China is excluded and what kind of the tariff rate on that? And then, I guess, other moving pieces would be your downshift and mix and kind of how much inventory you have on there.

Jeff Hammond
Jeff Hammond
Analyst at KeyBanc Capital Markets

But it just seems like the pricing, looks like you have two prices that kind of add up to low 20%. It just seems like a big number relative to pretty manageable impact. Thanks.

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

Yes. So I'll take the first part of your question Jeff just on the actual expected tariff costs. So the 45,000,000 to $55,000,000 there's a lot of nuances in there. But essentially if you look at just the tariffs coming out of China there's what folks are calling the IEPA tariffs, the International Emergency Economic Powers Act. There's the reciprocal tariffs that stack on top of IEPA.

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

There's the Section two thirty two steel tariffs. There's the existing from years ago Section three zero one tariffs. And so all of those different tariffs that I just mentioned carry a different weight. The highest being the 145,000,000 the lowest being 20,000,000 And so when you start looking at our receipts you've got to go literally down to the HTS code to understand what HTS code that's being received under and then that impacts what rate you're ultimately paying. And so I think on the surface folks are thinking it's all 145%.

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

That's actually not the case. And so there's a decent portion of our products that fall under that steel, aluminum type exception that are being tariffed much lower than the 145.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

Yeah, Jeff. It's all predicated on the HTS code or the harmonized tariff schedule that Dave talked about. And so each thing that people import gets imported under this particular code. And each code has a particular tariff assigned to it based on the properties and principles of it. And so, you know, this is not a tops down

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

exercise.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

This is what our based on our receipts and our receipt profile and the HTAs codes and quantities that we're importing, this is what it looks like.

Jeff Hammond
Jeff Hammond
Analyst at KeyBanc Capital Markets

That's really helpful color. Thanks guys.

Operator

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

Joe Ritchie
Joe Ritchie
Managing Director at Goldman Sachs

Hey guys, good morning. And just want to say thank you for the transparency on Slide eight. That's very detailed, super helpful. Thanks for that. First question, really, as you kind of think about your kind of relative competitive positioning to some of your biggest peers, I know Watts isn't going to report for another couple of weeks.

Joe Ritchie
Joe Ritchie
Managing Director at Goldman Sachs

How how would how do you think you're positioned from a cost structure standpoint relative to to your biggest peers?

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

We we think we are extraordinarily well positioned from a cost perspective.

Joe Ritchie
Joe Ritchie
Managing Director at Goldman Sachs

Okay. Is there any is there any other other color you can provide just on, you know, what you've heard from either your customers or suppliers in terms of, like, what that actually like, is there a way to quantify that or what that actually means? More details around that.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

Not that we're willing to talk about. I mean, I don't think that I think, you know, everyone makes capacity and fulfillment decisions based on what their core competencies are. We have some competitors that clearly are more vertically integrated for relatively small portions of what we compete with them on. And so think if you listen to the original comments, the capacity available capacity for the stuff that the products that we have is very limited. And yes, there is some captive capacity that certain of our competitors have.

Todd Adams
Todd Adams
CEO & Chairman at Zurn Elkay Water Solutions

But I would just highlight that it's relatively small. And so when you look at the competitive response with respect to price increases and other things, we're all sort of lined up at roughly the same prices, some people ahead, some people behind. And then the decision is how do you want to service that demand from a quality, reliability, lead time and cost position. And I think we're really happy with where we sit competitively really across the board.

Joe Ritchie
Joe Ritchie
Managing Director at Goldman Sachs

Okay, great. And then just my quick follow-up for Dave. I saw you guys accelerated your buyback this quarter. How are you thinking about continuing to maybe more aggressively buyback your shares just given current environment?

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

Sure. So we bought back $77,000,000 in the quarter. I mentioned at the start the $55,000,000 was part of the offering that we did in mid February. I think our cash flow guidance was $290,000,000 for the year. We're confident in our ability to hit that.

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

And we'll just continue to monitor as we have done call it the past two years and make smart decisions from what the stock price is and how much we buy in a quarter. But I think given where our leverage is, given where our cash position and future cash flow generation is, we've got the ability to continue to buy back.

Joe Ritchie
Joe Ritchie
Managing Director at Goldman Sachs

Okay. Thank you.

Dave Pauli
Dave Pauli
CFO at Zurn Elkay Water Solutions

Thanks, Joe.

Operator

There are no further questions at this time. With that, I will turn the call back over to Brian Wendland for final closing remarks. Please go ahead.

Bryan Wendlandt
Bryan Wendlandt
Director, Corporate FP&A & Treasury at Zurn Elkay Water Solutions

Thanks everyone for joining us on the call today. We appreciate your interest in Zurn LK Water Solutions. We look forward to providing our next update when we announce our second quarter results in late July. Have a good day.

Operator

Ladies and gentlemen, this concludes today's conference call. We thank you for participating and ask that you please disconnect your lines.

Executives
    • Bryan Wendlandt
      Bryan Wendlandt
      Director, Corporate FP&A & Treasury
    • Todd Adams
      Todd Adams
      CEO & Chairman
    • Dave Pauli
      Dave Pauli
      CFO
Analysts
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Earnings Conference Call
Zurn Elkay Water Solutions Q1 2025
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