Zurn Elkay Water Solutions Corporation

Good morning and welcome to the Zern LK Water Solutions Corporation third quarter 2024 earnings result conference call with Todd Adams, chairman and chief executive officer, David Polly, chief financial officer, and Brian Wendland, director of FP&A for Zern LK Water Solutions. A replay of this 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 Brian Wendland.

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 containing the press release that we issued yesterday afternoon as well as in our filings with the SEC. In addition, some comparisons will be made with 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. 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 ZernLK Water Solutions.

Thanks Brian and good morning everyone and thanks for taking the time to call in this morning. I'll start on page 3. The third quarter again slightly exceeded our guidance across the board and we are also raising our outlook again for the full year. We leveraged third quarter core growth of 4% into 9% adjusted EBITDA growth which drove margins to .6% according to 150 basis points of margin expansion year over year. Through nine months, our consolidated EBITDA margins hit at 25% and as you may have seen in the release, we raised our outlook for the year over year margin expansion to 250 to 270 basis points. Pre-cash flow in the quarter was $87 million and we deployed $50 million of that to repurchase 1.6 million shares during the quarter at an average price of under $31. Leverage falls to 0.8 times and as we mentioned in the release, we are raising our outlook for free cash flow and now see the full year around $260 million. And finally, we again raised our dividend this year to 9 cents a quarter which represents an increase of 12.5%. Later in the call, I'll spend some time on the outlook for our end markets heading into 2025 but much like we've said throughout the year, the resilience of our end markets and perhaps our unique exposure to particular verticals give us confidence of an improving backdrop over the course of the next couple of years. I'll hand it over to Dave to take you through some more color on the quarter. Dave?

Thanks, Todd. Please turn to slide number four. Our third quarter sales totaled $410 million and grew 4% organically on a pro forma core basis. Mid-single digit core sales growth in our non-residential end markets was partially offset by slattish -over-year sales to our residential end markets and pockets of the commercial segment within non-residential. End market trends continue to align with our expectations and our growth initiatives drove the sales performance to the higher end of the outlook we provided 90 days ago. Turning to profitability, our third quarter adjusted EBITDA was $105 million and our adjusted EBITDA margin expanded 150 basis points -over-year to .6% in the quarter. At 25.6%, our third quarter adjusted EBITDA margin is the highest consolidated margin since the LK merger two years ago and up 30 basis points sequentially from the second quarter. The strong margin and -over-year expansion was driven by the benefits of our productivity initiatives leveraging our Zern LK business system and continuous improvement activities across the organization as well as executing on the LK-related synergies. For calendar year 2024, we believe our -over-year margin expansion will be a bit better than we discussed 90 days ago and we are again raising our expectation for full year EBITDA. We'll cover that in a little bit more detail later in the call. Please turn to slide five and I'll touch on some balance sheet and leverage highlights. With respect to our net debt leverage, we ended the quarter with $308 million of net debt and leverage continued below one at an all-time low of .8 times. Our .8 times leverage is inclusive of the $50 million we deployed to repurchase shares in the quarter. On a -to-date basis, we have now deployed $130 million to share repurchases and $41 million to dividends. We continue to have excellent capital allocation optionality and as we have discussed, we will remain focused on a balanced capital allocation strategy going forward. I'll turn the call back to Todd.

Thanks, Dave. I'm back and on page six. Here you can see our -to-date sustainability impact and progress towards our targets. The beauty of our sustainability efforts and message and impact is that it compounds each and every day and the benefit accrues not only to the environment but directly to our customers' benefit. You've heard us talk about various states and legislation related to clean drinking water and filtration. The leading edge of that conversation has centered around the state of Michigan and its filter first regulations which are now being actively implemented. We're delighted to have worked with the state and its partners to develop the ways in which to implement solutions that will ensure that when a K-12 student in the state of Michigan goes to school, they'll be drinking clean water. The other element of our impact is in areas that have disruptions in their water supply, places like North Carolina with the recent hurricanes. We're helping communities and schools with filtration to ensure that PFAS and other contaminants that are in the water supply as a result of failed water treatment plants and a saturated watershed are filtered out and people are getting safe water in what is a very difficult situation. I'm now on page seven. Last quarter we highlighted our long-term growth algorithm of market growth plus price plus breakthroughs and how over the last 15 years that's resulted in a 6 to 7 percent compounded top line organic sales growth rate for us. This morning we'll go a touch deeper on the market part of that equation as we head into 2025 and I'll share the headlines and the data that everyone reads about but also how to get underneath that to see how that impacts our business. Just to start with some basic information, starting on the left, here's the Dodge Momentum Index which measures the value in dollars of all non-residential building projects in the planning process against the baseline year of 2000. The thought is that it's the leading indicator for all future non-residential construction spending and therefore it's generally used to monitor the future direction of construction spending. Think of it as a 9 to 12 month preview of what's likely to start but also realize that there's a lot in there, price, commercial, institution, governmental buildings, so it's a pretty broad view of what could happen. In the middle, the next is ABI which is a sentiment survey that tracks a cohort of partners of the AIA member-owned architectural firms and whether their billing activity for the previous month grew, declined, or remained flat. To understand this just a little bit more, a score of 50 indicates a balance between positive and negative reports while a score of 100 indicates that all firms reported improvements. A rise in the index above 50 means that more firms reported an increase in demand for design services than reported a decline in demand. It's important to note that a rise in the index above 50 is not a direct measure of rise in demand because the survey does not ask firms reporting stronger demand to quantify the level of increase in demand nor does it provide information on the size of those firms. That being said, higher readings in the ABI generally coincide with some form of growing demand. And finally on the far right, construction backlog is a measure of the amount of work surveyed by the inspectors having their current backlog. In some ways, it's their lead time to taking on new business and as you might guess, it's their best estimate assuming no delays and consistent levels of staffing. So when you look at and read the headlines of these, they all have a level of validity to them and how to think about the future but it all varies by region, vertical, and other than backlog reporting, lack certainty as to what's really going on at the ground level which you can begin to see in the starts data which is on page 8. So here is the Dodge starts data on a square footage basis, actuals from 2021 through 2023 with an estimate through August for 2024 and a projection for 2025. Here we've split the data between institutional and commercial and again, measured in millions of square feet. First, a couple of very simple observations. The square feet, commercial is two and a half to three times the size of institutional, largely as a function of the massive impact of warehouses which represent roughly 55% of the entire commercial starts data. Second, the institutional starts just doesn't bounce around all that much. An education which would be everything from an elementary school to a new research building at a university represents consistently 40% plus or minus of the entire institutional market. Off to the right, you'll see the Dodge breakdown amongst the rest of the verticals between institutional and commercial. And for institutional, it's healthcare and recreation buildings which includes things like stadiums, parks, public and private entertainment venues, as well as churches, dorms, government and municipal buildings. The common thread being highly specified, dense, complex buildings built to last for decades and not particularly sensitive to interest rates and content rich from a CERN perspective. In commercial, the remainder of the verticals are parking garages, office, retail and hotel. With office, retail and hotel being the most relevant to our business, again, because of the incrementally complex nature of those types of buildings and environments relative to warehouses and parking garages. If you move to page nine, the only thing we've done here is further segment the data from page eight down to our key verticals. On the left, this graph is just the education and healthcare vertical starts information. Again, actuals through 2023 and estimates and projections for 2024 and 2025. These two verticals represent 60% of the entire institutional index and 80% of our exposure to the institutional non-residential construction market. Simply said, we're materially over indexed to the strong stable parts of institutional within non-residential construction. On the bottom left, this is the graph, again, just for office, retail and hospitality verticals. The same periods as before, with the conclusion being those verticals represent only 30% of the overall commercial starts information, yet represent 75% of our exposure to commercial. So when you look at this and break it all down, it's certainly one reason why our business has been so resilient over the past 20 years. The other thing is that when you look at the projection for starts in 2025, within our most critical verticals, it's better than at any point in time over the last number of years. So certainly a good signal for us, but we're not popping champagne yet because those starts, number one, actually have to happen. And two, we'll see it when we start to see the bid quotes turn into buy quotes, which brings me to the last one for me, which is on page 10. I'll start by saying non-residential construction and all that goes into it is a very complex industry. If you've visited a job site or even built a home, this will resonate with you. When you think about all the coordination amongst the trades, staffing levels, regional migration, supply chain challenges, permitting, inspections, and on top of that weather, and just the reality of the different seasons in which work can be done in various parts of the country, it's complex. In general, the way to think about our business is that the average length of time to construct the non-residential building is approximately 18 months, some shorter, some longer. With our portfolio, which is by far the broadest and most expansive in the industry, we participate across the entirety of those approximately 18 months, with flow systems early in the process, water safety and control in the middle, and towards the end of the process with hygienic and environmental and drinking water. This is the chart on the left. To think about how that manifests itself within our business, you need to understand the lag effect. Simply said, in any given year, only about 20% of our new construction sales will come from starts activity within that calendar year, and roughly 80% will come from the start activity of prior years. To the right, we've tried to illustrate that over a given year by quarter. Think about it this way, in Q1 of 2025, virtually all of our new construction sales will come from starts in 2024. And by the time we get to Q4, current year 2025 starts, we'll have about 40% contribution to our sales. I think the way to conclude all of this is to say, on top of all the market data we just went through, we've got our own more detailed views of specific regions, channels, and customers, and is ultimately how we manage the business. We also have things like drinking water infiltration, which can drive outside growth that isn't really dependent on anything we've looked at this morning. The net of all of that is that it gives us high confidence in our core growth outlook, will continue to improve over the next couple of years. And with that, I'll turn it over to Dave on slide 11.

Thanks, Todd. While the market has had its ups and downs over a longer period of time, we have demonstrated an ability to deliver core growth through a number of different market dynamics. Over the last 55 quarters, we have had positive core growth 51 times, and our long-term core sales cager, back 10 years, is 6%. We are focused on a single geography in North America that is highly leveraged to the stable education and healthcare end markets within institutional. Our retrofit exposure has increased over the years to 45%, and we are deploying resources at the local regional levels where we win every day. There is not a single contiguous non-res market here in the U.S. This is a hyperlocal, hyperregional business. Our track record of sales growth has allowed us to deliver excellent profitability and cash flow. Year to date, our consolidated EBITDA margins are 25%, and our expectation is 30 to 35% incremental margins as we move forward. Our margin strength has come from leveraging our variable cost model and relentless continuous improvement to the deployment of the ZernLK business system. The CAPEX light model coupled with our disciplined working capital management has led to robust cash flow. And finally, on capital allocation, the balance sheet has never been in a better spot. We currently have the lowest leverage we have had as a public company with a flexible balance sheet, allowing us to increase our return of capital to shareholders via dividend and share repurchases while in the background cultivating M&A. Please turn to slide 12, and I'll cover our outlook for the fourth quarter and for calendar year 2024. For the fourth quarter of 2024, we are projecting -over-year core sales growth to be in the low single digits and are anticipating our adjusted EBITDA margin, or excuse me, our adjusted EBITDA to be between 88 and 90 million for the quarter. For the full year, we expect to see low single pro forma core sales growth -over-year. With respect to our adjusted EBITDA margin, we are again raising our outlook and now expect adjusted EBITDA margin expansion to be between 250 and approximately 270 basis points -over-year. Our free cash flow expectation has also improved as we are now expecting cash flow to be approximately 260 million. Before we open the call for questions, just a reminder that we've included on page 12 our fourth quarter assumptions for interest expense, non-cash stock compensation expense, depreciation and amortization, adjusted tax rate, and diluted shares outstanding. As a reminder, the -over-year sales comparison in the fourth quarter is completely comparable, as the last impact from product line exits occurred in last year's third quarter. We will now open up the call for questions. Thank you.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one in your telephone keypad to raise your hand and join the queue. If you would like to redraw your question, simply press star one again. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset to ensure that your phone is not unmuted when asking your question. Again, press star one to join the queue.

Your first question comes

from the line of Brian Blair with Oppenheimer. Your line is open.

Thank you. Morning, guys.

Morning.

Morning. Another solid quarter. Noted growth in all product categories for Q3. I guess the level set. Was there meaningful delta in growth rates in the quarter? And then for Q4, what are you contemplating by major product category in the low single digit guide that you bought?

Yeah, Brian, this is Dave. Nothing different between the different product categories. Obviously, drinking water continues to perform very well. We saw double digit growth in the installed base of filtered bottle fillers in the quarter. We continue to focus on just expanding the installed base of filtered bottle fillers as well as the attachment rate of those filters. Todd talked about some of the events in Michigan this quarter, and I think that will help both of those factors that our team are focused on. So we'll now have a nice installed base of filtered bottle fillers in Michigan with a pretty high attachment rate on a go-forward basis as the state looks to comply with that legislation. And then I would say very similar for the fourth quarter in terms of breaking down between the four product categories, how the sales looked in the third quarter. I'd expect something similar in the fourth quarter.

Okay, understood. And kind of offered a segue there with drinking water, still growing double digits. Looking to 2025, is there any reason to expect that growth rate to moderate? And to what extent, if you can quantify, could Michigan filter first implementation or other states following suit benefit your teams over time?

Yeah, so I think in terms of next year, nothing would suggest that it would slow down. Just in terms of trying to size Michigan, if you look at the state, the legislation that was passed requires one bottle filler, one filtered bottle filler per 100 students in the state. And so if you look at the state of Michigan, there's just about 1.5 million occupants within K-12 schools. So you can do the math on how many bottle fillers would be required in the state. Just as a proxy, an average bottle filler might sell for $1,200 to $1,300. And then there's also regulation around just faucets within classrooms and things like that. So there's a number of filtered faucets that will also sell into the state of Michigan. The other thing to keep in mind though with the legislation in Michigan is that it's a two-year adoption. So the law was passed in October of last year. The state just put out applications for schools within the last month, month and a half. Schools will start to get approval for spending, and then they'll likely spend in 25 and 26. So a lot of the legislation stuff that is either in play or passed in the state of Michigan tends to have a fairly long period of adoption.

Understood. Appreciate that detail. One more quick one, if I may. You mentioned that normalized 30 to 35% incrementals you expect to drive going forward. I believe you're also underway with some supply chain repositioning that should benefit Evita Group next year. Can you remind us of the benefit that should drop through and perhaps the phasing or the timing of that?

Yeah, right. It's Todd. We've sized that somewhere in the neighborhood of 5 to 10 million at full run rate. I think we'll be in a position to articulate that perfectly when we get to February. But I think you can for sure count on five next year. And then it's just a matter of how fast does it all ramp and can we get all the benefit in the year just based on current inventory levels and sell through and all that kind of stuff. But something we've been working on for a number of years. I think it's a particularly helpful hedge against the backdrop of a potential tariff environment. But we've been working at it for a number of years. And so it'll begin to read through next year and then full run rate into 2026.

Got it. Appreciate the color. Thanks again.

Our next question comes from the line of Andrew Buscaglia with BMP Paribas. Your line is open.

Hey, good morning, guys. Good morning. So the story all year has been really strong margins and this quarter back gross margins I thought were exceptional. I'm wondering if you could talk a little bit more about gross margins. What's driving that? How sustainable are the current levels? And then what's the long-term goal from here in gross margins? Is there really a feeling or can that just keep going higher?

Well, I think it's a testament to a number of things. One, the foundational is there an business system work that happens day in and day out that winds its way into gross margin through productivity, waste elimination, improvements in quality, waste elimination around freight and things like that. So the short answer is it's incredibly sustainable. And then I think the other thing to point out is that our fastest growing product category is mixed favorable. And so I think it's our view that it's very sustainable at the levels it's at, subject to the usual seasonality that we see, but in general we think it can continue to march higher. I don't know that there's a number that I'm going to give you, but from where we are I think targeting over time a 50% gross margin is realistic for our product portfolio today.

Yeah, that's helpful. You know another question I had along the margin line is on slide 10 you talk about how you work through that process. Is there a margin differential as you work through the month one through 18?

You know, not particularly. I think when you get to the end our drinking water margins are better than our hygienic, but when you aggregate the three across they're pretty similar at the end of the day.

Yeah, and that's why obviously Andrew assumes that all jobs start at the same time and end at the same time, which isn't necessarily the case. You've got jobs in process at different stages of the process at any given point in the quarter.

Right, okay. Okay, thank you guys.

Next question comes from the line of Andrew Creel with Dow Shabang. Your line is open.

Hi, thanks. Good morning everyone. Thanks for all the new color in the slides. Very helpful. So on those and all that information on Dodge Star, so you mentioned more encouraging projections looking at next year, but that you need to see the naturally happen. So just wondering, have you seen any increase in pauses or hesitancy with customers to actually push projects through

the finish line right now? Not in any pronounced way, Andrew. I think you said the magic statement, which is they actually have to happen. And so when you look at the 24 information, that's actuals projections through August, we're not seeing on the ground anything moving around over the last quarter. And then obviously as they get into 2025, there's usually some wiggle in the beginning of the year based on the weather patterns in the US. But taken as a whole, the Dodge Starts information usually is pretty reliable and gets, I would say retroactively updated every time it's issued. Each month. And the bias is usually again to increase it. So we've got to see it happen, but nothing pronounced or anything of any significance on delays or push-ups from our vantage point.

Okay, great.

And on net price, I think my understanding is this year, net price has been a bit below the long-term algorithm, maybe in that 50 bits or so range. Just keep through like your confidence that maybe like one to two points in 2025 as demand comes back a bit.

Yeah, I think that's a very, very good assumption. We're seeing the market put in price increases beginning in 2025. We've done our preliminary communication around that and everything that we see and I see leads me to believe that that's a really good assumption heading into 2025. As we sit here today, right? I mean, I think to the degree there are tariff implications or other things that happen between now and points in time in 2025 that could differ. But I think as a baseline, that couple points of price is probably a really good assumption heading into 2025.

Thank

you. Okay. Next question comes from the line of Nathan Jones with Stifle. Your line is open.

Good morning, everyone. Good morning. I move a follow-up to Brian's earlier question on the incrementals and supply chain savings. You've got 30 to 35% normalized incrementals. Should we think of the supply chain savings over the next year or two as contributing to that 30 to 35% incremental or as additional to that 30 to 35% incremental?

Yeah, Nathan, it's Dave. I would think about it as additional. So 30 to 35% normalized incremental margins and then we'll have a step-up benefit from that supply chain action.

Awesome. In fact, when you guys acquired LK, you gave some data around the number of water fountains in the US. It was like 8 million and the penetration of bottle fillers on those was like, I think it was a million six. Is there an update you have to that? I'm just interested to see kind of how the penetration of those has evolved over the last couple of years to get kind of a better idea of how long the runway is for penetration of bottle fillers.

Yeah. So if you look at the, call it million six two years ago, Nathan, I'd say there's an incremental 200 to 300,000 bottle fillers over the last, I guess since July of 2022. One last one on

that.

Yeah. So there's still a fairly massive installed base of non-bottle fillers and non-filtered bottle fillers here in the US.

What's your guys' opinion on what the saturation of that is? Like there's 8 million water fountains out there. They're not all going to have bottle fillers eventually. There's going to be a top number to that. I imagine it's still far, far above where it is today, but do you have any kind of guesstimation of what max penetration might be?

You know, Nathan, I don't know that we do, but I think you can reliably think about that installed base growing in the couple hundred thousand to potentially 300,000 over the coming years. So I think check back with us when we feel like it's more appropriate, but at the present, I think it's very, very early days. I mean, the category is I think 11 years old, right? And so it took our entire lifetimes and multiple lifetimes to get to the 8 million installed drinking fountains. I think with legislation, you know, mandating, you know, particular number of units per student and then the retrofit replace, right? Because the life cycle of a bottle filler is somewhere in the neighborhood of 10 years. So we don't work on the very early beginnings of capturing a little bit of that very initial replacement cycle, but I think you can think about it as reliably growing the installed base by a couple hundred thousand, you know, probably moving to 300,000 over the next five years or so.

Excellent. Thanks very much for taking my questions.

Yep. Next question comes from the line of Mike Halloran with Beard. Your line is open.

Hey, good morning, guys. Good morning. Hey, good slide. And I'm just trying to triangulate, you know, the Dodge starts on the subsegment information with the timing that you laid out on slide 10. It seems to me what you're saying is there's relative stability in your markets as we sit here today. The tailwinds from a potential spike in the education, the education and healthcare side of things, I mean, that would be more the second half of next year. So the idea from your perspective, if I'm triangulating this, is pretty stable going into the front half of next year and then back part of next year in 26 is where the tailwind from that would come in or is it just a little early to make that assumption?

No, I think in general, if the starts turn out to occur as projected in the verticals, particularly on the institutional side, the vast majority of that benefit accrues to 2026. And just as maybe a point to make, this represents just our new construction sales. And so, you know, 40 to 45% of the remainder of the business is retrofit replace, break fix, which occurs in a relatively orderly 2 to 3% growth per annum. And then it doesn't include our residential exposure. So this is just new construction in institutional and commercial. But your thesis around when does show up, yeah, it'll show up a little bit towards the end of 2025, but in a more pronounced way throughout 26 provided these things happen as they're projected today.

Nick Santo is going to ask about the other piece that you got to it. So how do you think about the balance sheet usage from here? Rates of dividend, balance sheets in great shape, obviously. How's that funnel from an M&A perspective look at this point? And how do you think about actionability?

I think Dave covered a lot of that in his comments. And obviously, we think we can, you know, continue to grow the dividend at a double digit rate for the foreseeable future. We're going to continue to invest in ourselves by buying back stock below what we see the intrinsic value being based on our view of the outlook. And to get to the root of your question, the cultivation activity is picking up. And so I think we're going to have opportunities to convert things that we've cultivated on a proprietary basis. Sometime in 25, I think that the nature of the conversations gives me some element of confidence that there will be some things that are actionable and we'll be able to convert. But in the meantime, I think we're going to reliably invest in what we believe is a great investment ourselves and continue to watch and be in a position to execute on some M&A sometime in 25.

Thanks, Todd. Appreciate it.

Yep. Next question comes from the line of Joe Richie with Goldman Sachs. Your line is open.

Okay. Good morning, guys. How are you? Good. Good morning. Good. So I want to follow up on that question. It was really helpful to get some of this macro data and the kind of like the initial framework for next year. I just want to maybe understand that education and healthcare piece a little bit better because for the last few years, we've seen a bunch of ESSER funding come through on the education side. And so I don't know, is there any is there maybe a little bit more color on what's driving that expected increase in 2025 on the starts data?

Dave can probably quote the ESSER numbers more efficiently than I can. But when you look at the vast majority of that funding, virtually none of it went to building any form of schools. It was all everything from salaries to safety to technology. And so the demand for new schools and frankly the age of schools did not benefit in any way from that ESSER funding. And so I think when you look around the country and you see population migration, you see the age of those K through 12 schools throughout the country and the requirements today to make them you know safe buildings, sustainable buildings. I think that's simply what's driving the expected outlook. But Dave can probably quote the ESSER numbers more efficiently than I can.

Yeah, I think Joe when you look at it, I think Todd hit it. The ESSER numbers were massive in terms of the amount of money that was provided to K through 12 schools in the U.S. I think the unfortunate thing is or what this graph is illustrating is that it wasn't spent on new construction. I think that's the point there was certainly some upgrades that were made but not even in a material way. And so in terms of our numbers, we haven't seen a massive influx or a significant influx from ESSER funds going towards drinking water updates. And so I think as the U.S. school infrastructure continues to age, you start to see new construction come out here in 2025.

Got it. Okay, understood. That's a really good distinction. Appreciate that. And then I guess my follow-on question, look, it's great to see the balance sheet position where it is today sitting at sub, you know, one-times leverage at this point. Just give us an update if you can on your M&A pipeline priorities for the excess liquidity that you have today and any thoughts around that would be helpful.

Yeah, I mean much like we said just a question ago, the idea would be to continue to stick to what it is we do. I would not see us doing anything outside the U.S. I think it would be a combination of things within categories as well as some adjacencies that fit nicely between some of our existing product lines. So very much sticking to our knitting in our core market that give us incremental content per square foot that we can leverage through the way we go to market today and obviously, you know, migrate to the model that we've leveraged as Dave pointed out, you know, capex light, highly specified, those types of things. So that's the pattern of things that we're shooting at and cultivating. So I think it'll look a lot like things we do today, you know, in our core market here in North America.

Yeah, and I should have probably clarified the question a little bit. Just maybe just on the adjacencies, Todd, can you elaborate on that? Like what, you know, what were the types of different, you know, opportunities that are out there that could fit with the portfolio today?

Well, there's, I mean, when you go inside each of our four significant categories, there's a bunch. And so I'm not going to get into each and every detail of the pockets of opportunity that we see, but, you know, suffice it to say they will all fit really nicely within one of the four product segments that we talk about today.

Okay, thank you guys. Yep. And our last question comes from the line of Brett Newsy with Newzoo. Your

line is open.

Hey, good morning,

all.

Morning.

Good morning.

Hey, just wanted to come back to the construction cycle illustration. Very, very helpful. I was wondering if you might be able to drill down on the groupings in a little more detail. So if you look at the flow systems, which does lead, are you seeing any early signs of improvement on the rate of change that might, you know, might inform that things are getting better there? Any granular color on some of those, you know, those rates of change?

Yeah, I mean, qualitatively, I would say if you had to force rank what's growing the fastest, that might be our fastest growing at the present, again, excluding drinking water. And so what we're seeing is, you know, we're seeing flow systems, activity, you know, at a pretty decent clip. And so that's where, you know, if we weren't seeing that as a backdrop to some of the stability and maybe early innings of growth in the Dodge starts, it would be a little bit worrisome. But we are seeing flow systems grow, you know, in line with what we would expect and sort of at the trajectory that I think the starts data would indicate. So that's just qualitatively. Obviously, that has some level of seasonality to it because the number of starts, obviously, you know, beginning in the late fall and through winter in certain parts of the country decline. So we're seeing, we've seen that throughout the year. So I think it's a good sign. We're not trying to declare victory on 2025 yet, because a lot can happen between now and then. But, you know, they're performing in line with the trajectory that the starts data would indicate.

Okay, great. And then just to follow up on some of the growth, so you noted the high end of the growth achievement and was driven by growth initiatives, but you didn't go as far as saying anything was related to share gain. Do you think you picked up a little bit of share in the quarter? And I guess, is there any way to parse out what growth initiatives bridged you to the upper end versus, you know, more market related activity?

Yeah, I think measuring share in a quarter is extraordinarily difficult. I think the way to think about it is are we growing our specification share reliably over time? And I think the answer to that question is unquestionably yes. And so rather than, you know, rather than try to measure discrete set of opportunities that may have started as long as 18 months ago and say, did you capture share? You know, the North Star for us is did we grow our specification share throughout the year and specifically in the quarter? And the answer to that is absolutely. And so that will manifest itself in long term share gains versus trying to measure it, you know, in any specific quarter with a unique set of opportunities against a competitive set.

Okay, great. Maybe just one last one because I'm last, but back to the EBITDA margin progression. So it's just been really, really strong. You noted the ongoing productivity. You know, when you think about the efforts in terms of structural versus discretionary, is there any variable discretionary costs that would maybe need to come back next year? And then thinking about the mixed complexion institutional versus commercial, if commercial does get better next year and maybe there's some moderation in some of the pockets of institutional, are there any mixed dynamics to think about? Thank you.

I'll try to remember the whole question, but I think that I don't see anything from a variable basis that needs to come beyond the stuff that you would ordinarily think of like rep commissions and freight and things of that matter, but all at a rattleable level. So inside that 30 to 35% incremental envelope. And then as it relates to the categories, you know, institutional, I would say it's not a secret. It's our most profitable vertical commercial next followed by residential. And so, you know, as we see institutional chug along and as we see commercial begin to recover, you know, commercial is probably much more in line with the fleet average. So, you know, I would say it's good, but nothing, you know, nothing outside of that. So again, I think when you look back over time, those incrementals are pretty reliable. Institutional is clearly our most profitable vertical and residential is our least profitable. So, you know, I think taken as a whole, we're pretty comfortable with that 30 to 35% incremental going forward.

Appreciate the extra insight. Best of luck.

That concludes the question and answer session. Mr. Brian Wendland, I turn the call back over to you.

Thanks, everyone, for joining us on the call today. We appreciate your interest in ZernLK Water Solutions and we look forward to providing our next update when we announce our fourth quarter results in early February. Have a good day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.