Zurn Elkay Water Solutions Corporation

Good morning and welcome to the ZernLK Water Solutions Corporation Second 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 Pauley, Vice President of Investor Relations for ZernLK Water Solutions. This call is being recorded and will be available for one week. The phone numbers for the replay can be found in the earnings release the company filed in the 9K with the SEC yesterday, July 26. At this time, for opening remarks and introduction, I will turn the call over to Dave Pauley.

Good morning, everyone, and thanks for joining the call today. Before we begin, I would 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 filings with the SEC. 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 are helpful to investors, and contain reconciliations to the corresponding GAAP information. 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 in our SEC filings. One final reminder, we closed the LK transaction on July 1st, so our second quarter results that we will be walking through today do not include the impact from LK. We will start reporting a combined ZERN LK with our third quarter results. With that, I'll turn the call over to Todd Adams, Chairman and CEO of Zurn LK Water Solutions.

Well, thanks, Dave. And for everyone out there, just recognize Dave's a brand new dad. Three weeks ago, he and his wife, Laura, had a new son, Nolan. So when you call in, be sure to congratulate him. He's burning both ends of the candle here. So thanks, Dave, for everything, and congratulations. So, well, good morning, everyone. And hopefully everyone had a chance to read through the earnings release last night. and we do certainly appreciate everyone taking the time to join the call this morning. As Dave said, the merger was completed on 7-1, and we've been working really, really closely together the last few months in preparation of bringing these two businesses together. The strategic logic around the transaction continues to be exceptional. Complementary North American water quality, safety, flow control, conservation, and hydration products and solutions serving the same end markets and the same customers with both significant operational and commercial synergies. I'm really pleased where we are with respect to the integration, probably three to six months ahead of where I thought we'd be at this point, because we've got a lot of important things already behind us in the few short weeks since we've closed. We've aligned the sales and marketing organizations into a single team just last week, and we've already made or decided upon essentially all of the third-party rep changes that we want as a single business. In doing so, we've established a single go-to-market, and we'll be leveraging our proven demand creation capability, which is super important. And doing it right away will help us build the kind of momentum we want heading into fiscal year 23, as opposed to dealing with that much change to start our full fiscal year as a combined business that maybe we contemplated originally. We're also working through the change curve with the legacy LK team while teaching and fostering a common language we're going to use to run our business, the Zearn LK business system. In many, many ways, this transaction reminds me of when the old Rexnord combined with the Zearn business. We found a business with tremendous people, a great culture, fantastic products that could be better and go faster than even the Zearn team at that time thought. The really important difference is we've got 15 more years of experience leveraging the business system to develop and deploy a strategy, significantly more talent across the board to execute, and an even clearer vision of what we can turn the combined business into, because the only thing we're focused on is being the very best pure play water solutions business in the market, and one that's a monster in both the marketplace and produces superior financial results. In terms of the second quarter, which, as Dave said, will be the last standalone quarter for the legacy Zurn business in short, was really good. Sales growth of 17% with 15% core growth and segment margins of 25.1%. Pre-cash flow was $41 million and leverage dipped to $1.9. And when you look ahead to the end of 2022 and to start fiscal year 2023, leverage will be just above one times. We also announced an increase to the dividend last week to $0.07 a quarter, consistent with what we communicated back in February with the announcement of the LK transaction. Before I turn it over to Mark, I want to touch on everyone's favorite topic of conversation in the last 24 months, supply chain. Thinking as a whole, we've managed the unprecedented environment extraordinarily well, really for some time, dating back to the onset of tariffs, through the pandemic disruption, and then the follow-on freight and logistics challenges that we've all dealt with. And doing all of that while growing at a double-digit top-line rate. Consistent with what we said the last three quarters, we're continuing to see our supply chain normalizing back to 2019 levels. Just for some context, from the time we order things to the time we receive, convert, and ship them, it used to take about 70 to 80 days. Obviously, just a proxy for the total, but think of it as our end-to-end supply chain loop. Then you have to back that into best-in-class availability and lead times with share gain-driven double-digit growth and some seasonality. Our supply chain ballooned to about 160 to 170 days over the last 12 to 18 months, but through a bunch of effort and strategic changes to our supply chain sourcing and SIOP processes, along with some 80-20 work we've been doing. What we're seeing today is that that's back in the 80-90 day range, with further improvements through the fourth quarter and into fiscal year 23. The punchline is that you should expect to see a sizeable inventory reduction for us over the second half of the year, and also what looks like a more favorable commodity and freight cost environment as we start fiscal year 23. With that, Mark's going to take you through some financial details, and I'll come back and cover a few details on the integration.