Zurn Elkay Water Solutions Corporation Q2 FY2025 earnings call

• Sustainability: Delivered 1.2 billion gallons of filtered water (up 21% y-o-y), introduced total PFAS filter, prevented 9.6 billion single-use plastic bottles, and $1.4 million in philanthropic giving. - Product Innovation: Launched Elkay Pro Filtration with easier filter changes (≤30 seconds), longer filter life (lead filter up to 10,000 gallons), enhanced aesthetics, and connected capabilities. - Supply Chain: Tariff cost impact for 2025 revised to $35-$45 million (down $10M from 90 days ago); continuing to reduce China supply chain exposure, aiming for <2-3% of COGS from China by end 2026.

Second quarter sales totaled $445 million, representing 8% core growth year-over-year. Adjusted EBITDA was $118 million, with an adjusted EBITDA margin of 26.5%, which expanded 120 basis points year-over-year and is the highest since the Zurn Elkay merger. First half sales increased $47 million with 7% core growth, and EBITDA increased $22 million. Net debt leverage ended the quarter at 0.7x, the lowest as a public company, and free cash flow exceeded $100 million in Q2, ending at $102 million.

• Q3 2025: Projecting core sales growth and adjusted EBITDA margin similar to Q2. - Full year 2025: Raised guidance to core sales growth at least 5%, adjusted EBITDA of $420 million to $430 million, and full year free cash flow approximately $300 million.

• Tariff Uncertainties: Moving target with changes like 232 copper tariffs and trade agreements. - Supply Chain Exposure: Dependence on China, though efforts are underway to reduce it.

Q: Hoping you could offer a bit of color on Q2 growth by product category.

A: Todd A. Adams mentioned all categories grew, with innovation in drinking water, flow systems, etc., driving momentum.

Q: I was hoping to get an update on the end market outlook.

A: David J. Pauli said resi market softer, but institutional, commercial, and waterworks outlooks unchanged from initial guidance.

Q: I'd like to see the new filtration offering at Elkay. In the past, there had been a target out there of getting to around $100 million or so. So can you level set us where you are on that now?

A: Todd A. Adams said target towards $100 million will be raised, growth rate double digits, and filtration category expected to grow.

Q: I guess I'll do a follow-up on the new filtration product there. Is there a materially higher ASP for this kind of product?

A: David J. Pauli said probably a 10% increase in average selling price.

Q: My other question is, I guess, on some of the dynamics that you saw in the quarter. I think you talked about $10 million of demand pulled forward into 2Q, but said that would ship in 3Q. Is that right?

A: Todd A. Adams explained about demand pulled forward in 2Q and how it will ship in 3Q, managing customer demand to avoid inefficiencies.

Q: Just following up on that last one there. I mean the dollar numbers you're talking about from a prebuy perspective aren't particularly large. So I'm guessing you would say that the inventory levels from a channel perspective are relatively balanced.

A: Todd A. Adams said inventory levels are balanced as products are tied to construction or MRO events.

Q: This is Ed on for Andrew. Some industrial companies have cited some concerns on budgetary spending for healthcare and education, which might already be starting to show up in their results, but it doesn't look like you guys are seeing this based on this quarter and last. Can you draw a line as to why you may not see any weakness in these areas yet?

A: David J. Pauli said haven't seen impact as cuts were to specific programs vs. building upgrades, and Todd A. Adams added on lag effect of revenue.

Q: Yes. Great. Very, very helpful. And then I guess somewhat related, -- can you comment on perhaps any -- or the current state of water funding and regulations at both the federal and state level?

A: David J. Pauli talked about state-level filter first legislation, like Michigan passing law, Wisconsin, etc., proposing legislation.

Q: Yes. So I wanted to ask a question. I want to make sure I understand the core sales growth assumption, the 5-plus percent for the year. When I go back and I take a look at your end market assumptions from that February release, it doesn't look like there's a lot of volume baked in and then you're talking about resi maybe getting a little bit lower. And so is the core sales, the 5-plus, is that mostly price? Or is there a volume assumption baked in there as well?

A: Todd A. Adams said 5% is a placeholder, with more price than expected, and unit volumes and organic growth contributing.

Q: Got it. Okay. That's helpful. And then look, the margin is surprisingly upside. I think you made some comments around staying price/ cost positive throughout -- in the near term and then longer term. Clearly, at least today, the tariff impact, the gross tariff impact has come down. How do we think about then kind of like the list pricing that you were expecting to put through when we last spoke versus what actually went through?

A: Todd A. Adams said April 15 price increase, with price in good shape, and continuous improvement activities contributing to margin.

Q: Just back on price. Can you give us price in the quarter?

A: Todd A. Adams said total price year-over-year is probably 2 points, with 1 point from announced price increases.

Q: Todd, you laid out, I think, third quarter last year, some Dodge information and kind of how you think about your end markets. And the idea that with Dodge starts kind of moving in '25, that would give you kind of visibility for better growth in '26. Just wondering, as you see the Dodge start data come in, how that's progressing versus maybe how you would have thought six months ago?

A: Todd A. Adams said Dodge start data still positive, not meaningfully different, and growth in '26 should be fine.

Q: I want to come back to Section 232, so the steel tariffs and then the incremental copper considerations. Are there any hedging mechanics that we should be aware of or that you might be taking and then thinking about any lagged impact as you sort of roll those through on the higher prices later in '25 or maybe in early '26?

A: Todd A. Adams said no hedging, rolling demand view, and no lagged impact.

Q: Just back on the Q3 core sales guide, they are similar to 2Q. Just want to be clear here. So 8% organic in 2Q, are you adjusting out the few points of prebuy as the starting point for Q3? Or are you saying the year-over-year in Q3 is going to be 8% or so?

A: Todd A. Adams said Q3 year-over-year is 8% against same comparable quarter a year ago, not adjusting Q2.