Q4 2024 Earnings Summary
- Zurn Elkay Water Solutions has significantly reduced its exposure to China from 70%-75% at its peak to less than 25% currently, aiming for less than 10% by 2026, demonstrating supply chain flexibility and resilience against tariff risks.
- The company anticipates acceleration in its institutional markets, particularly in health care and education, in the second half of 2025, supported by positive indicators such as the Dodge starts data predicting a decent increase in starts from '24 to '25, indicating future growth opportunities.
- Management highlighted significant capital allocation optionality and is actively pursuing strategic M&A opportunities that are expected to add value, expressing confidence in working on "a handful of things that we think are really smart and make a ton of sense for us," demonstrating potential for growth through disciplined acquisitions.
- The company's guidance does not include potential tariff impacts, and the rapidly changing tariff environment could negatively affect future earnings.
- Despite efforts to reduce exposure, the company still relies on China for about 25% of its supply chain, posing risks from tariffs and supply chain disruptions. They aim to reduce this to less than 10% by the end of 2026, but the existing exposure remains a risk in the meantime.
- The CEO admits uncertainty about the impact of higher interest rates on medium to long-term growth, indicating that higher rates could potentially hurt growth, although the extent is unclear.
| Metric | YoY Change | Reason |
|---|---|---|
Institutional Segment Revenue | +9% | The growth is primarily driven by stable institutional demand in education and healthcare, retrofit and replacement activities, and continued synergies from the Elkay Merger. These markets are less sensitive to economic fluctuations, supporting consistent revenue increments. |
Operating Income (EBIT) | +50% | The jump stems from cost improvements in materials and logistics, productivity initiatives, and merger-related synergies that reduced overhead. Lower one-time charges compared to earlier periods also contributed to the higher EBIT. |
Net Income | +162% | This significant rise is linked to improved operational efficiency, reduced non-recurring costs from the Elkay Merger, and lower restructuring charges. Steadier end markets and the absence of prior-year merger expenses further boosted profitability. |
EPS (Basic) | +163% | The EPS surge reflects higher net income and fewer outstanding shares (due to share repurchases), alongside better operating margins. Synergies from the Elkay integration and continued focus on core sales growth drove these earnings improvements. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Core Sales Growth | FY 2025 | no prior guidance | Expected to be similar to 2024 | no prior guidance |
Adjusted EBITDA | FY 2025 | no prior guidance | $405M to $420M | no prior guidance |
Free Cash Flow | FY 2025 | no prior guidance | $290M | no prior guidance |
Adjusted EBITDA Margin | Q1 2025 | no prior guidance | 24.5% to 25% | no prior guidance |
Market Assumptions | FY 2025 | no prior guidance | • Low single-digit decline in commercial end markets<br>• Low single-digit growth in institutional and Waterworks end markets<br>• Flattish conditions in residential end markets | no prior guidance |
Price Realization | FY 2025 | no prior guidance | Approximately 1 point of price realization | no prior guidance |
Tariff Exposure | End of 2026 | no prior guidance | Less than 10% exposure to materials from China by the end of 2026 | no prior guidance |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Core Sales Growth | Q4 2024 | Projected to be in the low single digits year-over-year | 3.9% year-over-year (from 356.8In Q4 2023 to 370.7In Q4 2024) | Met |
Free Cash Flow | FY 2024 | Expected to be approximately $260 million | $285.2 million (calculated from Q1–Q4 2024 net income + adjustments – CapEx) | Beat |
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M&A Pipeline Confidence
Q: Confidence in closing M&A deals this year?
A: Management is working hard on several smart opportunities that make sense for the company, though timing isn't fully under their control. They have ample balance sheet flexibility and are being disciplined about where they choose to spend their time. While not committing to specific timing, they are optimistic about advancing deals that align with their strategy. -
Tariff Impact on Guidance
Q: Were any incremental tariff impacts included in guidance?
A: No incremental tariff impacts were included in the guidance due to the rapidly changing environment. Management feels confident in their ability to navigate any new tariffs, leveraging their ability to implement price increases if necessary. They highlight that their exposure to China has decreased considerably and will continue to decline through 2025 and 2026. -
Reducing China Exposure
Q: What is the company's current exposure to China, and how has it changed?
A: At its peak, the company's exposure to China was approximately 70% to 75%. Currently, it has reduced to less than 25%, with a goal of reaching less than 10% by the end of 2026. Supply chain adjustments over the past 5–6 years have increased flexibility, allowing the company to shift sourcing to Southeast Asia, North America, or the U.S. This flexibility helps them serve the market at the best cost despite tariff uncertainties. -
Second Half Dynamics and Growth Outlook
Q: Expectations for first versus second half dynamics across key markets?
A: Based on Dodge starts data predicting a decent increase from '24 to '25, management expects the institutional market, especially in healthcare and education, to potentially accelerate in the second half of 2025 if starts materialize. Commercial could see similar trends but possibly not to the same magnitude. The first half of 2025 is expected to resemble the quarters turned in during 2024. -
Vertical Growth Assumptions
Q: Have vertical growth assumptions changed versus 90 days ago?
A: Management recently refreshed their internal data and finds the numbers are on the same trajectory, with minor fluctuations. The institutional growth guidance is based on the aggregate impact of starts, lead and lag effects, and other factors. They expect starts to improve in the back half of 2025, leading to better growth into 2026, as product usage aligns with the build cycle. -
Interest Rate Impact on Growth
Q: Will higher rates impact medium to long-term growth?
A: The vast majority of the company's business, including institutional sectors like education and healthcare, as well as retrofit and replace markets, are largely not interest rate sensitive. While higher rates don't help, management cannot quantify any negative impact. They are focused on driving above-market growth through their strategic initiatives, despite the interest rate environment.