Zurn Elkay Water Solutions Corp Q1 FY2025 earnings call

Key Points

• Todd Adams noted a solid Q1 with 5% organic growth, 110 basis points EBITDA margin improvement, and cash flow ahead of expectations. Little impact from tariffs in Q1, with price increases effective in Q2.
• Supply chain strategy focuses on minimizing China exposure, competitively advantaging via cost, lead time, quality, and dual sourcing. Lead times for supply chain changes are measured in years due to equipment, protocols, and relationship building.
• Sustainability efforts highlighted: 600 million gallons of filtered water delivered in Q1, up 33% year-over-year. Associate-submitted hashtag CI projects up 60% year-over-year.

Tariff Impact

• Current tariff cost impact for 2025 is expected to be between $45 million and $55 million. The company has a multiyear strategy to reduce China exposure, with direct material spend from China to be under $30 million by end of 2026.

Sales for Q1 2025 totaled $389 million, with 5% organic growth. Adjusted EBITDA was $98 million, and the adjusted EBITDA margin expanded 110 basis points year-over-year to 25.2%. In terms of direct material spend in 2024, 59% of COGS related to direct material, with 44% from North America, 25% from China, and 31% from other countries outside North America and China. By the end of 2026, the direct material spend from China is projected to be under $30 million, reducing to less than 2% to 3% of COGS.

Q2 2025

• Core sales growth expected in the low to mid-single digits over prior year.
• Adjusted EBITDA margin projected to be in the range of 25.5% to 26%, a 20 to 70 basis point margin expansion.

Full-Year

• Affirming original full-year guidance as the first half is on track with the pace needed to deliver the full-year outlook.

• Potential new tariffs from non-China sources.
• Industry constraints: minimal domestic capacity for some sourced items, long lead times for supply chain changes.
• Uncertainty around tariff environment and its impact on demand.

Q: Bryan Blair asked about volume, price contribution, and operating adjustments.

A: Todd Adams stated the initial framework had multiple scenarios, and the response from supply chain and pricing gives confidence to manage at least current guidance, with price increases above normal and no notable change in orders before Q2 price increase.

Q: Nathan Jones inquired about tariffs, price, and demand destruction.

A: Todd Adams said at the dollar level they are price-cost neutral, uncertain on demand destruction, but managing effectively with supply chain agility.

Q: Andrew Krill asked about tariffs and supply chain reaction.

A: Todd Adams and Andrew Krill discussed the ability to react to tariff changes by accelerating moves, using consignment inventory, shifting production, and not being single-sourced, expressing confidence in reacting.

Q: Mike Halloran questioned the government channel and capex.

A: Todd Adams said the government vertical is small, not a major headwind, focusing on other subverticals.

Q: Andrew Buscaglia asked about pricing and future implications.

A: Todd Adams said managing through moving tariff parts, confident in navigating with an experienced team, and pricing as a moving target.

Q: Joe Ritchie asked about competitive positioning and share buyback.

A: Todd Adams stated they are well positioned cost-wise, not sharing specific details on competitors; David Pauli said continuing to monitor share buyback based on cash flow and stock price.