Zurn Elkay Water Solutions Corporation

Good morning and welcome to the Zurn Water Solutions Corporation's first quarter 2022 earnings results conference call with Todd Adams, Chairman and Chief Executive Officer, Mark Peterson, Senior Vice President and Chief Financial Officer, and Dave Pauly, Vice President of Investor Relations for Zurn Water Solutions. This call is being recorded and will be available for replay for a period of two weeks. The phone numbers for the replay can be found in the earnings release the company filed in the 8K with the SEC yesterday, April 26th. As it's time for opening remarks and introduction, I'll turn the call over to Dave Pauley.

Good morning, everyone, and thanks for joining the call today. Before we begin, I'd like to remind everyone that this call contains certain forward-looking statements that are subject to the Safe Harbor language contained in the press release that we issued yesterday afternoon, as well as in our SEC filings. In addition, some comparisons will refer to non-GAAP measures. Our earnings release and FCC filings contain additional information about these non-GAAP measures, why we use them, and why we believe they are helpful to investors, and contain reconciliations to the corresponding GAAP information. Consistent with prior quarters, we will speak to 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 in our SEC filings. With that, I'll turn the call over to Todd Adams, Chairman and CEO of Zern Water Solutions.

Thanks, Dave, and good morning, everyone. Hopefully everyone had a chance to read through our earnings release last night, and we certainly appreciate everyone taking the time to join the call this morning. I guess it's only been about 70 days since we last updated everyone about the LK transaction. We've made terrific progress towards the close and bringing the two businesses together. All the regulatory things are behind us, really without a hitch. The S4 became effective this week, and we'll have the shareholder vote towards the end of May. I think we're going to target a clean closing right at the end of the second quarter. So as we announce our Q2 earnings in July, we'll be in a position to talk about what a combined second half will look like for the new Zurn LK Water Solutions business. I'll talk more later about some of the joint preparation we've been doing, but it's been really rewarding to see the teams engage with one another and begin to build action plans to execute the opportunities in front of us as we get to the closing. Moving on to the first quarter results, in a nutshell, it feels like a pretty decent start to 2022. Obviously, there's been a lot of moving parts in the world the last 10 to 12 weeks, but the benefit of being a focused pure play water solutions business and the combination of a clear strategic plan around driving share gains in our core business, coupled with discerned business system that underpins our strategic and operational execution, provides us great balance to some of the macro uncertainty out there. As we talked about last quarter, we're not immune from the supply chain, transportation, material challenges that most everyone is facing. But taken as a whole, this quarter, again, feels better than the last. There were, are, and will, of course, be spot challenges. But our teams continue to navigate and retire risk while also having to look forward to continue to support what is really good growth for us. There are a few things in the quarter that didn't go our way. but we had a good plan and executed well, and that's simply what it takes to perform at a high level in the type of environment we're in. As far as the quarter, sales were up 17% year over year, 15% organically, and again, this is against the first quarter last year where we grew 12% and 4% organically. Our segment margins in the quarter were 24.5%, very much in line to slightly ahead of our expectations, and our pro forma leverage was It was 2.1 times exactly what it was at the end of December. Mark will cover some additional details on the financials, but a couple of points that I think are incrementally positive to the quarter are we saw really strong order growth across all categories, considerably above our sales growth rate. And secondly, we're seeing great traction to our Bright Shield offering and seeing the market take to it. and this integrated solution we've developed ahead of what will be a busy new construction season in North America over the next six to seven months, as well as what will be the first traditional school MRO cycle in over two years. I'll move on to slide four. As we've discussed in the past, there are a lot of inherent barriers to entry in our business. It's a complex path to win consistently and at scale. Said another way, building a sustainable competitive advantage is something that's very difficult to, and in our case, across the broadest portfolio in the industry, which is only further enhanced with our transaction with LK. Many of you already know this, but as a refresher, building codes, regulatory approvals, reliability, quality, service level, and innovation really, really matter. And only with great innovation can you drive high levels of specification share. And then there are the countless relationships at the owner, engineer, architect, general mechanical contractor level that need to be cultivated, both nationally, and in the local trade areas. The final mile is having the best, strongest local representation, as well as strong, strategically aligned relationships with leading wholesalers. If you've got that, you're in the game. In our case, there's no one that comes close to delivering the content per square foot we can deliver to an opportunity, which makes us the default lowest total cost of ownership. Some of the newer realities in our business are sustainability, labor shortages, value-engineered solutions, pod construction, connected products, and things like the WELL 2.0 building standard. Providing safe public and private spaces to students, patients, and patrons will only be a bigger differentiator moving forward. These have been the thrust of our strategic plan the last several years, essentially leveraging our competitive advantage today while skating to where the puck is going. Here's just a simple example of leveraging innovation into a competitive advantage today and one that will absolutely be lasting going forward. PRVs, pressure relief valves. This is a market that we'd size around $120 million. These valves are integral to regulating water pressure inside a building for both potable and fire protection systems. Depending on the size and the location of the building, you could have dozens of these. Our new product in the category, really across all six typical sizes, is a new patented solution. It's built with a Venturi valve design that handles high pressure rates while providing industry-best flow performance. It allows for both horizontal and vertical installation options, making it quicker and easier. The shortest lay length in the industry means to every opening in the market we can provide a valve. Some competitors' products simply aren't ergonomic. And the combination of a stainless steel interior and composite cartridges extend the life of the valve, and it uses 60% less material than competitive PRVs. And finally, it seamlessly integrates into Zurn's remote pressure monitoring system to easily monitor building water pressure. I share this example not because I'm trying to sell you one, although we'd be happy to, but highlight how we segment, target, and go after opportunities embedded in our strategic plan, And this replicates itself dozens, even hundreds of times across categories and compounds over years. In this case, our new innovation gives us a chance to top-grade specs, change codes, while opening up a new category that will turn into meaningful organic growth for us. And this is against the competitor with an inferior design with a bunch of attributes not suited to how future buildings are going to be built. Next on page five. When we shared the news of the LK transaction, we expect the people in industry to be excited. The feedback from the marketplace and our customers has exceeded all of our expectations and the unique nature of the transaction and true partnership has created a great dynamic and foundation for all of the integration planning. While we continue to operate and make decisions as independent companies, we found plenty of opportunity to introduce our teams, hold joint meetings, and do some planning sessions. Just this week, We're doing all of the diagnostic work for our 80-20 implementation with a broad team of both Zurn and LK associates, while also holding our initial Zurn business system leadership training session. Ten weeks post the announcement and about ten weeks until we close, the resounding view is that the strategic logic is probably even more sound than we thought when we announced it. The sociology between the two organizations has been really, really good. And finally, our confidence in delivering the financial synergies is exactly where we had hoped it to be. Just one more thing from me on page six before I turn it over to Mark. With having published our sustainability report a few weeks ago, hopefully many of you have had a chance to check it out. We've made ESG leadership a priority, and that's only enhanced with LK, the clear leader in drinking water for public and private spaces in North America. What's also gratifying is all the progress around ESG is manifesting itself in some recognition. And while we're not big on talking about it or advertising it, it's great to see. and we're actually seeing some strategic advantage from our ESG leadership. Attracting and retaining talent, being sought after as a thought leader on sustainable buildings are all things that help reinforce that by integrating ESG into our strategic priorities. It's helping us grow and building on to the competitive advantage that we've already built. So with that, I'll turn it over to Mark to walk you through some additional details on our performance and provide some color on our Q2 outlook.