Q4 2021 Zurn Water Solutions Corp Earnings Call
Okay.
Okay.
Speaker 1: Good morning and welcome to the ZERN Water Solutions Corporation 4th quarter 2021 earnings release conference call with Todd Adams, Chairman and Chief Executive Officer, Mark Peterson, Senior Vice President and Chief Financial Officer, and Dave Polly, Vice President of Investor Relations for ZERN Water Solutions. This call is being recorded and will be available on replay for a period of two-
Good morning, and welcome to the Zurn Water Solutions Corporation fourth quarter 2021 earnings release Conference call with Todd Adams, Chairman and Chief Executive Officer.
Mark Peterson, Senior Vice President and Chief Financial Officer, and Dave Poly, Vice President of Investor Relations for Zurn water solutions. This call is being recorded and will be available on replay for a period of two weeks the phone numbers for the replay can be found in the earnings release the company filed in an 8-K with the SEC yesterday.
Speaker 1: The phone numbers for the replay can be found in the earnings release. The company filed in an 8K with the SEC yesterday, February 1st. At this time for opening remarks and introduction, I'll turn the call over to Dave Polly.
February 1st at this time for opening remarks, and introduction I'll turn the call over to Dave Poly.
Speaker 2: Good morning, everyone. I'd like to remind you 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 a
Good morning, everyone I'd like to remind you 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.
Speaker 2: In addition, some comparisons will refer to non-get.
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're helpful to investors.
Speaker 2: 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 …
Contain reconciliations to the corresponding GAAP information.
Speaker 2: consistent with prior quarters, we will speak to certain non-GAAP metrics as we feel they provide a better understanding of our operating system.
Consistent with prior quarters, we will speak to certain non-GAAP metrics as we feel they provide a better understanding of our operating results. These measures are not a substitute for GAAP and we encourage you to review the GAAP information in our earnings release, and our SEC filings.
Speaker 2: 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 files.
Speaker 2: With that, I'll turn the call over to Todd Adams, Chairman and CEO of Zurn Waters.
I'll turn the call over to Todd Adams, Chairman and CEO of certain water solutions.
Speaker 3: Thanks, Dave, and good morning. Hopefully, every land had a chance to read through the release last night, as I thought Dave was going to mention. This is the quarter where you'll see the former Rexdard PMC results presented as discontinued operation.
David Good morning Hope.
Hopefully everyone had a chance to read through the release last night as I thought it was going to mention.
This is the quarter, where you'll see the former.
<unk> P&C results presented as discontinued operations.
Speaker 3: There's a fair amount of moving parts when you go through one of these complex transactions. But from our view, there were no surprises as to how everything shook out as we went through all the transactional accounting, other than a lot of work from Mark and Dave and our meet and lean team, but no surprises.
You know Theres, a fair amount of moving parts. When you go through one of these complex transactions, but from our view.
There were no surprises as to how everything shook out as we went through all of the transactional accounting other than a lot of work for Mark and Dave and our lean team, but no surprises.
Speaker 3: We're really pleased with our fourth quarter results and frankly the whole year of 2021.
We're really pleased with our fourth quarter results and frankly, the whole year of 2021.
Speaker 3: We drove terrific results and executed at a very high level amidst both the complexities of the RFP transaction and separation work as well as the supply chain and logistics dynamic that when you step back from it, believe we manage exceptionally well.
We drove terrific results and executed at a very high level amidst both the complexities of the RMT transaction and separation work as well as the supply chain and logistics dynamic that when you step back from it believe we manage exceptionally well.
Speaker 3: As far as the quarter sales were up 23% year over year, 16% organically, and this is against the fourth quarter last year where we grew 15% and 10% organically.
As far as the quarter sales were up 23% year over year, 16% organically and this is against the fourth quarter last year, where we grew 15% and 10% organically.
Speaker 3: As we communicated last quarter, we successfully worked through some of the temporary logistics constraints we saw in the fall and continue to see a gradually improving market around transportation with respect to availability and cost.
As we communicated last quarter, we successfully worked through some of the temporary logistics constraints, we saw in the fall.
And continue to see a gradually improving market around transportation with respect to availability and cost.
Speaker 3: And expect that we taper back towards more normal levels as we go throughout 2022.
I would expect that we taper back towards more normal levels as we go throughout 2022.
Speaker 3: Our segment margins were 24% in the quarter, very much in line, just slightly ahead of our expectations. Precassial of $26 million drove our poor formal leverage to 2.1 times at the end of the year.
Our segment margins, which were 24% in the quarter very much in line to slightly ahead of our expectations free cash flow of $26 million drove our pro forma leverage to two one times at the end of December .
Speaker 3: You can see for the year, record results across the board. And we start 2022 with a lot of positive organic momentum, along with a market outlook that is clearly better than we've seen in the past several years. Our team has energized about the future for Zurnwater Solutions, and anticipate 2023 will be another record year for us. I'll quickly move to slide.
You can see for the year record results across the board and we start 2022 with a lot of positive organic momentum along with the market outlook that is clearly better than we've seen in the past several years. Our team is energized about the future for <unk> water solutions and anticipate 2023 will be another record year for us.
I'll quickly move to slide four.
Speaker 3: I've mentioned in the past that one of the big decisions around the timing of the R&T was ensuring that trajectory for standalone business was really strong.
I've mentioned in the past that one of the big decisions around the timing of the RMT was ensuring the trajectory for a standalone business was really strong and.
Speaker 3: And with the benefit of another year of strong execution and visibility into the next level, into the next year's level of activity that's happening in our markets, along with organic investments reading through and even more in the early stages, we really see an incredible one-way for growth over the next three to five.
And with the benefit of another year of strong execution and visibility into the next level into the next year's level of activity that's happening in our markets along with organic investments reading through and even more in the early stages, we really see incredible one way for growth over the next three to five years.
Speaker 3: Every year we do a detailed three year strategic plan, something we've been doing for the last 15 plus
Every year, we do a detailed three year strategic plan something we've been doing for the last 15 plus years.
Speaker 3: If the Absolute Foundation of the Reckonored Business System creates a roadmap for our strategic deployment of breakthrough growth or margin opportunities.
It's the absolute foundation of the Rexnord business system. It creates a roadmap for our strategic deployment of breakthrough growth or margin opportunities.
Speaker 3: Prioritizes resources towards our biggest opportunities and takes big three-year objectives and makes them come to life every day with tangible objectives and accountability.
Prioritizes resources towards our biggest opportunities it takes big three year objectives that makes them come to life everyday with tangible objectives and accountability.
Speaker 3: It creates the framework and alignment throughout the organization that is matured, continues to improve, and most importantly, measures performance and progress. At any point in time, everyone knows the priorities, why they're important, and how we're doing. It's relentless in providing clarity on why what we're doing today, next week, and next month helps us three years.
It creates the framework and alignment throughout the organization that has matured continues to improve and most importantly measures performance in progress at any point in time, everyone knows the priorities why they are important and how were doing its relentless in providing clarity on why what we're doing today next week and next month helps us three years.
From now.
Speaker 3: This year's plan is something we've called the next wave, because it really does build off of prior successes and course corrections and capitalizes and compounds on the unique competitive advantages we've created.
This year's plan is something we've called the next wave because it really does build off of prior successes and course corrections capitalizes and compounds on the unique competitive advantages we've created.
Speaker 3: We also benefit from the opportunity to focus on ZERN and ONLY ZERN.
We also benefit from the opportunity to focus on <unk> and only <unk>.
Speaker 3: And we see a path of substantial increase in the size of Zern organically, with really the same financial characteristics that we have today. A lot of themistically, seeing M&A opportunities convert over the planning horizon, allowing us to double the business over the coming year.
And we see a path of substantial increase in the size of its earned organically with really the same financial characteristics that we have today will optimistically seeing M&A opportunities convert over the planning horizon, allowing us to double the business over the coming years.
Speaker 3: So the right to see this strategic framework we've consistently used to evaluate our performance for the strategic planning.
To the right you'll see the strategic framework, we have consistently used to evaluate our performance for the strategic plan against starting with getting into the right markets, where we can build real sustainable competitive advantage.
Speaker 3: Starting with getting into the right markets where we can build real sustainable competitive advantage.
Speaker 3: And then it leveraged the ZERN business systems to develop plans to drive a above market growth, strong incremental margins, and superior free cash flow to continue to invest to invest in our business and create capacity for M&A while return.
And then it leveraged the <unk> business system to develop plans to drive above market growth strong incremental margins and superior free cash flow to continue invest to invest in our business and.
They create capacity for M&A, while returning cash to shareholders in order to do all of that our teams have to be incredibly engaged and delight our customers.
Speaker 3: In order to do all of that, our teams have to be incredibly engaged and delight our customers.
Speaker 3: We're not going to get ahead of ourselves, but it's clear to me that as we execute the next wave, the Jerm Water Solutions can be a much larger company with a consistent financial profile while continuing to build out the business very much focused on the types of things we do today.
We're not going to get ahead of ourselves, but it's clear to me that as we execute the next wave certain water solutions can be a much larger company with a consistent financial profile, while continuing to build out the business very much focused on the types of things we do today.
Moving to page five.
Speaker 3: One of the things that we've made tremendous progress over the last three years on is ESG leadership. And truly believe it's a critical pillar in creating superior share with the value moving forward.
One of the things that we have made tremendous progress over the last three years on its ESG leadership and truly believe it's a critical pillar in creating superior shareholder value moving forward.
Speaker 3: The progress over that time was included things like establishing board level committee oversight to oversee our ESG efforts, as well as an internal steering.
The progress over that time is included things like establishing board level Committee oversight to oversee our ESG efforts as well as an internal steering committee.
Speaker 3: Streamed line reporting by adopting the SASB framework and enhancing our CDP disclosure.
Streamline reporting by adopting the SaaS be framework and enhancing our CDP disclosures <unk>.
Speaker 3: Implemented in refined policies that reflect our commitments in the areas including diversity and inclusion, human rights, environmental stewardship and sustainability, product safety, and supplier diversity.
Lamented and refined policies that reflect our commitments in the areas, including diversity and inclusion human rights, environmental stewardship, and sustainability product safety and supplier diversity.
Speaker 3: We have integrated ESG into our strategic planning process, which includes evaluating how climate-related issues impart our business strategy and financial plundice.
We have integrated ESG into our strategic planning process, which includes evaluating how climate related issues impacted our business strategy and financial planning.
Speaker 3: We were recently named one of America's most responsible companies by Newsweek for the second year in a row.
We were recently named one of America's most responsible companies by Newsweek for the second year in a row.
Speaker 3: In December , we join the UN Global Compact to reaffirm our commitment to universal principles on human rights, labor, anti-corruption, and the environment.
In December we joined the UN global compact to reaffirm our commitment to universal principles on human rights labor anti corruption and the environment.
Speaker 3: Our entire business aligns incredibly well with the U.N. goal to ensure availability and sustainable management of water and sanitation for all. And just this week, we're launching an employee-led social impact fund to provide financing, support, and resources for associate ideas that advance our ESG efforts.
Our entire business aligns incredibly well with the UN goals to ensure availability and sustainable manageable management of water and sanitation for all and just this week. We are launching an employee led social impact fund provide financing support and resources for associate ideas that advance our ESG efforts.
Speaker 3: We know that the best and most innovative ideas come from our teams, and we're ready to fund those ideas.
We know that the best and most innovative ideas come from our teams and we are ready to fund those ideas.
Speaker 3: In mid-February, we'll be issuing the inaugural ZURN Sustainability Report.
In mid February we'll be issuing the inaugural Zurich sustainability report.
Speaker 3: In there, you'll see that we have established ESG-related targets, including commitments to reduce greenhouse gas emissions and energy use, and goals for diversity among leadership and suppliers.
In there Youll see that we have established ESG related targets, including commitments to reduce greenhouse gas emissions and energy use and goals for diversity among leadership and suppliers.
Speaker 3: We have provided 1% of company time for employee volunteerism and renewed our philanthropic commitment, including setting a $5 million giving target by 2024.
We have provided a 1% of company time for employee volunteerism and renewed our philanthropic commitment, including setting a $5 million, giving target by 2024.
Speaker 3: We will remain aligned with industry specific sustainable accounting standards board metrics from the value reporting foundation, and we'll expand our reporting to measure and disclose our performance on issues that affect people.
We will remain aligned with industry specific sustainable accounting standards board metrics from the value reporting foundation and will expand our ESG reporting to measure and disclose our performance on issues that affect people and the planet.
Speaker 3: You will see an expanded ESG content index, adding multiple new metrics from GRI and from other SASB sectors that apply to our business operations.
You will see an expanded ESG content index, adding multiple new metrics from <unk> and from other SaaS be sectors that apply to our business operations.
Speaker 3: And we're also adding a table in the report that cross-references ESG topics covered within our report.
And we're also adding a table in the report the cross references ESG topics covered within our report.
Speaker 3: and our other published documents with the corresponding SASB Sustainable Industry Classification System Code and GRI.
And our other published documents with the corresponding SaaS be sustainable industry classification system code and cry.
Speaker 3: Operating as a pure play water management company presents new opportunities to embed ESG principles and practices into every aspect of our business.
Operating as a pure play water management company presents new opportunities to embed ESG principles and practices into every aspect of our business.
Speaker 3: We're committed to continually evaluating our approach to ensure that we're committed to the targets that matter, discussing our progress transparently, and always improving. So look for that in just a couple.
We're committed to continually evaluating our approach to ensure that we're committed to the targets that matter discussing our progress transparently and always improving so look for that and just a couple of weeks.
Speaker 3: So with that, I'll turn it over to Mark to walk through some of the additional details on our performance and provide some color on our Q1 outlook. Thanks, Todd.
So with that I'll turn it over to Mark to walk through some of the additional details on our performance and provide some color on our Q1 outlook.
Todd Please turn to slide number six.
Speaker 4: On a year-over-year basis, our fourth quarter sales increased 23% to $232 million.
On a year over year basis, our fourth quarter sales increased 23% to $232 million the.
Speaker 4: The combination of the December 2020 Hadrian acquisition and the December 2021 Wade Drains acquisition grow 7% of the year-over-year growth, with the remaining 16% of growth coming from the core business, as core sales grew year-over-year across nearly all of our product categories.
The combination of the December 2020, Hadrian acquisition and the December 2021 way <unk> acquisition drove 7% of a year over year growth with the remaining 16% growth coming from the core business as core sales grew year over year across nearly all of our product categories.
Speaker 4: With respect to profitability, our adjusted EBITDA, excluding corporate costs, increased 21% from the prior year fourth quarter to $556 million, and our adjusted EBITDA margin was in line with our expectations at 24%.
With respect to profitability, our adjusted EBITDA, excluding corporate costs increased 21% from the prior year fourth quarter to $556 million and our adjusted EBITDA margin was in line with our expectations at 24%.
Speaker 4: Then our core business and adjusting to the impact of the temporary cost reduction actions we had in place in the fourth quarter of 2020 through the COVID-19 pandemic actions we took are just the even 10 margin expanded by approximately 20 basis points a year a year.
Within our core business and adjusting for the impact of a temporary cost reduction actions, we have in place in the fourth quarter of 2020 due to the COVID-19 pandemic actions, we took our adjusted EBITDA margin expanded by approximately 20 basis points year over year.
Speaker 4: With respect to corporate costs, they were in line with our expectations for the quarter, and as we've communicated over the past few quarters, with the close of the RMT transaction and our transition to a standalone pure play water business, we will be reducing our annual corporate expenses to approximately 20 million dollars in terms of adjusted EBITDA, and we remain on track to achieve that annualized run rate in our second quarter of 2022.
With respect to corporate costs. They were in line with our expectations for the quarter and as we've communicated over the past few quarters with the close of the RMT transaction and our transition to a standalone pure play water business, we will be reducing our annual corporate expenses of approximately $20 million in terms of adjusted EBITDA and we remain on track to achieve that.
Annualized run rate in our second quarter of 2022.
Speaker 4: We turn to slide number seven, and I'll put on some balance sheets and leverage highlights.
Please turn to slide number seven and I'll touch on some balance sheet and leverage highlights.
Speaker 4: I'll start with a quick reminder for everyone that in conjunction with the close of the RMT transaction on October 4th, we paid off all of the debt that was on our balance sheet at September 30th and put in place our new capital structure that includes a $550 million term loan with a $200 million revolver that is currently undrawn.
I'll start with a quick reminder, for everyone that in conjunction with the close of the RMT transaction on October 4th we paid off all the debt that was on our balance sheet at September 30, and put in place our new capital structure that includes a $550 million term loan b.
$200 million revolver that is currently undrawn.
Speaker 4: Our new seven-year term loan has an interest rate of 2.25% with a 50 basis point LIBOR floor and pushes any debt maturities out to 2020.
New seven year term loan has an interest rate of 225% with a 50 basis point LIBOR floor and poses any debt maturities out to 2028.
Speaker 4: With respect to our net debt leverage, we anticipated closing out the year at a 2 to 2.1 times when you pro forma our adjusted EBITDA for the $20 million of annual corporate expenses on a go forward basis. As you can see, we ended at the low end of that range on December 31st.
With respect to our net debt leverage we anticipated closing at closing out the year at a two to two one times when you pro forma or adjusted EBITDA for the $20 million of annual corporate expenses on a go forward basis. As you can see we ended at the low end of that range on December 31.
Speaker 4: It's from the spot number 8, I'll make a few comments in our outlook for the 1st quarter of 2022 as well as the full year.
Please turn to slide number eight I'll make a few comments on our outlook for the first quarter of 2022 as well as the full year.
Speaker 4: For the first quarter of 2022, we are projecting total sales to increase year-over-year by a high team's percentage.
For the first quarter of 2022, we are projecting total sales to increase year over year by a high teens percentage.
Speaker 4: With respect to margins, we'd like to adjust the EBITDA margin, excluding corporate costs.
With respect to margins, we expect our adjusted EBITDA margin, excluding corporate costs.
Speaker 4: be between 24% and 24.5% in the quarter.
To be between 24% and 24, 5% in the quarter.
Speaker 4: We anticipate corporate costs, in terms of adjusted EBITDA, be approximately $7 million in the quarter as we work our way down to the approximate $20 million annual run rate I discussed earlier.
We anticipate corporate costs.
In terms of all in terms of adjusted EBITDA.
Be approximately $7 million in the quarter as we work our way down to be approximate $20 million annual run rate I discussed earlier.
Speaker 4: For the 2022 fiscal year, we remain confident in delivering double digit reported and core growth year over year. With respect to profitability, we believe our adjusted EBITDA margin, excluding corporate costs, will be consistent with our margins in fiscal year 2021 and will generally improve each quarter as the year progresses. Our corporate expenses will be approximately 22 million.
For the 2022 fiscal year, we remain confident in delivering double digit reported and core growth year over year.
With respect to profitability, we believe our adjusted EBITDA margin, excluding corporate costs will be consistent with our margins in fiscal year 2021, and will generally improve each quarter as the year progresses, our corporate expenses will be approximately $22 million for the year.
Speaker 4: Before we open the call for questions, just a few comments on our interest expense, dot-com expense, depreciation and amortization, tax rate, and the loot share that's standing for the quarter and the year.
Before we open the call for questions just a few comments on our interest expense stock comp expense depreciation and amortization tax rate and diluted shares outstanding for the quarter and the year.
Speaker 4: We anticipate our interest expense for the March quarter to be approximately $5 million and approximately $21 million for the fiscal year.
We anticipate our interest expense for the March quarter to be approximately $5 million and approximately $21 million for the fiscal year.
Speaker 4: A non-cash stock compensation expense should be about $5 million in the March quarter and approximately $17 million for the fiscal year.
Our noncash stock compensation expense should be about $5 million in the March quarter, and approximately $70 million for the fiscal year.
Speaker 4: depreciation and amortization will come in around $6 million for the March quarter and approximately $18 million for the fiscal year.
Depreciation and amortization will come in around $6 million for the March quarter, and approximately $18 million for the fiscal year.
Speaker 4: Our tax rate on an adjusted pre-tax earnings basis will be between 26.5% and 27.5% for the March quarter, as well as the full fiscal year.
Our tax rate on an adjusted pre tax earnings basis will be between 26, 5% and 27, 5% for the March quarter as well as the full fiscal year <unk>.
Speaker 4: In Duluth shares outstanding updated to reflect the conversion of restaurant equity grants and equity grants. As a result of the RMT transaction will be approximately 130. To 131Million for each quarter of fiscal 2022.
Diluted shares outstanding updated to reflect the conversion of restaurant equity ramps in certain equity grants as a result of the RMT transaction will be approximately $130 million to $131 million for each quarter of fiscal 2022.
Ed will open the call up for your questions.
Speaker 1: At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. And we'll pause for just a moment to compile our Q&A roster.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad and we'll pause for just a moment to compile our Q&A roster.
Speaker 1: And your first question comes from the line of Brian Blair from Oppenheimer. Your line is open. Thanks guys.
And your first question comes from the line of Bryan Blair from Oppenheimer. Your line is open.
Thanks, guys strong finish to the year.
Thanks, Brian and Brian .
Speaker 1: To start with your double-digit core growth outlook, I'm just wondering if anything over the last 90 days, you know, whether Omicron's spread, continued supply chain tightens.
To start with your double digit core growth outlook I'm, just wondering if anything over the last 90 days with her omicron spread continued supply chain tightness in any of the headline risks of the day you know it has meaningfully concerned your team and maintaining that guide and if possible it would be great to hear what you.
Speaker 1: any of the headline risks of the day, you know, it has meaningfully concerned your team and maintaining that guide and if possible it would be great to hear what you're
Speaker 5: currently contemplating for underlying market growth, price realization and Zurn outperformance or share capture within that framework.
Here <unk>.
Currently contemplating for underlying market growth price realization.
And is there an outperformance of share capture within that framework.
Speaker 3: Yeah, you bet a lot of headline news, Brian , but I would call it not a whole lot different than really the last two years in terms of... Even today.
Yeah, you bet.
Okay.
Headline news, Brian , but I would call it not a whole lot different than really the last two years in terms of.
Yeah.
Speaker 3: things changing day-to-day, but underlying that, fundamentally, we're very much committed to that double-digit growth for the year. I think it incorporates sort of a low-to-mid single-digit market growth outlook.
Things changing day to day, but under an underlying that fundamentally we were <unk>.
Much committed to that double digit growth for the year I think it incorporates sort of a low to mid single digit market growth outlook.
Speaker 3: very similar from a price perspective, maybe a touch more, and then two points of market outgrowth. And so, you know, you can see your way to something.
Very similar from a price perspective, maybe a touch more and then two points of market outgrowth and so you can see your way to something.
Speaker 3: you know, ten plus, and I think we're sort of starting the year, maybe a little cautious.
10, plus and I think we're sort of starting the year, maybe a little cautious.
Speaker 3: But I think our underlying confidence in delivering that is relatively high and virtually unchanged from 1996.
But I think our underlying confidence in delivering that is relatively high and virtually unchanged from 90 days ago.
That's great to hear.
Speaker 5: That's great to hear. And any further color or detail you can offer us on project pipeline and your key education in healthcare verticals.
Any further.
Color or detail you can offer us on project pipeline in your key education and health care verticals.
Speaker 5: Just wondering if you can offer any directional insights on market outlooks specific to those spaces, Zurn's positioning, and how that influences your 2022-23 prospects and confidence in continued growth.
If you can.
No Frank directional insights on market outlook specific to those spaces earns positioning and how that influences. Your 2022 23 prospects and confidence in continued.
Growth trajectory.
Speaker 3: I think the level of activity we're seeing in those verticals is very, very strong. I think you're seeing funds.
I think the level of activity, we're seeing in those verticals is very very strong.
I think youre seeing.
Funds flow.
Speaker 3: to state and local governments and ultimately to school districts. And, you know, there's a high priority on hygiene amongst other things, including technology and things of the life, but building upgrades.
To state and local governments and ultimately to school districts and there is a high priority on hygiene amongst other things, including technology and things of the like the building upgrades.
Speaker 3: is a big part of it and so I think the level of activity is very good as we track our funnels, you know, they continue to grow and be robust and...
A big part of it and so I think the level of activity is very good as we track our funnels, they continue to grow and be robust and.
Speaker 3: I think it supports the market outlook that we've got very clearly. And I think when you think about things like Bright Shield and connecting.
I think it supports.
The market outlook that we've got very clearly and I think when you think about things like bright shield.
And connected products.
Speaker 3: You know, it only reinforces our ability to drive some outgrowth in those categories and in those verticals. So I think it's a positive outlook for those two remains. And I think now we're starting to see that next phase of money actually, you know, getting to school districts to be able to invest in, in the structure and hygiene and upgrades for students. So it's a good dynamic.
It only reinforces our ability to drive some outgrowth in those categories and in those verticals. So.
I think it's a positive outlook for those two.
<unk> and I think now we're starting to see that next phase of money actually getting to school districts to be able to invest in infrastructure and hygiene and upgrades for.
For students so it's.
It's a good it's a good dynamic.
Speaker 5: That sounds like solid momentum there and maybe offer some quick color on early stage weight integration and what your team's expecting for year one revenue where current margins are and where you expect to drive profitability over time.
It sounds like solid momentum there.
Maybe offer some quick color on early stage wage integration and what your team is expecting for year, one revenue where current margins are and where do you expect to drive profitability over time.
Speaker 3: So, wage range is very complimentary to our core ZERN, trained business, very high relative spec chair, strong regionally. And I think we see the opportunity to implement the ZERN business system drive 80-20 and really create an even stronger position within our specs and...
So we drained as very complementary to our core zurn train business.
Very high relative spec share.
Strong regionally and I think we see the opportunity.
To implement the Zurn business system drive 80 20.
And really create.
At an even stronger position within our specs and even more so regionally.
Speaker 3: You know, from a revenue standpoint, it's relatively small today.
From a revenue standpoint, it's relatively small today.
Speaker 3: circa $15 million, and the margins would come in at below the fleet average, and I think we've got a very solid plan to convert the business to the model that we have.
A $15 million and the margins would come in at below the fleet average and I think we've got a <unk>.
Very solid plan to convert the business to the model that we have.
Speaker 3: and drive some additional simplifications. So I would say towards the end of 22, you can see that at or near the fleet average and with a solid growth outlook. So it was a little talk in for us, not huge, but I think strategically important when you think about the importance of spec share in our business.
And drive some additional simplification, so I would say towards the end of 'twenty two you should see that.
At or near the fleet average and with a solid growth outlook. So it was a little tuck in for us not huge but I think strategically important when you think about the importance of spec share in our business.
Speaker 3: and then our ability to drive the efficiencies through the ZERN business system, and what can do for our portfolio.
And then our ability to drive the efficiencies through the Zurn business systems.
It can do for our portfolio over time.
Understood. Thanks again.
You bet.
Speaker 1: Your next question comes from a line of Jeff Hammond from Keybank. Your line is open.
Your next question comes from the line of Jeff Hammond from Keybanc. Your line is open.
Hey, good morning, guys.
Speaker 6: So, Mark, you mentioned margins should progress and improve, like, through the year, and I'm just wondering, you know, what the big drivers of that are, and maybe you can speak within that. You know, how you see price-cost, you know, playing out as you move through, and maybe an update on what is getting better, you know, or stabilizing on the supply chain side.
Good morning morning, Jeff.
Mark you mentioned margins should progress and improve through the year and I'm just wondering what the big drivers of that are and maybe you can speak within that.
You see price cost play.
Playing out as you move through in and maybe an.
<unk> date on <unk>.
What is getting better.
Stabilizing on the supply chain side.
Speaker 4: Sure. Yeah, Jeff, I think a couple of things trying to margin improvement, you know, as the year, as the year progresses.
Sure Jonathan.
I think a couple of things driving the margin improvement as the year as the year progresses well.
Speaker 4: We'll continue to make headway on the integration of both acquisitions. You know, the hatred deal we did over a year ago, as well as the way that we just talked about. So the year progresses and our integration plans.
We will continue to make headway on.
On the integration of both acquisitions and then the Hadrian deal we did over a year ago as well as the way Apple does and Todd has talked about so as the year progresses and our integration plans.
Speaker 4: move forward, we'll see margin improvement in both of those M and A deals that we've done over the past month in the past.
Move forward, we will see margin improvement in both of those.
M&A deals that we've done over the past past month in the past year, plus one piece of it from a price cost standpoint that equation for us we will get better as the year progresses I appreciate.
Speaker 4: That's one piece of it. From a price cost standpoint, that equation for us will get better as the sugar progresses. It's, I don't know, I appreciate the first half of the year, the overall cost is a little bit tougher when you look at that equation, given the environment we're in today versus what we were in a year ago. So things that we're doing, our productivity initiatives and cost reduction initiatives, progress of the year looks forward. Does that equation get...
First half of the year, the overall comps just a little bit tougher when you look at that equation given the environment. We're in today versus where we were a year ago. So the things that we're doing our productivity initiatives and cost reduction initiatives progressed as the year moves forward to that equation gets gets better for us.
Speaker 4: gets better for us. And I'd say, you know, we've been putting some, we talked about in the latter part of 21 and here in the early part of 22, a little bit outside, drove investment as well as investment around some of the near-shoring initiatives we've been putting in place. We start kind of, you know, again, as we get in the back half of 22, we start coughing against the, where we started that investment, 21. So I think those are probably the three big buckets, Jeff.
And then I'd say, we've been putting some we talked about in the latter part of 'twenty, one and here into the early part of 'twenty two.
A little bit outsized growth investment as well as investments are also in the near shoring initiatives, we've been putting in place.
And we start kind of again as we get into the back half of 'twenty, two we start comping against what.
When we started that investment in 'twenty, one so I'd say those are probably the three big buckets, Jeff that are going to allow that margin as the year progresses to steadily improve.
Speaker 4: that are going to allow that margin of the year progresses to steadily improve.
Speaker 6: Okay, and then just on supply chain, I think your biggest issue, maybe last quarter was really, you know, some freight dynamics, just maybe update us on what's going on there.
Okay, and then just on supply chain I think your biggest issue maybe last quarter was really.
Some freight dynamics, just maybe update us on what's going on there.
Speaker 4: Yeah, so you're right last quarter, we've released some timing issues, right? Just getting things, you know, over over here into the US and to our plants and out and then in a timely fashion, we had just had some timing issues with that.
Yes, so you're right last quarter was really some timing issues and just getting things.
Over over here into the U S into our plants and allergen in a timely fashion. We had just had some timing issues with that as you can see the results. This quarter that did impact us at all saw I think some of the things that we've done from an automotive standpoint in the third quarter to get in front of it definitely helps.
Speaker 4: As you can see, you know, in the results this quarter, that can impact us at all. So I think some of the things that we've done from an econometric standpoint and then the third quarter to get in front of it definitely helped. We've talked about from an inventory standpoint, you know, carrying a little more inventory to assure availability. Those actions, you know, started this last quarter, you'll see some of that in the first half of the next year.
We've talked about from an inventory standpoint, you will carry a little more inventory to assure availability. Those actions started this last quarter youll see some of that in the first half of next year.
Speaker 4: So in that way, we've done the try to, you know, kind of counter that initial issue we hit the third quarter definitely pay dividends in this quartering into the numbers and what's like those same actions are keeping in the good spots. So right now, Jeff, you know, we don't have any significant concern.
So and given that we've done to try to kind of counter that initial issue, we had with third quarter definitely paid dividends in this quarter and into the numbers and awards that will say matches that keeps us in a good spot right now Jeff. We don't we don't have any significant concerns about an air pocket like we experienced.
Speaker 4: about an air pocket like we experienced in the third quarter. Never seen ever. Obviously, but no, we know today that things we've put in place.
During the third quarter never say never obviously, but normally noted they are the things we put in place an economy for some of that we feel pretty good about where we are with inventory levels and availability of our of our products.
Speaker 4: kind of much of something that we feel pretty good about where we are with even trail levels and the build of our product.
Speaker 6: Okay, and then just last one, just any differentiation in the growth between the different business groups, either in the fourth quarter, kind of within the outlook, or is it pretty broad-based?
Okay, and then just last one just any differentiation in the growth between the different business groups.
Either in the fourth quarter or kind of within the outlook or is it pretty broad based.
Speaker 4: I think it's pretty broad page Jeff. I wouldn't say there's a material differentiation as you think about sort of those two sub-sactors.
I'd say, it's pretty broad based Jeff I wouldn't I wouldn't say there is a material differentiation as you think about sort of those three subsectors Autozone business you know as we look forward in 'twenty two.
Speaker 4: We look forward to 22. You know, right now we see a path where all those sectors are growing and that double digit category that we've been talking about.
Right now, we see a path where we're all sectors are growing in that double digit type category that we've been talking about.
Speaker 4: Good momentum in the funnel around all those categories.
Good good momentum in the funnel around all of those all those categories I think ultimately.
Speaker 4: and the one that could stand out and be a little different, especially with some of the school projects and education projects, Tataqa earlier would be.
The woman, but one that could that could stand out and be a little different especially with some of this the school projects and education about as Todd talked about earlier will be the hygienic and environmental sector could be could be a little tad.
Speaker 4: I can't believe it. But again, I see all broad base to cross all people with some centers.
But again I'd say overall broad based across all three of those sectors.
Okay, great color thanks, guys.
Speaker 1: Again, if you'd like to ask a question, press star then the number one on your telephone keypad. Your next question comes from Joe Richie from Goldman Sachs. Your line is open.
Again, if you'd like to ask a question press Star then the number one on your telephone keypad. Your next question comes from Joe Ritchie from Goldman Sachs. Your line is open.
Thank you and good morning, everyone.
Speaker 7: Morning Jill. Maybe just staying on margins for a second and just thinking about the one-q margin guide. Looks like you're expecting a little bit more revenues sequentially, but the margins kind of like in line with 4Q. Just maybe talk a little bit about the puts and takes on the margins for Q1. I know that you kind of already answered the progression throughout the year.
Good morning, Joe maybe just maybe just staying on margin for a second and just thinking about the <unk> margin guide.
It looks like Youre expecting a little bit more revenue sequentially, but the margins kind of like in line with <unk>.
Just maybe talk a little bit about the puts and takes on the margins for Q1, I know that you've kind of already answered the progression throughout the year.
Speaker 4: Yeah, I feel like if you've got to look at it sequentially, Joe, if you're in the higher end of that range, you're sequentially looking at a margin that's gonna be, you know, close to what we would expect.
Yes, I feel like if you kind of look at it sequentially Joe.
If you are in the higher end of that range here sequentially looking at a margin that's going to be.
Close to what we would expect.
Speaker 4: with our incremental or decriminal sequentially. So I think, you know, tell us where we are in this number. You expect to kind of be in a similar range. The difference would be, I think, if you just look at the overall.
With our Incrementals or Decrementals sequentially. So I think where we ended December do you expect it to be in a similar range.
The difference would be I think if you just look at the overall sort of timing of how our prices rolling in the house. The material cost is rolling in this is the margin. This is the quarter where that that overall dynamic just gives the tightest for us so that is related to the timing function, although some of our pricing actions.
Speaker 4: sort of timing of how our price is rolling in, the house and the trail cost is rolling in. This is a margin, this is the quarter where that overall dynamic just gives the title support. So that's really just the timing function of some of our pricing actions, some of the costs that we're seeing and how that's gonna roll through in the quarters. That really is the reason why you can be a margin.
Cost that we're seeing and how that is going to roll through in the quarter. So that really is the reason why the margin basis generally on a stable standpoint, Q4 into Q1 and none of that is mentioned earlier and just watching them as we get into June three to four you see that margin progression and the other thing too is that weighted acquisition in the first quarter, we really haven't.
Speaker 4: from a stable standpoint, Q4, into Q1, and then as I mentioned earlier, and just question them as you get it to 3 to 4, you see that market progresses. The other thing too is that weight acquisition in the first quarter, we really haven't.
Speaker 4: It started a lot of our integration actions to benefit that first quarter of March. And that does put a little bit of a mix impact in Q1 as well. Just that new acquisition now, that ramp is a few years from...
Started a lot of our integration actions to benefit that first quarter margins that does put a little bit of a mix impact in Q1, as well does that new acquisition, how that ramp is the of the year progresses.
Speaker 7: Got it. That's helpful. As you kind of think about that margin progression then throughout the year, and you think about the swing factors, it seems like you guys are pretty confident in the growth outlook, things are looking good there. Your price actions are coming through. Would you say that like, you know, great logistics is probably the biggest swing factor of this, just curious how you're thinking about it on what can push the margin higher or lower throughout the year.
Got it.
That's helpful.
Kind of think about that that margin progression then throughout the year and you think about the swing factors. It seems like you guys are pretty pretty confident in the growth outlook I think theyre looking to get their price actions are coming through when you say that like.
Great logistics is probably the biggest swing factor I'm, just curious how you're thinking about it.
On what's been placed margins higher or lower throughout the year.
Speaker 3: Yeah, Joe, I think a big part of it is, you know, when you think about the Zern Biz.
Yes, Joe.
I think the big a big part of it is when you think about the zurn business.
Speaker 3: It really follows the construction season in North America. So the Q4, Q1 are the relative load points.
It really follows the construction season in North America. So the Q4 Q1 are the relative low points.
Speaker 3: in terms of top line throughout a year. Thank you to Q3 is more. So it's really just that tremendous operating leverage on the asset light model as you roll through the middle part of the year. I think is the biggest thing. I mean, obviously.
In terms of topline throughout a year and Q2 Q3 is more so it's really.
Just that tremendous operating leverage on the asset light model as you roll through the middle part of the year I think is the.
The biggest thing I mean, obviously.
Yes.
Speaker 3: Freaked and logistics are a piece of it, but I wouldn't call it the swing factor by any means.
Freight and logistics are a piece of it but I wouldn't call it a swing factor.
Any means based on the assumptions that we've given you I think it's just more of that core operating leverage that we get in the asset light model over the course of.
Speaker 3: I think it's just more that core operating leverage that we get and the asset light model over the course of, you know, a revenue base that grows.
Revenue base that grows pretty significantly in the middle of the year when when the level of activity is higher.
Speaker 7: Okay, yeah, that makes a ton of sense. Maybe one last one for me. Be remiss if I didn't ask you about the M&A pipeline. How you feel about things today? Now that you've got the standalone business up and running, like how does the pipeline look today and how you're thinking about M&A for 2022?
Okay, Yes.
That makes a ton of sense, maybe maybe maybe one last one for me.
Miss if I didn't ask you about the M&A pipeline, how you feel about things today now that you're you've got the Standalone business.
Running like how does the pipeline look today and how are you thinking about M&A for 2022.
Speaker 3: Yeah, I mean, I think we're not going to predict it or time it, but I think we feel really good about the targets, the quality of the targets. And I think...
Yes, I mean, I think we're not going to predict it or time, it but I think we feel really good about.
The targets.
Quality of the targets and I think that.
<unk>.
The the.
Our reality is everything we do is generally proprietary.
Speaker 3: So the timing of those is difficult to predict, but I would say the richness of the conversations, and I think our anticipated conversion is pretty good on some high priority things.
<unk> of those is difficult to predict but I would say the the richness of the conversations and I think our anticipated conversion is pretty good on some high priority things and we just got to keep doing the work.
Speaker 3: and the cultivations, and I think they'll be there over time, but I would say, I think I'm very pleased with the quality of the funnel and the progression of where they are in that funnel. So stay tuned, I suppose.
And the.
The cultivation and I think there'll be there over time, but I would say I think I'm very pleased with the quality of the funnel and the progression of where they are in that funnel. So stay tuned I suppose.
But I feel really good about our ability to convert some things over the course of 2022.
Great. Thank you all.
Speaker 1: This concludes the ZERN Water Solutions Corporation 4th quarter, 2021 earnings call. Thank you for your participation. You may now disconnect.
This concludes the <unk> water Solutions Corporation fourth quarter 2021 earnings call. Thank you for your participation you may now disconnect.
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