09 Aug ELCO Water Opportunities 2nd Quarter Report

ELCO Water and Climate Impact SMA
2nd Quarter 2021 Investor Update

The ELCO Water and Climate Impact SMA (formly ELCO Water Opportunities SMA) strategy has performed in-line with our expectations for the first half of 2021 and we expect the positive trend to continue as the U.S. government finalizes the massive $3.5 trillion infrastructure bill. Water and water related infrastructure are key components to President Biden’s historic bill.

We believe there is no other industry that offers such transparent growth prospects like the ones currently being experienced in the water sector. This growth comes from acquisitive, regulatory, and organic opportunities as the world continues to modernize and invest in clean reliable drinking water and the infrastructure that supplies it as well as improving wastewater solutions. Globally, water scarcity has become a major crisis with climate change, pollution, poor sanitation, an ever-expanding population, and increasing consumption. Water scarcity may hurt the consumer staples sector the most, per Barclays Capital recent report. This is something we highlighted last quarter as a major drought in Taiwan crippled semi-conductor manufacturing. The companies we are currently invested in are the solutions providers for these threats. They are innovative and efficient and will be the major beneficiaries of increased investment in water.

We wanted to highlight two large positions in the portfolio that we believe are well positioned to benefit from the infrastructure bill and whose shares Matt Diserio and his team at Water Asset Management have bought throughout the quarter i.e Rexnord Corp and Great Lakes Dredge and Dock. Both of these companies will be critical players in any money directed to water related investments in President Biden’s bill and importantly help defend against climate change.

Rexnord recently closed the spin-off of their Process Motion Control segment, a solid industrial recovery business. Upon closing, Rexnord will become a pure play water management business. Zurn (Rexnord’s Water Management business) is a market leader in the North American commercial plumbing market. Several factors have contributed to the company’s success. Their innovative culture has enabled the company to design high performing products that meet stringent plumbing code requirements. Zurn has continued to gain specification market share. The company also has a broad product portfolio and strong multi-channel distribution. They can supply 80% of a building’s plumbing needs, while most of their major competitors cannot supply much more than 15% to 20%. Customers include commercial, institutional, infrastructure and residential construction end markets. Products are sold through independent sales reps, plumbing wholesalers, and industry-specific distributors. We believe Rexnord is very well positioned as capital will be allocated to “smart building” and infrastructure enhancements which includes more efficient water management systems.

During the COVID-19 pandemic, Great Lakes was deemed an essential and critical infrastructure service working almost without any disruptions throughout the year, both internationally and domestically. The last 12 months revenue was ~$700 million, and the last 12 months adjusted EBITDA was $117 million. The company has a backlog of about $480 million and consistently are booking work. Their main business segments are coastal protection and restoration works which include port deepening, shoreline protection, and barrier islands construction. The widening of the Panama Canal has created significant business opportunities for Great Lakes. Ports around the U.S. need to be dredged to draft larger ships travelling through the canal. The company also uses its fleet to install offshore wind turbines and have several projects in their backlog including Equinor and Empire Wind. We believe Great Lakes will be a major beneficiary of the infrastructure bill. Among many other elements of the proposal, President Biden calls on Congress to invest an additional $17 billion in inland waterways, coastal ports, land ports of entry and ferries. Lasse Petterson, the company’s CEO recently stated at an industry conference, “the market is solid for the foreseeable future. And the political situation of the U.S. is very supportive of infrastructure investments. And in parallel, we now see the offshore wind market opening up and we want to be an active participant in that market which gives us diversity and gives us an opportunity to grow our top-line going forward. So it’s a very exciting time for us here in Great Lakes Dredge & Dock.”