Q3 2021 Zurn Water Solutions Corp Earnings Call

Okay.

Good morning, and welcome to these are in water Solutions Corporation third quarter 2021 earnings results Conference call with Todd Adams, Chairman and Chief Executive Officer, Mark Peterson, Senior Vice President and Chief Financial Officer, and Dave <unk>, Vice President Investor Relations for Zurn water solutions.

This call is being recorded and will be available on replay for a period of two weeks.

The phone numbers for the replay can be found in the earnings release. The company filed an 8-K with the U S. You see yesterday October 26.

At this time for opening remarks, and introduction I'll turn the call over to Mark Peterson.

Thank you and good morning, everyone before we get started today, we're pleased to announce that David Paul will be assuming the day to day Investor Relations responsibilities as of this earnings call.

Many of you have already had a chance to work with David in the past six months that he's been instrumental in assisting us with the investor relations during that time.

Dave has been with the company for the past nine years working with several financial rules and that's been our corporate controller for the past four and a half years.

But before I turn the call over to Dave for his opening comments I just want to touch on the RMT transaction that closed on October four.

The timing of the close our third quarter results include the PMC segment.

The fourth quarter of 2021, the P&C segment will be reported as discontinued operations, who will provide high level comments on Pmt's financial results. This quarter, but we ask that you hold any questions. You may have on the PMC segment for Rex Regal Rexnord earnings call next week on Tuesday November 2nd.

I'll now turn the call over to Dave Bali.

Thanks, Mark good morning, everyone.

Like to remind you 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 SEC filings contain additional information about these non-GAAP measures.

Why are we use them and why we believe they're helpful to investors and contain certain reconciliations to the corresponding GAAP data 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.

With that I'll turn the call over to Todd Adams, Chairman and CEO of certain water solutions. Thanks, Dave Congratulations and good morning, everyone. Hopefully you all had a chance to read through the release last night and see the consolidated rexnord numbers for the last time and as Mark covered in his comments, we'll use this call to essentially just covers are in water solutions results.

And.

And leave the PMC results to the Regal Rexnord team when they report next week.

First of all this is truly a milestone quarter for us we got the RMT transaction done with the new Regal extraordinarily about seven five months a testament to the collaboration between the two companies is simply outstanding effort.

Everyone in our advisors on both sides.

Our team in particular for everything they've done to facilitate the separation.

When you go through one of these things, it's obviously touches a lot of things that need to get sorted pretty quickly antitrust the SEC the IRS contracts licenses it tax benefits you name it.

And from our side, it's really gratifying to all go through all of that and not Miss a beat.

Getting everything done for day, one standalone, while continuing to execute at a high level is really a testament to the team and talent we've assembled here.

It's even more important is that we started October one with all of that behind us and focused on the future.

The transaction is a terrific outcome for both companies and shareholders and we're excited about what it means for certain water solutions to be Standalone, and obviously rooting for the new Regal Rexnord. This team's success and believe they have a really bright future moving forward. So.

So we'll get on to the Gws part of the program.

From a top line perspective, we grew 15% in the quarter, 5% on a core basis and Thats on top of the 5% core growth, we delivered last year and frankly, it should have been a little bit more.

I'm not going to pull out a harmonica and seeing the supply chain blues, because our teams have done an incredible job of managing through the compounding impact of tariffs supply and labor constraints and lately the logistics not the world's found itself in the.

The deep expertise and experience we have in managing a complex supply chain has kept US ahead of the price cost equation for a long time, while keeping industry best lead times and also has allowed us to disproportionately invest in growth versus investing in capacity and things like maintenance Capex.

To get a little specific on the logistics topic, we had a plan to import almost 900 containers over the course of the quarter and about 50 of them were late.

A handful of those were delayed by Covid shutdowns at ports, leaving China and other parts of Southeast Asia.

Another 25 relate because it delays getting picked up at our suppliers through either a shortage of trailers are drivers and the rest are a function of using a break bulk transport solution that simply got delayed at various ports in the U S. So that's the bad news.

If half of these break our way we are looking at core growth of 9% to 10%.

The good news is it's not a labor shortage at zurn, its not a product supply based performance issue.

Lot of component availability issue.

We talked about last quarter, it's the compounding impact of a whole bunch of things colliding trading a topic that will be the most talked about.

Thing on earnings calls the season supply chain challenges, but in our case, it's really a few discrete transportation delays.

To us it feels like the third quarter was or as close to the inflection point of this transportation and logistics not the world finds itself in.

And as we start our fourth quarter. It feels like we're in great shape, essentially everything that needed to leave our port at this point is left everything is here is winding its way out of the various ports and warehouses.

And with one month of the fourth quarter in the bank, we're off to a good start and as we said in the release taken as a whole the second half will end up sort of as we'd expected 90 days ago.

As it relates to gws profitability, we delivered margins of 26, 5% at the high end of our expectations. Despite the lower shipments hopefully, it's pretty clear that we continue to execute execute well on the price cost equation.

But I want to make a comment or two to give you a better feel on why our margin profile is so strong and sustainable and that is actually a whole lot more than just pushing price increases through to the marketplace.

A huge competitive advantage, we have relative to the people. We compete with is the relative shares we have across the broadest portfolio of products in the industry, which is an extraordinarily difficult thing to replicate.

And it's the reason and the reason that's important is that environments that we're in and frankly, we continue to be in products that work better together that are easier to install and faster to install and fundamentally save labor and cost for the building owner and the mechanical contractor are going to win it's a big advantage to us and even more so as we continue to expand.

Our portfolio.

Second while we typically lead the market with respect to price. It's also about continually doing a better job on product design and innovation I won't get too specific but there is a particular category, we redesigned and developed a patented product that weighs a quarter of the weight of our competitors suffice it to say, it's a <unk> valve.

So we don't have we have an advantage because of our portfolio, but imagine as an example, we're selling a product at a market price, but our material cost on the product is 75% less not to mention our freight costs are lower so when you understand these types of examples it becomes clear as to why our margins are so superior to our competitors.

If we can move to page four.

The future for <unk> on a standalone basis it is exciting.

That's a big part of the reason why we decided to separate P&C. When we did the incubation time for a number of breakthroughs, we're really beginning to take route and as we take a step back and look at the next three to five years, we see incredible runway for growth both organically and also from an M&A perspective.

The idea of being a standalone pure play water business Levered to a number of water and sustainability Megatrends is something we've been laser focused on for a while and we feel like we're very early in the journey of capitalizing on opportunities here.

And that's before we dial in what an infrastructure bill might do for our business.

Sitting here today I would say, we've never had the number of organic opportunities in front of us that we see today.

The one we've discussed for the last year has been the touchless hygienic opportunity that we branded bread shield.

<unk> continues to have an enormous medium to long term upside not just for new construction with a massive available retrofit market that we've really only entered in the last year, but.

But it's not just that.

The fact that we've effectively reinvented our drain business the past several years with patented solutions that perform better reduce cost for installers and give us opportunities to rewrite specifications around these solutions.

We're also leading the industry in developing products that can be used for peak fabrication. Our off site construction that the industry is leveraging to combat lower levels of skilled labor required to meet the strong demand for new construction.

We've leveraged our product portfolio to enter the adjacent fire protection market site works market and pretreatment markets. These are all share gain opportunities for us that we weren't even participating in just three years ago.

E Commerce has allowed us to reach a whole new subset of customers and we're excited about the Jan channel Jan San Channel and believe it has incredible growth potential for us in the coming years.

And finally, it's not just only about extracting the cost synergies from acquisitions, we have made with capitalizing on the growth from acquisitions that with that.

Capitalizing on the growth from acquisitions.

Under the Zurn leadership positions around specification content per square foot and lean construction set trends. The bottomline is we see a clear path to double digit growth next year and are also optimistic that we will see some M&A opportunities convert.

Setting up strong growth into 2023 and beyond.

We're not going to get ahead of ourselves at this point, but it is clear to me that gws can be a much larger company with a consistent financial profile, while continuing to build out our business very much focused on the types of things we do today.

If we can get to page five.

So now that we're a pure play water business, our ESG profile and impact is both more visible and heightened.

We believe that as we move forward. It wont just be about providing products that save the world billions of gallons of water.

Keep the potable water supply safe inside buildings, or creating safe and hygienic space inside public and private spaces.

It'll also about doing it the right way and an inclusive way and were up for the challenges Theyre, taking a leadership role demand.

I also think it's important for everyone to know that we've been at this for a while and we're very much looking forward to getting out and meeting with investors on the topic and we are pleased to share our progress as we publish our upcoming 2021 corporate social responsibility report.

Before I turn it over to Mark if you could just turn to page six.

As some of you on this call May remember a couple of years ago, we laid out a relatively comprehensive capital allocation strategy for rexnord.

That was grounded in the reality of a relatively undervalued multi industry business with strong deleveraging characteristics, but become public from private it from a private equity led IPO.

It left us with leverage North of four times, we had finally.

Achieved the financial profile to begin to return money to shareholders in the form of a reasonable dividend a regular share purchase repurchase program and.

And our priority around water related acquisitions.

In the case of dws, well, it's a very different dynamic our capital allocation strategy is something we wanted to clearly communicate to investors as we start stand alone.

First gws as a differentiated growth company.

With a mid single digit core growth rate over a decade.

An exceptional margin profile, an equally strong deleveraging characteristics as the old rexnord.

One really good example of this is over the past 15 years Capex has been about 1% of sales.

Next we're starting life with leverage of only two times and we would expect to maintain a modest leverage profile between two and three times could drift lower at times, but in general expect that to be our targeted range.

You May have also seen that last week, our board declared an initial dividend of <unk> <unk>, a quarter or 12, <unk> annually and while its modest to start it's something we think we can selectively and comfortably increase overtime as we grow and.

And finally with respect to acquisitions, we believe we have a deep funnel of opportunities that fit our return criteria that we can do with our cash flow that only enhance our long term growth rates and returns.

I'll also leaving the optionality for larger more transformative opportunities should they become actionable from our proprietary funnel.

So with that I'll turn it over to Mark to walk through some additional details on our performance and provide some color on our Q4 outlook.

Thanks, Todd Please turn to slide number seven.

On a year over year basis, our third quarter consolidated sales increased 13% to $557 million.

The growth was driven by 100 basis point benefit from foreign currency translation, a 400 basis point positive contribution from our Hadrian acquisition in our water management platform partially.

Partially offset by a small divestiture in our PMC platform that reduced our total sales by approximately 100 basis points and finally core sales growth of 9%.

Turning to profitability, our adjusted EBITDA increased 18% from the prior year third quarter to $128 million and our adjusted EBITDA margin expanded 100 basis points year over year to 23%.

The incremental sales volume and the realization of our scope three and other productivity actions drove the year over year improvement in our margin this quarter. Despite the headwinds we face from the temporary cost reduction actions, we took last year due to the COVID-19 pandemic.

Please turn to slide eight and review our platform results.

At the platform level.

Water management sales were up 15% from the prior year September quarter is the Hadrian acquisition contributed nine points of growth positive foreign currency translation contributed one point and the core business increased 5%.

While sales were adversely impacted by approximately 400 to 500 basis points due to some temporary transportation delays as Todd touched on earlier the demand in Saar remains strong in the quarter as orders increased high single digits over the prior year quarter.

With respect to profitability our <unk>.

Water management platform delivered a 9% increase in adjusted EBITDA over the prior year as margins were in line with our expectations at 26, 5% in the quarter inclusive of our continued investment in growth.

Year over year margin contribution was impacted by the COVID-19 related temporary cost reduction actions, we took in the prior year third quarter as well as the temporary mix impact from the Hadrian acquisition <unk>.

Excluding those two items margins in the core business expanded year over year.

Turning to PMC sales increased 11% and includes a 100 basis point benefit from foreign currency translation.

200 basis point reduction from the small 'twenty 'twenty fourth quarter divestiture in China.

On a core sales increase of 12%.

The core sales increase was driven by a 14% increase in non aerospace end markets, coupled with aerospace sales that were flat year over year.

Demand trends remain solid as core orders and non aerospace end markets increased nearly 30% from the prior year and year over year orders growth grew over 100% and aerospace end markets and the book to Bill ratio was above one for the quarter.

PMT the adjusted EBITDA margin expanded 260 basis points year over year to 23, 5% as the benefits from the sales growth sculpsure actions and other structural cost reduction initiatives more than offset the year over year margin headwinds from the temporary cost reduction actions, we took last year due to the COVID-19 pandemic.

So please turn to slide nine and I'll touch on some of the cash flow and balance sheet highlights.

With a strong free cash flow generation in the quarter and growth in adjusted EBITDA, Our net debt leverage was reduced to one five times at the end of the September quarter from two one times at the start of the calendar year.

In conjunction with the close of the RMT transaction, we paid off the $500 million notes, including the make whole fee and the $625 million term loan both of what's on our balance sheet under 30.

Our new capital structure that one of the place of the close of the transaction includes a $550 million term loan b with $200 million revolver as trailing undrawn.

The new seven year term loan has an interest rate of 225% with a 50 basis point LIBOR floor and of course as any debt maturities out to 2028.

With respect to our cash balances, we anticipate ending our fiscal year 2021, with approximately $125 million to $130 million of cash on the balance sheet.

Let's turn to slide 10, I'll make a few comments on our outlook for the fourth quarter as well as some items that will help with fiscal year 'twenty two modeling.

For the fourth quarter of 2021, we are projecting total sales to increase year over year by a high teens percentage.

With respect to margins, we expect our adjusted EBITDA margin to be between 24% and 24, 5%, which excludes what we've historically referred to as corporate segment costs.

We anticipate corporate cost in terms of adjusted EBITDA to be approximately $10 million in the quarter.

We remain on track to reduce our corporate expenses of approximately $20 million on an annualized basis again in terms of adjusted EBITDA during the first quarter of 2022.

Before we open the call for questions a few comments on our interest expense stock comp expense depreciation and amortization tax rate and diluted shares outstanding.

We anticipate our interest expense for the December quarter to be approximately $5 million or noncash stock compensation expense should be about $16 million inclusive of a nonrecurring accounting adjustments for the conversion of restaurant equity brands to Zurn equity grants as a result of the RMT transaction and we.

We anticipate our depreciation and amortization is coming around $8 million.

Our tax rate on adjusted pre tax earnings in the December quarter will be approximately 30% and our diluted shares outstanding again updated to reflect the conversion of restaurant equity grants to certain equity grants as well as a result of the RMT transaction will be approximately 129 million shares in the quarter.

Looking at the calendar year 'twenty two we wanted to provide an update on several expenses without the RMT transaction is complete.

We expect calendar year 'twenty, two annual interest expense to be approximately $20 million.

Annual stock comp expense to be about $17 million and annual depreciation and amortization to come in around $18 million.

We anticipate a tax rate on adjusted pretax earnings and the 26 five to 27, 5% range.

Diluted shares outstanding again updated to reflect the conversion of the retro equity grants zurn equity grants as a result, we arent transaction will be approximately 130 to 131 million shares we will providing additional guidance for fiscal year 'twenty to you on our next earnings call in February of 2022 with that we'll open the call up.

For your questions.

Thank you if you'd like to ask a question. Please press star one on your telephone keypad.

And our first question is from Bryan Blair with Oppenheimer. Your line is open.

Yes.

Thanks, Good morning, guys.

Good morning, Brian.

So quickly to level set on Q4 core growth expectations as low to mid teens. The right range. If we account for two months or so incremental hadrian contribution than kind of high single digit range accounting for the.

The delayed shipments from Q3.

Well, yes, I mean, we talked about at a high high teens all in so we think about the core embedded in that number is going to be yes, you said in the in the low teens.

From a core growth standpoint in the fourth quarter Brian.

And there is a bit of a spillover as we mentioned earlier from some of the growth that we did.

<unk>, what we're picking up in the early innings of the fourth quarter.

Okay makes sense and more importantly, I was hoping you could offer a little more color on your team's confidence in double digit core growth in 2022.

Any insight on volume versus price contribution we suspect there'll be.

We have quite a bit of carryover with the latter relative growth rates of your major product category is there any call outs by.

Key end markets will be very helpful.

It's it's an incredibly balanced.

View going forward I mean, the combination of.

A reasonable market.

The price actions that we've got in place already.

And then the contribution from some breakthroughs that I sort of tried to run through.

Give us.

I think both confidence and some headroom to get to that double digit core growth rate for 2022.

And Thats.

It's been a while since I think we had sort of that sort of confidence in.

And our forward look we're not going to we've got a few months.

Climate.

To that point, but at this point I think it's a pretty balanced view between market organic growth initiatives and price that's already sort of behind us that will just carryover and the combination of those three get us.

Get us north of that 10%.

I'll get to here.

Maybe provide a little more detail on.

Hadrian integration.

There are some constraints earlier this year that were outside your control.

That has efforts re accelerated there.

What our run rates margins, we know that there is still.

Yes.

Meaningful degree of dilution versus versus the core, which you said was up year on year.

And any confidence in terms of getting towards 20% over time.

It's incrementally better Brian I think.

The reality is the COVID-19 shutdown impacted that business, probably far more than many others.

The volume.

Ramp is probably nine months behind what we would have anticipated that is beginning we're starting to see that happened in the quarter and I think we're making good headway on the actions required to get the margins towards that.

<unk> average or at least something with a two in front of it I think 'twenty two is going to be the big year for margin expansion for.

<unk> Hadrian I think from a competitive standpoint, we feel really good about the progress we've made.

We're starting to get traction.

<unk> specifications and conversions and so I would anticipate along with.

A better environment, plus the opportunity to really dig in and get at it.

Two will be the big year from a from a margin expansion at <unk>.

I appreciate the detail thanks again guys.

You bet Brian.

Our next question is from Jeff Hammond with Keybanc. Your line is open.

Hey, good morning, guys good.

Good morning, John Jeff.

So just maybe on.

You've talked about the business unit safety flow and hygienic, maybe just speak.

Those are trending neither in the order rates are in the revenues this quarter.

I would tell you that I think water safety and control grew almost.

Close systems grew the nex and hygienic environmental.

Finished third in the quarter I think.

As my as my comments alluded, we still believe in the medium to long term growth I can tell you is as a category.

It's been slower this year than we would have anticipated.

We're hearing that both from the wholesale community as well as some of the competitive intelligence. We have picked up but we are starting to see it pick back up here in September and October and so I think you had a rush if you will to get to.

To get ready for some sort of reopening and now now that people are back in.

Getting back to more of that steady conversion as opposed to this wave and so I guess the good news is the opportunity is there.

I think we've outlined it is massive.

The things we've put in place around the Jan San Channel E Commerce, and bright shield give us a lot of confidence that it's on the come we're seeing seeing traction with a number of opportunities, but in the meantime, water safety control continues to take market share.

And I think my comments on the drain line and being reinvented.

Are giving us great growth and a nice trajectory. So that's how it would sort of shake out in the 123 for the quarter.

Okay, and then just on the hygienic. So I know there is this kind of COVID-19 related opportunity with the education channel.

Whether theyre getting allocated dollars.

Are you seeing on that end in terms of capturing some of that.

That federal money.

Well, we think we're going to get it I think if you follow the bouncing ball the funds get allocated to schools and then the school boards prioritize and so I think from a.

From an opportunity set we know regionally who's got what.

And then it's really about calling on them and helping with the conversion and then the priority towards providing a hygienic space inside of a school.

But I think the way we.

We've contemplated that growth is it probably becomes a lot more in 'twenty two.

And I think we are well positioned to capture a bunch of them.

Okay, Great and then just last one you guys certainly have had a lot of balls up in the air.

We've been internally focused maybe just speak to M&A pipeline.

Evaluations and your thoughts on getting something done into 'twenty two.

Okay.

Well.

I think as you know.

Everything we've done has sort of been on a proprietary basis.

And so.

We're going to stick with that for the time being because it's work.

Between now and the first half of 'twenty two.

Valuations I think.

<unk>.

<unk>.

To deliver the kind of returns that we expect and anticipate so without getting overly specific.

<unk>.

I think I'm pretty confident that we're going to have some things convert here.

And.

The right down the middle in terms of.

What we've been doing and if you think about stainless drains and you think about world dry or anything about Hadrian when you're thinking about just these are all sort of competitive forays into other people's pockets and when you.

We integrate them taken the market leverage the spec leveraged the pull through leverage to go to market all of a sudden you begin to get people's attention.

On.

What we've been doing and so it's really along those lines that I think will continue to do some.

Some M&A that will be impactful and we'll comment on timing, but I think from evaluation standpoint seems pretty reasonable.

Confident we'll get some things done.

Okay. Congrats on the split guys. Thanks.

Thanks, Jeff Thanks, Jeff.

Our next question is from Joe Ritchie with Goldman Sachs. Your line is open.

Thanks, Doug good morning, everybody and congrats.

Good morning, Joe.

For what it's worth I mean, I think the supply chain issues that continue into next quarter opening up the earnings call with the harmonica that'd be up kind of awesome.

<unk>.

It was contemplated Joe, but we decided against that.

Yes.

So.

Maybe maybe maybe getting back to the task at hand.

Hi.

You guys mentioned that you don't.

Water management business.

This quarter margins would have been up our core business would have been up but not for some of these issues.

And obviously the dilution.

Hey, Brad.

Just curious just from a pricing standpoint are you guys running ahead of cost at this point and when you contemplate 2022.

Do you expect this day.

We expect to be above price cost could be a positive contributor to margin in 2020.

Yes, I think I would tell you at this point with what we've put we've put in place today, we are running ahead.

And I think the way we thought about 'twenty two as we continue to run modestly ahead.

Which is entirely consistent with.

The last 14 years of.

My experience with with Zurn.

So I don't see a reason why we would that we would fall behind.

Okay. That's great to hear and then Todd can you maybe elaborate a little bit more on the <unk> opportunity is this.

Any greater share of wallet with some of the larger kind of like industrial distributors there.

Should we think about the opportunity in exactly.

What youre doing from a channel perspective.

In fact.

Yes, I mean, there is a whole adjacent channel of people that go into commercial buildings and clean them and do various maintenance activities.

We were basically we never touched it.

And so what we've done over the course of the last six months is.

Sign up some partnerships to establish.

Some reps that are out there calling on these and then partnering with local wholesalers to pull that through.

And it's still early days, but this the number of.

Connect provides.

Provide what the opportunity of bright shield is get them to go out and begin to call and sell on with their customers with our support and then pulling it through by having.

Local stocking positions in their in their local trade area, and frankly also being able to help them schedule and installers in fact that they wanted some outside help we've got a.

Partnership network of mechanical contractors that are doing that work for us. So it's okay.

It is early days I think we started talking about it maybe six months ago.

But I think it provides.

Ballast to new construction.

Untapped, because we've really never been in there and I think the bright shield offering about creating a completely hygienic.

Space inside of our commercial buildings is a powerful value proposition and one that.

It's got a long tail.

Yes that makes sense one last one for you guys and Dave Congrats on the.

Removing the interim title.

There's been a lot of discussing the.

The investor based on when you guys would have potentially an investor day, and I'm curious to hear any thoughts around.

Around timing with the with the new business.

And so we're going to we're going to use the fourth quarter, we'll start doing some some targeted marketing.

During this quarter and they were looking to the first half of.

Our next year from Investor day, where we'd really like to do something like that in person.

Kind of a situation we're all in right now it doesn't feel like that was going to happen with.

In this calendar year. So we're looking at the first half of next year. When we have guidance out for <unk> for 'twenty two to have a full blown investor day, but this quarter, we will be doing a lot of targeted marketing with the new business.

Okay, great. Thank you.

Thanks.

The next question is from Mig <unk> with Baird. Your line is open.

Thank you good morning, and congrats on completing this RMT transaction.

Well. Thank you Nick Thanks, Matt Good morning.

Good morning.

No.

Maybe we can talk a little bit about.

During the supply chain I know you have a design and assembly business, but most of your revenues are in North America. The vast majority of it I'm sort of curious how you're.

Supply chain.

Relative to that.

How much would you say.

Our components are imported and where are they normally imported from what sort of region.

Well for a whole bunch of competitive reasons I don't think it makes a lot of sense to talk through that but suffice it to say.

A significant portion of our Cogs is imported from places outside of the United States.

I will tell you that it's less than it was five years ago as we've done.

Some level of onshoring.

<unk> lead times.

To deal with the tariff issues and so this this.

Balanced supply chain that we have today.

It looks a whole lot different than it did three or four years ago.

Because we had a conscious we made a conscious decision.

To.

Eliminate.

Supply chain risks in having too much.

In places like China, and others. So.

<unk>.

I think it would look.

A lot of different three years ago, it's much more balanced globally than it is today, but all in.

I would tell you that and you know this.

It's very much a design procure assemble test model, where we leverage third parties.

To manufacture some of the goods and we we do the late point assembly modification as needed.

But it's not as overweight China is your issue is you may infer or expect.

Yes, I mean I.

It wasn't necessarily thinking China I was just sort of curious as to as to how that was set up because I would presume that you would have opportunity to acquire suppliers in other places as well not just China.

We're thinking longer term a year ago, given the learnings over the last couple of years is it fair to say that youre going to continue to work towards localizing the supply chain presuming that again your geographic revenue mix remains as it is today.

I wouldn't I wouldn't say that I think.

Done is.

Really setup.

A global network of finding.

The highest quality suppliers at the best costs with the best lead times.

And <unk> done that with redundant suppliers.

Usually in different geographies to avoid.

Some sort of event, whether that be environmental or geopolitical or whatever the case might be and so I think we've got a relatively dispersed supply chain with redundant capabilities.

And obviously some of that has included.

Domestic suppliers suppliers in Wisconsin suppliers in Texas, you pick it.

I don't think youre going to see a sea change in that approach I think we've steadily trying to.

Create a redundant capacity for our supply base and I think we'll continue to do that so I don't think theres anything.

Materially different I don't think were to start buying suppliers or things like that.

I think we're going to continue to do what we do in <unk>.

If we see an area, where we're not pleased with the quality of the performance, where we see an opportunity to improve our competitive position and lead times.

We can do that so.

I think we're really happy with.

How our supply chain has performed for a very very long time, I think this logistics sort of I think I called it or not.

Is somewhat unfortunate, but I don't think it changes our view on how we're going to.

Invest and grow our business.

Yes, Okay I appreciate that.

On the logistics issue that you talked about.

The track record here for you, it's pretty clear that you've been very successful at pushing through raw material cost increases through pricing and offsetting that but I'm kind of curious as to how these transportation or logistics costs work are you do you have pricing flexibility of any sort to be able to offset that.

Or should we look at your margin performance in the quarter and the fourth quarter as sort of being inclusive of this headwind, meaning as things hopefully get better in 2022.

That becomes accretive to incremental margin.

But I think when we.

Yeah.

Issue, a price increase or take a price increase.

We contemplate all sorts of inflation and so on.

I would tell you that it's hard to say that because containers went from.

5000 to $20000.

Perfectly dialed in a price increase to cover that I think we've got some of it may probably not all of it so.

Nicely are saying I think you got to look at the margins and just say sort of is what it is.

Maybe we're a little bit short, maybe we're a little bit ahead, but in general I think our price increases are offsetting our.

Yeah.

Our cost inflation.

I think the other point is the things that I tried to.

Talk about.

When we're actually designing developing and selling a product that we have 75% less than our competitors.

That's a big deal and that we can keep for a long period of time and so we're pretty happy with.

Our overall performance here disappointed that.

A few didn't didn't show up on time, but nonetheless, it's not just about covering all the cost inflation is about finding ways to.

To work around that and control your destiny, a little bit as opposed to just passed price onto the market.

I appreciate that and then lastly for me maybe just a reminder, in terms of what the normal incremental margins for fourth.

The water business.

What looked like and again you talked about the fact that the margin expansion Adrienne, it's really going to kick into 2022.

Well continue to guidance, but how that might potentially help boost these incrementals.

As we look into next year. Thank you.

Yes, historically on this platform, we've always targeted incrementals on July 30% range.

In some quarters, when you're a little bit higher a little bit longer and you got to dial in on average.

That 30% range has been in what we historically.

We'll look at it.

That really shouldnt change going forward.

And as Todd mentioned next year is the euro.

We'll see margin.

Expansion Hadrian for sure we see it sequentially over the year has progressed.

Smaller acquisitions, there will be a contributor.

Sure.

Huge huge margin needle mover for us, but overall contributor.

Of course next year will we have some growth investments.

Teed up as well to push the.

Sure Catherine side of equation, but all in you kind of just to go back to answering the question as you think about this platform and that in that 30% range over an extended period of time is a very reasonable spot and thats with the growth investments that we need in the business to continue to take the share.

And our end markets.

Alright I appreciate it thank you guys.

Thanks Meg.

We have no further questions at this time I'll turn the call back over to the presenters.

Thanks for joining us on the call today, everyone. We appreciate your interest in <unk> and look forward to providing our next update when we announce our December quarter results in February of 2020 to have a good day.

Thank you ladies and gentlemen, this concludes today's conference call and you may now disconnect.

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