Q1 2025 Zurn Elkay Water Solutions Corp Earnings Call
Speaker Change: Good morning and welcome to the Zurn LK Water Solutions Corporation, first quarter 2025 earnings results conference call. We've taught Adams, Chairman and Chief Executive Officer,
Speaker Change: David Pauli, Chief Financial Officer, and Bryan Wendlandt, Director of FBNA for Zurn LK Water Solutions. 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 Bryan Wendlandt. Please go ahead.
Speaker Change: Good morning, everyone, and thanks for joining the call today. Before we begin, I'd like to remind everyone that this call contains certain four-looking statements that are subject to the Safe Harbor language containing the press release that we issued yesterday afternoon as well as in our findings with the SEC.
Speaker Change: In addition, some comparisons were for the non-gett measures. This release and SEC filings contain additional information about these non-gett measures, why we use them, and why we believe they're helpful to investors and contain reconciliations to the corresponding gap.
Speaker Change: With prior quarters, we will speak to certain non-get metrics as we feel they provide a better understanding of our operating results.
Speaker Change: 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 CEO , Zurn LK Water Solutions.
Todd Adams: 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% organic growth.
Todd Adams: 110 basis points of year-over-year improvement in EBITAM margins and cash flow ahead of our expectations
Todd Adams: 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.
Todd Adams: We're going to get into the details regarding the impact of tariffs in just a few minutes.
Todd Adams: 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 punch line ahead of time. 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.
Todd Adams: 2nd, which is really important because there's been some confusion by the cell side on this. By the end of 2026, only 2 to 3% of our cogs will be coming from trying to based on a glide path that Dave will share in a bit.
Todd Adams: 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.
Todd Adams: in 2017 and 2018 and again during the pandemic has only been enhanced through the breakthrough work we've been at for years now.
Todd Adams: 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 in here this morning, we come very close to that by the end of 2026.
Todd Adams: 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.
Todd Adams: 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.
Todd Adams: 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 hand it over to Dave to take you through some more color on the quarter.
Dave: Thanks, Todd. Please turn to slide number 4. Our first quarter sales total 389 million, which represents 5% core growth. Our reported growth was 4% and impacted by one point of currency.
Dave: In the first quarter, we generally saw our end markets perform in line with the guidance we provided 90 days ago. Mid single-digit core sales growth in our non-residential end markets were partially offset by softness and residential and pockets of the commercial segment within non-residential.
Dave: Solid Execution on our Growth Initiatives drove our sales performance to the higher end of the outlook we provided 90 days ago. As our first quarter results were volume driven, and as Todd said, not impacted by the announced terra-ferlated price increases as those start in the second quarter.
Dave: Turning to profitability, our first quarter adjusted EBITDA was 98 million and our adjusted EBITDA margin expanded 110 basis points year over year to 25.2% in the quarter.
Dave: 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 carry-over benefits of the synergy actions we took last year.
Dave: Please turn to slide five and I'll touch on some balance sheet and leverage highlights.
Dave: Perfect 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 million we deployed to repurchase shares in the quarter. 55 million of our share repurchases were part of the share offering that we executed in mid February .
Dave: Our balance sheet, leverage, and cash flow generation are in a good spot as we continue to evaluate our funnel of M&A opportunities. I'll turn the call back over to Todd.
Speaker Change: Thanks, David. I'm back on page 6. Here's a glimpse at our Q1's 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.
Speaker Change: 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, 100 and number three in the capital goods industry.
Speaker Change: I'll highlight just one thing here, and that's the 600 million gallons of filtered water delivered in Q1. That's up 33% over the prior year Q1, driven both by the growth and the installed base of filtered units and improved filtration attachment rates that we've been driving.
Speaker Change: Lots of things happening in and around drinking water infiltration 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 7.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: As I mentioned earlier, we've been driving a multi-year change to our supply chain strategy which has been guided by two fundamental principles. Number one, minimize our exposure to China.
Speaker Change: and two, competitively advantage ourselves from a cost, lead time, quality, and dual sourcing perspective while leveraging third parties, both domestically and internationally.
Speaker Change: Some of the constraints or I guess realities are, as an industry, there is minimal to no available domestic capacity for significant portions of what we source.
Speaker Change: That's before taking into consideration the cost based on things like material cost, labor availability, as well as capital expenditures required to scale the levels we and other industry participants would require to meet the market demand.
Speaker Change: 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 basic things like equipment lead times
Speaker Change: Product quality protocols and processes and not to mention building relationships and trust with our supply chain partners.
Speaker Change: 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. And finally, we and virtually every other industry participant and competitor will be able to do so in the future.
Speaker Change: 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.
Speaker Change: 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: 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 our business.
Dave: Starting with the box in the upper left hand corner of the slide, we provide a breakdown of the 60 million of 2024 actual cost of good sold.
Dave: 507 million of our cost of goods sold relates to direct material spent and the remainder roughly 350 million relates to all other cost of goods sold
Dave: 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.
Dave: The center of the tear of 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.
Dave: of the total 2024 Direct Material spend, 44% of that spend or 222 million came from North America. North America represents our largest concentration of both Cogs and Direct Material.
Dave: Our 2024 direct material spend out of China was a 127 million or 25% of our total direct material spend.
Dave: And finally on this box, our 2024 spend coming from countries outside of China and North America is roughly 158 million or 31% of our direct material spend
Dave: Shifting to the box in the upper right corner, approximately 285 million or 33% of our cost of good sold are on the surface subject to some level of tariffs.
Dave: With the tariffs in place today, most material purchases coming from China are subject to a tariff as high as 145. However, there are some exclusions like products that are primarily iron steel or aluminum that result in a tariff significantly lower than the 145.
Dave: The 158 million a product being sourced in all other countries outside of North America and China, there's generally a 10% reciprocal tariff in place, but again with some exception.
Speaker Change: 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 and 55 million Todd will cover our response to the tariffs and pricing in a bit before we get to that I want to cover the last box on the slide.
Speaker Change: As a business we navigated the initial tariffs that were put in place several years ago very well. While we successfully manage the day-to-day impact of those first tariffs, we also implemented a multi-year strategy to significantly reduce our exposure to China that we are now seeing the benefits of. [inaudible]
Speaker Change: China is at the center of the terror 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.
Speaker Change: As you can see, our direct material spend from China will be under 30 million by the end of 2026 and significantly reduces each quarter as we move forward.
Speaker Change: 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 in the process.
Speaker Change: As we continue to gain clarity on a terrifying environment, this chart will evolve as we accelerate moves out of China, shift production to dual sources [inaudible]
Speaker Change: and respond to the latest set of rules around tariffs. In the end, what this all means is that by the end of 2026, we are looking at a combined Zurn Alkae business that has less than two to three percent of clogs coming from China.
Speaker Change: I'll turn the call back over to Todd to wrap up the tear of discussion .
Speaker Change: Thanks Dave and just to wrap it up on supply chain and price cost and I'm sure there'll be some questions. You know our response to the tariff situation
Speaker Change: or other derivatives of it is grounded in finding the best combination of highest quality, most reliable and best cost supply chain we can.
Speaker Change: It feels like there will 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.
Speaker Change: Based on our response to the situation, both of our supply chain actions and selective price increases we have high confidence in our ability to manage
Speaker Change: 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 26, we'll represent only two to three points of cost, which means as we cover the cost in 25, it actually gets easier to cover those costs into 2026.
Speaker Change: In the meantime, we're going to continue to do we have been doing, which is managing this on a skew by skew basis, supplier by supplier, country by country, and we've got the experience and track record to make it happen.
Speaker Change: and just to clarify what we're outlining this morning is based on the scenario in place as it last night. As things change, we'll adjust and adapt accordingly. But in any event our hope is that we gave 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 today for the Q2 Outlook.
Dave: Thanks, Todd. Before I jump into guidance, I wanted to take a minute to give an update on our Hashtag C.I. Projects.
Speaker Change: 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.
Dave: We challenged our team at the start of the year to have a substantial increase in the Hashtag CI submissions and through the first quarter our associates have responded.
Dave: Year over year, the submitted Hashtag CI projects are up 60%. These are items that save time, eliminate waste, and improve day-to-day processes, and are then shared across the organization.
Dave: Now to the guidance. For the second quarter of 2025, 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%.
Dave: which is 20 to 70 basis point margin expansion over the prior year.
Dave: With Sinslide 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.
Dave: 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 90 days ago and we are affirming our original full year guidance. We'll now open the call up for questions.
Dave: Thank you. Ladies and gentlemen, we will now begin the question and answer session. As we enter into the Q&A session, we ask that you please limit your input to one question and one follow up.
Dave: At this time I would like to remind everyone to ask a question, please press the star button followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again.
Brian Blair: Your first question comes from the line of Bryan Blair of Oppenheimer. Please go ahead.
Thank you for joining us.
Morning.
Brian Blair: A nice start to the year and kind of goes without saying that you know a lot has changed since early February when you initiated the you know 2025 guidance, but it's encouraging that you've
and your outlook for core growth margin expansions.
Brian Blair: I imagine that the bridge looks quite a bit different from the original framework.
Brian Blair: And I apologize really, I missed some of this detail and technical difficulty at the outset.
Brian Blair: I mean, relative to the roughly three points of volume, one point of price that you would discuss previously, what's your team now contemplating per volume and price contributions of the year, and then beyond pricing, maybe you can offer a little more color on some of the operating adjustments, repositioning that.
Brian Blair: It will help your team to navigate the uniqueness of this backdrop.
Brian Blair: Yeah, Brian , I think, you know, 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.
Brian Blair: In 2025 and as you point out there's been a lot of moving parts.
Brian Blair: So there's a premium on being both agile and experienced 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 8 months to go.
Brian Blair: and I think it wouldn't be prudent to identify what would be the incremental change to our guidance from a price perspective.
Brian Blair: without contemplating what would be the impact to the end markets over the course of the next eight months, which nobody knows.
Brian Blair: So I think what we're saying to tell you this morning is...
Our initial frame were contemplated a wide range of scenarios.
Brian Blair: Our response, both from a supply chain perspective and a price increase, gives us great comfort that we can make edge.
Brian Blair: to, at a minimum, the guides that we had in February and are reiterating this morning. 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...
Speaker Change: We've got 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.
Speaker Change: But I think the guidance that we put out is very durable in regardless of the environment, but that's the way to think about it.
Thank you.
Speaker Change: I appreciate the color, and that does make sense. I appreciate it that we are early days here.
Speaker Change: Is there anything that you can speak to in terms of, you know, impact to project timing or saving or any notable change in MRO order trends over the last few weeks since the industry has had?
Speaker Change: I would say from a clear understanding that pricing was going to go up and theory a little bit with a near term.
Yeah, so we pointed out that we really had no-
Speaker Change: Revenue impact in the first quarter from it, we did see...
Speaker Change: Seven to ten days of March and into the first couple of weeks of April ahead of our 415 price increase but notably you know nothing has been at least that I know has been pushed, moved or changed you know I think that you know these are
Speaker Change: 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.
Good, that isn't dirty, I'll leave it there. Thanks again.
Thank you.
Speaker Change: Your next question comes from the line of Nathan Jones of Steeple. Please go ahead.
Good morning, everyone.
Good morning.
Speaker Change: I guess I'll talk a little bit about tires and price. I'm sure that's all we're going to talk about today. It's shocking. It's shocking. No, I know. I'm sure you're shocked.
Speaker Change: About $50 million of overall cost in Christy year implies that you probably need mid-chingled
Speaker Change: to cover that. First, to clarification, when you say price cuts mutually, you talk about databases or at the margin line.
Speaker Change: I think what we're trying to highlight Nathan is at a minimum at the dollar level based on the scenario that we've laid out.
Fair enough.
Speaker Change: I know it's very difficult to speculate on what the impact the price increases will have on demand.
Speaker Change: But you guys kind of reaffirm the full year guidance, obviously price is going to be a fair bit higher. Do you just assume that there's some demand destruction that goes along with that new kind of end up at the same place at the end of the year?
Speaker Change: 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.
Speaker Change: but we don't know to the degree what that what that is at this point so I think the way to think about it is
It's not going to foot across us.
Old Guidance Plus Price
Speaker Change: minus something doesn't equal where we are today. I think we're putting it as a place sold over the time being and as things become a little bit more clear over the course of the quarter, you know, we'll update people as we can, but I think
Speaker Change: If I had to call it now, I think that we would...
Speaker Change: 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 impact but I think it's a little bit too early to make any of those calls at this juncture.
Okay, I have one hypothetical question for you.
Speaker Change: I expect that you guys are raising price to cover what the current tariff environment will be.
Speaker Change: Over the next year and a half, you're going to significantly decrease the amount of product that you're importing from China, which should increase your costs. And then you have the potential, you know, Trump is at yesterday saying
Speaker Change: Harris on China are going to 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, to prices go down or to Zurn Hall the line on that pricing.
Speaker Change: Well, I think it is very hypothetical. There's only about six nested questions in there. The way to think about his Nathan, the normal price increases that we put in for
Speaker Change: Decades, we've never retraced price. I think this sort of feels like a little bit of an unusual environment.
Speaker Change: The industry and support our customers. 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 advantage from a supply chain perspective in whatever the environment going forward is will ultimately benefit our profitability.
Speaker Change: and I think those are a lot of nested hypotheticals and I think as things clarify, we'll clarify it for you.
That answers the question. Thanks very much.
Speaker Change: Our next question comes from the line of Andrew Krill of Deutsche Bank. Please go ahead.
Andrew Creel: Hi, thanks. Good morning, everyone. I wanted to ask on, like, education, verbal quality. Obviously, that's, you know, one of your biggest, most important, and verticals, so have you seen any slowing there, or, like, increased hesitancy from customers, to stand, and I think that...
Speaker Change: spirit of the question is it like you know doge and the Trump administration you know cuts and spending or have any um any impact there. Thanks.
We have not
Speaker Change: Okay, great, that is good. And then one more on the foyer guy, I think, Jim.
Speaker Change: and going back to Terrace just, I think, seems like one of the bigger potential risks is that this rest of the world, Terrace, right now that's that 10% assumed in the guide, goes back or goes off to a 40% plus type of number.
Speaker Change: and this does seem to impact where you have been moving, the supply chain too. So if that were to happen, you know,
Speaker Change: What's your level of confidence that you can quickly react to that? Can you still affirm this full your guide if that were to happen?
Well, I think...
Speaker Change: I guess Andrew, I've tried to answer it, I think, at least a couple times [inaudible]
I think that
We believe we have the best cost supply chain.
Speaker Change: 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 position 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.
Speaker Change: You, amongst others, thought that we had a big problem heading into this quarter. Here are the facts as we know them today, hopefully to take away is that we're managing it really effectively and I think whatever the change...
Speaker 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.
Speaker Change: Yeah, I think too, Andrew, what I would add is just-
Speaker Change: Around the tariffs there's a number of actions that we can take, right? We can accelerate moves out of a certain country.
Speaker Change: There's levels of consignment inventory. There's levels of inventory that we've bought ahead. 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...
Speaker Change: 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.
Got it. Thanks.
Thank you.
Speaker Change: Your next question comes from the line of Michael Halloran of Baird. Please go ahead.
Good morning, everyone.
Shoot!
Speaker Change: First question is just if you look back historically and think about channel and obviously this is unique, but how does the the government channel and specifically on the drinking water side of things, how do they react on the cat backside when you get these periods of uncertainty because you're kind of bouncing really good secular and real secularists and rulers?
Speaker Change: A lot of need for the drinking water fountain replacement cycle and filtration with
Speaker Change: You know, limitations potentially on funding or something else, you know, historically how does that play out in your mind?
Speaker Change: Yeah, I mean, again, specifically the drinking water, Mike, I'm not sure that we have...
Speaker Change: You know, a long history. I do think that the government vertical for us is...
relatively small. [inaudible]
Speaker Change: And so I think when we think about drinking water and where we're
Speaker Change: Investing is a combination of, as we've talked about, education, health care, and then a lot of other, you know, sub verticals beyond that, of which government is one. So I don't see it as being particularly...
Speaker Change: I don't see it creating a particular headwind, I guess, is the way to say it most.
Speaker Change: Most simply, but I guess we'll find out. But again, I think we've got enough other really good things going on in terms of
Speaker Change: product, channel, adjacency, new products, filtration, attachment. You know, those are all things that are that we can't control or in our favor. 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.
Speaker Change: Purchasing inventory from your side to get in front of some of these headwinds.
Speaker Change: It seems if I'm thinking about the second quarter and then the back half of the year that the inventory side keeps you in a pretty good cost-contained position for the second quarter.
Speaker Change: and then the pricing is more of a 3Q impact 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. [inaudible]
Speaker Change: I think at a high level it's a reasonable assumption taking us all with obviously the devil is in all the details in terms of, you know,
Speaker Change: What we've bought ahead, what we've moved, what we're transitioning over the balance of the year, but I think in general it's not a bad way to think about it.
Thanks guys, appreciate it.
Thanks Mike.
Speaker Change: Your next question comes from the line of Andrew Buscaglia of BNP Paraba. Please go ahead.
Hey, good morning guys.
Morning.
Speaker Change: I just wanted to ask on, you know, you're on the first couple of companies to report so far and, you know, you know, you guys are doing a great job managing through this
Speaker Change: Yeah, Post-Cover, we saw a ton of inflation. We had to raise prices above average levels.
Similarly with Tarris, [inaudible]
You know, we're taking more price.
Speaker Change: I just wonder if, you know, this is a question for all companies but are you sort of barring pricing in a way from the future?
Speaker Change: And like, there's something have to give at some point. I understand, you know, you're commentary on demand destruction, but at some point, you know, what, how does this end if you just keep taking price to offset these costs?
Speaker Change: Well, I don't think anyone knows the answer to that. I would tell you that if you look at
Speaker Change: 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...
Speaker Change: in the same canoe. And so to the degree, there's going to be a school built, a hospital built, a stadium built. You know, I think that it will need the products that we sell. And obviously
Speaker Change: You know, I think for a lot of reasons, if these do go through at the levels that they're talking about, it will create inflation. What that does long-term, I don't know.
Speaker Change: It's probably not great, but I think for the near-term, we feel very confident in our abilities and navigate front of it, and I also think it's going to be moving target.
Speaker Change: I read some things last night and this morning around the 145 on China is too high and likely coming down but not to zero.
Speaker Change: I think our working assumption is that you know 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
Speaker Change: and navigated through a lot of different dynamics, and this is just one more.
Speaker Change: and I think that we feel very confident with the team we have, the processes we have in place.
Speaker Change: Our connectivity and the way we manage it with our business system.
Speaker Change: You know, it's going to keep us in great shape moving forward and you know, there's a premium on being agile and experienced in this sort of environment and we think, we think we like our chances.
Yeah.
Yeah, and you know when I first saw [inaudible]
You know, press release hit and you guys grew organic [inaudible]
Speaker Change: 5% and made the comment not a lot of price in there. I thought maybe he had some pull-forward but then I see on a slide your managing customers ordering heads up so effectively you're not really seeing pull-forward so I'm wondering. I don't know what you're saying.
Speaker Change: What's that dynamic like? Are you building a backlog effectively? You know trying to try to control?
Speaker Change: You know, that level of pull forward in order to maintain some normalcy, I guess.
Speaker Change: Well, again, 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.
Speaker Change: 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...
Speaker Change: You know, drains in large backflow forward, just based on the size and space constraints and things like that.
So we want to maintain a high level of availability. We don't want to get into a position where, you know, we're
Speaker Change: 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, you know, literally day to day.
Speaker Change: and a customer by customer, you vice-cute, and I think our teams are doing a really good job of that and are very experienced in doing that.
Got it, Nick Todd.
Yep.
Speaker Change: Your next question comes from the line of Jeff Hammond of Keybank Capital Markets. Please go ahead.
Hey, good morning, guys.
Speaker Change: Morning, Jeff. Thanks for the color and a lot of good detail here. I just want to go back to that bottom right chart on slide 8.
Speaker Change: As you think about the ramp down, you know, is this kind of as it was always planned or is that an acceleration and then two, I think the shift has been to Southeast Asia, and I think Todd you mentioned, you know, there'd be some tariff but
Speaker Change: Are you are you continuing to shift where you thought you'd shift or are you contemplating you know other other local's?
Speaker Change: I think the only thing incremental Jeff would be we have done some work to source in the US, maybe on an accelerated basis over the course of the last
3-6 months
Speaker Change: So yes, it's Southeast Asia. Yes, it's parts of Mexico, but I think we've
Speaker Change: I think the only thing that's changed maybe from our plan is to, you know, bring some more sourcing to the US and that's reflected, you know, I think in all the numbers that we're giving you.
Speaker Change: Okay, and then the 45 to 55 million was a little bit lower, just kind of doing the simple math, and I guess one, I wanted to understand better, the exclusion, you know, what portion of the China is excluded and what kind of a terrafreight on that, and then...
Speaker Change: You know, I guess the other moving pieces would be your downshift and mix and kind of how much inventory you have on there, but it just seems like the pricing, you know, looks like you have two prices.
Speaker Change: that kind of add up to low 20%, just seems like a big number relative to a pretty manageable impact.
Speaker Change: 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.
Speaker Change: There's the reciprocal tariffs that stack on top of IEPA. There's the Section 232 steel tariffs. There's the existing from, you know, years ago, Section 301 tariffs. And so,
Speaker Change: All of those different tariffs that I just mentioned carry a different weight, the highest being
Speaker Change: 145, the lowest being 20 and so when you start looking at our receipts you've got to go
Speaker Change: 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 percent, 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 tariff much lower than the 145.
Speaker Change: Jeff, it's all predicated on the HDS code and the harmonized tariff schedule that Dave talked about and so each...
Speaker Change: The 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 topstown exercise. This is
Speaker Change: What are based on our receipts and our receipt profile and the HTS codes and quantities that we're importing this is what it looks like.
Okay, that's really helpful color, thanks guys.
and David Pauli. Thank you.
Speaker Change: Your next question comes from the line of Joe Ritchie of Goldman Sachs. Please go ahead.
Joe Ritchie: Hey guys, good morning, and I just want to say thank you for the transparency on slide 8, it's very detailed, super helpful, thanks for that.
Joe Ritchie: First question, really, as you kind of think about your kind of relative competitive positioning to some of your biggest peers, you know, I know Watts isn't going to report for another couple of weeks.
Joe Ritchie: How do you think you're positioned from a cost structure standpoint relative to your biggest peers?
Joe Ritchie: We think we are extraordinarily well positioned from a cost perspective.
Speaker Change: Okay, is there any other color you can provide just on what you've heard from either your customers or suppliers in terms of what that actually, is there a way to quantify that or what that actually means? More details around that.
Joe Ritchie: Not that we're willing to talk about. I mean, I don't think that I think that you know, everyone makes capacity and fulfillment decisions based on...
Joe Ritchie: What their core competencies are, you know, we have some competitors that clearly are more vertically integrated for relatively small portions of what we can beat with them on. And so I think if you listen to the original comments, you know, the capacity...
Available Capacity for the stuff that
Joe Ritchie: The products that we have is very limited, and yes, there is some captive capacity that's certain of our competitors have, but I would just highlight that it's relatively small.
Joe Ritchie: and other things, you know, we're all sort of lined up at roughly the same prices. Some people ahead, some people behind.
Joe Ritchie: and then the decision is how do you want to service that demand?
from a quality, reliability, lead time
Joe Ritchie: and cost position, and I think we're really happy with where we sit competitively, really across the board.
Speaker Change: 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, you know, continuing to maybe more aggressively buyback your shares just get in the current environment?
Sure, so we bought back 77 million.
Speaker Change: I mentioned at the start the 55 million [inaudible]
was part of the offering that we did in mid-February in mid-February in mid-February.
Speaker Change: I think our hash flow guidance was $290 million for the year. We're confident our ability to hit that and we'll just continue to monitor as we have done called the past two years.
Speaker Change: and makes 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.
David Pauli: David Pauli, Bryan Wendlandt, David Pauli, Bryan Wendlandt, David Pauli, Bryan Wendlandt,
Okay, thank you.
Thanks Joe.
David Pauli: There are no further questions at this time. With that, I will turn the call back over to Bryan Wendlandt for final closing remarks. Please go ahead.
Brian Wendlandt: Thanks everyone for joining us on the call today. We appreciate your interest in Zurn OK water solutions forward providing our next update when we announce our second quarter results in late July . Have a good day.
Speaker Change: Ladies and gentlemen, this concludes today's conference call. We thank you for participating and as do please, disconnect your lines.