Q2 2024 Zurn Elkay Water Solutions Corp Earnings Call

Operator: Good morning, and welcome to the Zurn LK Water Solutions Corporation's second quarter 2024 earnings results conference call with Todd Adams, Chairman and Chief Executive Officer, David Pauli, Chief Financial Officer, and Brian Wendland, Director of FP&A for Zurn LK Water Solutions. A replay of the conference call will be available as a webcast on the company's Investor Relations website.

Operator: Good morning and welcome to the Zurn LK Water Solutions Corporation 2nd quarter 2024 earnings results conference call with Todd Adams, Chairman and Chief Executive Officer, David Pauli, Chief Financial Officer, and Bryan Wendland, Director of FPNA for Zurn LK Water Solutions.

Good morning and welcome to the Zurn LK Water Solutions Corporation's second quarter 2024 earnings results conference call with Todd Adams, Chairman and Chief Executive Officer.

Speaker Change: Chief Financial Officer, and Brian Wendland, Director of FP&A for Zurn LK Water Solutions.

Operator: A replay of the conference call will be available as a webcast on the company's Investor Relations website.

Speaker Change: A replay of the conference call will be available as a webcast on the company's Investor Relations website.

Bryan Wendland: At this time, for opening remarks and introduction, attend the call over to Bryan Wendland. 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 findings contain additional information about these non-GAAP measures while we use them and while we believe they're helpful to investors and contain reconciliation to the corresponding GAAP information.

Speaker Change: At this time, for opening remarks and introduction, I'll turn the call over to Bryan Wendland.

Bryan Wendland: Good morning, everyone, and thanks for joining the call today. Before we begin, I would like to remind everyone that this call contains certain war-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 findings with the SEC.

Operator: In addition, some comparisons will refer to non-GAAP measures. Consistent with prior quarters, we will speak to certain non-GAAP metrics as we feel they provide a better understanding of its operation. These measures are not a substitute for GAAP. We encourage you to review the GAAP information in our earnings release and in our SEC file. With that, I'll turn the call over to Todd Adams, Chairman and CEO of Zurn LK Water

Bryan Wendland: 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.

Bryan Wendland: Consistent with prior quarters, we'll 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 GAP. We encourage you to review the GAP information in our earnings release and in our SEC findings.

Bryan Wendland: Consistent with prior quarters, we will speak to certain non-GAAP metrics as we feel they provide a better understanding of our operating results.

Bryan Wendland: These measures are not a substitute for GAP. We encourage you to review the GAP information in our earnings release and in our SEC filings.

Todd Adams: With that, I'll turn the call over to Todd Adams, Chairman and CEO of Zurn LK Water Solutions. Thanks, Bryan, and good morning everyone. Thank you for taking the time to call in this morning. So I'll start on page 3. We turned in what we believe is a pretty solid quarter and are again raising our outlook for the year. We leveraged core growth of 3% into 20% adjusted EBITDA growth, which drove margins to 25.3%, equating to 370 basis points of margin expansion year over year. Free cash flow in the quarter was 80 million, and we deployed 60 million dollars to repurchase almost 2 million shares in the quarter.

Todd A. Adams: With that, I'll turn the call over to Todd Adams, Chairman and CEO of Zurn LK Water Solutions.

Todd A. Adams: Thanks Bryan and good morning everyone. Thank you for taking the time to call in this morning. So I'll start on page three.

Todd A. Adams: We turned in what we believe is a pretty solid quarter, and are again raising our outlook for the year. We leveraged core growth of 3% into 20% adjusted EBITDA growth, which drove margins to 25.3%.

Todd A. Adams: according to 370 basis points of margin expansion year-over-year.

Todd A. Adams: Free cash flow in the quarter was $80 million, and we deployed $60,000,001 to repurchase almost 2 million shares in the quarter. For the first half of the year, in dollar terms, EBITDA is up $35 million, and free cash flow is up $50 million over last year's first half, and we continue to expect a nice second half from a cash flow perspective. Our story at this point is really quite simple. We have what we believe is the premier water solutions business in North America, with best-in-class financial performance and a business system and culture that underpin our confidence in being able to perform at a very high level, regardless of the macro environment.

Todd Adams: For the first half of the year, in dollar terms, EBITDA is up 35 million and free cash flow was up 50 million over last year's first half, and we continue to expect a nice second half from a cash flow perspective. Qualitatively, our underlying markets continue to match our views coming into the year, and we're making steady progress on our growth initiatives and breakthroughs. Hopefully, our results over the last 12 months have answered the question on whether or not we achieved the 50 million dollars plus in synergies from the LK transaction, given where our consolidated EBITDA margins now sit.

Todd A. Adams: For the first half of the year, in dollar terms, EBITDA is up $35 million.

Todd A. Adams: And free cash flow is up $50 million over last year's first half, and we continue to expect a nice second half from a cash flow perspective.

Todd A. Adams: Qualitatively, our underlying markets continue to match our views coming into the year and we're making steady progress on our growth initiatives and breakthroughs.

Todd Adams: Our story at this point is really quite simple. We have what we believe is the premier water solutions business in North America with best in class financial performance and a business system and culture that underpins our confidence in being able to perform at a very high level regardless of the macro environment. We have a balance sheet and cash flow profile that puts us in a position to reliably and increasingly return capital to shareholders while executing on proprietary M&A opportunities moving forward.

Speaker Change: Our story at this point is really quite simple. We have what we believe is the premier water solutions business in North America with best in class financial performance and a business system and culture that underpins our confidence in being able to perform at a very high level regardless of the macro environment.

Todd Adams: I know out of the privilege of turning the call over to our newly minted CFO, Mr. Dave Polly.

David Pauli: I now have the privilege of turning the call over to our newly minted CFO , Mr. Dave Pauli.

Todd Adams: At the same time, I'd like to say good morning to our former CFO and now Chief Administrative Officer, Mark Peterson, who's listening in as he's driving to work and certainly not missing having to get here early for this call.

Speaker Change: At the same time, I'd like to say good morning to our former CFO and now Chief Administrative Officer, Mark Peterson, who's listening in as he's driving to work and certainly not missing having to get here early for this call. Dave.

David Pauli: Dave. Thanks, Todd. Please turn to slide number four. Our second quarter sales totaled 412 million and increased 300 basis points year-over-year on a pro-forma core basis. Mid-single-digit core sales growth in our non-residential end markets and initiatives was partially offset by flatish year-over-year sales to our residential end markets and pockets of the commercial segment within non-residential. With respect to demand in the quarter, year-over-year order growth was in line with our sales growth as our book to bill ratio was just above one in the quarter, and market trends continued 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.

Operator: Thanks, Todd. Please turn to slide number 4.

David Pauli: Thanks, Todd. Please turn to slide number four. Our second quarter sales totaled $412 million and increased 300 basis points year-over-year on a pro forma core basis.

David Pauli: Our second quarter sales totaled 412 million and increased 300 basis points year over year on a pro forma core basis. With respect to demand in the quarter, year-over-year order growth was in line with our sales growth as our book-to-bill ratio was just above one in the quarter. For calendar year 2024, we believe our year over year margin expansion will be a bit better than what we discussed 90 days ago, and we are again raising our expectation for full year EBITDA margin. Our.9 times leverage is inclusive of the $61 million we deployed to repurchase shares in the quarter. On a year-to-date basis, we have now deployed $80 million to share repurchases and $28 million to dividends.

Dave: Mid-single-digit core sales growth in our non-residential end markets and initiatives was partially offset by flattish year-over-year sales to our residential end markets and pockets of the commercial segment within non-residential.

Dave: With respect to demand in the quarter, year-over-year order growth was in line with our sales growth as our book-to-bill ratio was just above 1 in the quarter. End market trends continued 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.

David Pauli: Turning to profitability, our second quarter adjusted EBITDA increased 20% from the prior year-second quarter to 104 million, and our adjusted EBITDA margin expanded 370 basis points year-over-year to 25.3% in the quarter. At 25.3%, our second quarter adjusted EBITDA margin is the highest consolidated margin since the LK merger two years ago. The strong margin and year-over-year expansion was driven by the benefits of our productivity initiatives, inclusive of cost synergies, plus the lower material and transportation costs compared to one year ago. For calendar year 2024, we believe our year-over-year margin expansion will be a bit better than what we discussed 90 days ago, and we are again raising our expectation for full year EBITDA margin.

Dave: Turning to profitability, our second quarter adjusted EBITDA increased 20% from the prior year second quarter to $104 million and our adjusted EBITDA margin expanded 370 basis points year over year to 25.3%.

Dave: At 25.3%, our second quarter adjusted even a margin is the highest consolidated margin since the LK merger two years ago.

Dave: The strong margin and year-over-year expansion was driven by the benefits of our productivity initiatives, inclusive of cost synergies, plus the lower material and transportation costs compared to one year ago.

David Pauli: We will cover that in more detail later in the call. Please turn to slide five, and I'll touch on some of the balance sheet and leverage highlights. With respect to our net debt leverage, we ended the quarter with 333 million of net debt, and leverage continued below one at 0.9 times. Our 0.9 times leverage is inclusive of the 61 million we deployed to repurchase shares in the quarter. On a year-to-date basis, we have now deployed 80 million to share repurchases and 28 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.

Dave: With respect to our net debt leverage, we ended the quarter with $333 million of net debt and leverage continued below 1 at .9 times.

Todd A. Adams: 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.

Todd Adams: I'll turn the call back to Todd.

Todd Adams: Thanks, Dave. On page six, here you can see our year-to-date sustainability impact and progress towards our targets. We continue to see sustainability as both a core part of and natural byproduct of our business. The vast majority of our sales in the quarter came from products that deliver sustainable attributes to our customers: products that reduce water consumption, protect the potable water supply, and buildings reduce energy or GHG consumption, or are made of high levels of recycled content. Whether it's reducing water usage, filtering out contaminants from water, or eliminating single-use plastic bottles, we continue to innovate to address water-related challenges to public health and conservation.

Todd A. Adams: Thanks Dave. I'm on page 6. Here you can see our year-to-date sustainability impact and progress towards our targets. We continue to see sustainability as both a core part of and natural byproduct of our business.

Todd A. Adams: The vast majority of our sales in the quarter came from products that deliver sustainable attributes to our customers, products that reduce water consumption, protect the potable water supply in buildings, reduce energy or GHG consumption, or are made of high levels of recycled content.

Todd A. Adams: Whether it's reducing water usage, filtering out contaminants from water, or eliminating single-use plastic bottles, we continue to innovate to address water-related challenges to public health and conservation.

Todd Adams: We'd run our business the same way even if there wasn't anyone looking because the essence of what we do is to help our customers with their water challenges. But since people do keep score, I think it's important to note that across the main agencies that rate us on our own sustainability efforts, we are either in the top 3%, top 8%, or top 10% rated across the broad university of companies rated by these agencies. We approach sustainability with the power of the and, delivering great results and helping our customers meet their challenges and doing the right thing for the environment, our associates, and shareholders.

Todd A. Adams: But since people do keep score, I think it's important to note that across the main agencies that rate us on our own sustainability efforts.

David Pauli: We are either in the top 3%, top 8%, or top 10% rated across the broad university of companies rated by these agencies. We approach sustainability with the power of the ant, delivering great results and helping our customers meet their challenges and doing the right thing for the environment, our associates, and shareholders. I'll leave everyone with just a few thoughts on page 7.

Todd A. Adams: We are either in the top 3%, top 8%, or top 10% rated across the broad university of companies rated by these agencies.

Todd Adams: I'll leave everyone with just a few thoughts on page 7. Halfway through 2024, we've raised our outlook for the year twice. If you look at a longer time frame, we're growing at about only half of our 10-year Kager. This is because of the highly publicized demise of the commercial end market in non-residential construction. I say that a little sarcastically, but there have, of course, been, and in the near term, will continue to be some headwinds from the commercial end market, and also a bit of a flatish residential market. Despite this, we are still growing and generating exceptional margins and free cash flow through a combination of our unique competitive advantages.

Todd A. Adams: Halfway through 2024, we've raised our outlook for the year twice. But if you look at a longer time frame, we're growing at about only half of our 10-year keg. This is because of the highly publicized demise of the commercial end market in non-residential construction. I say that a little sarcastically, but there have, of course, been, and in the near term will continue to be, some headwinds from the commercial end market and also a bit of a flattish residential market.

Todd A. Adams: I'll leave everyone with just a few thoughts on page 7.

Todd A. Adams: Halfway through 2024, we've raised our outlook for the year twice.

Todd A. Adams: If you look at a longer time frame, we're growing at about only half of our 10-year CAGR.

Todd A. Adams: This is because of the highly publicized demise of the commercial end market in non-residential construction. I say that a little sarcastically, but there have of course been, and in the near term will continue to be, some headwinds from the commercial end market and also a bit of a flattish residential market.

Todd A. Adams: Despite this, we are still growing and generating exceptional margins and free cash flow through a combination of our unique competitive advantages.

Todd Adams: To name a few, our end market exposures, specifications, portfolio breadth, new versus retrofit balance, and differentiated secular growth opportunities like drinking water, and perhaps most importantly, the deployment of the Zurnel K business system. Dave gave me the updated statistic yesterday about our core growth track record. Over the past 54 quarters, that's 13 and a half years if you're playing along at home. We've had exactly four quarters; we did not grow organically, which I think is a pretty decent sample size to evaluate our track record. Also of note, the largest decline in any one of those four quarters was down 5% in the pandemic quarter of June 2020.

Todd A. Adams: To name a few, our end market exposures, specifications, portfolio, New vs. Retrofit Balance, and Differentiated Secular Growth Opportunities like Trinking, and perhaps most importantly, the deployment of the Zurn LK business. Dave gave me the updated statistics yesterday about our core growth track record over the past 54 quarters. That's 13 and 12 years if you're playing along. Also of note, the largest decline in any one of those four quarters was down 5% in the quarter of June 2020.

Todd A. Adams: To name a few are end market exposures, specifications, portfolio breadth, new versus retrofit balance, and differentiated secular growth opportunities like drinking water, and perhaps most importantly, the deployment of the Zurn LK business system.

Todd A. Adams: Dave gave me the updated statistic yesterday about our core growth track record. Over the past 54 quarters, that's 13 and a half years if you're playing along at home.

Speaker Change: We've had exactly four quarters we did not grow organically, which I think is a pretty decent sample size to evaluate our track record. Also of note, the largest decline in any one of those four quarters was down five percent in the pandemic quarter of June 2020.

Todd Adams: During this current period, I'll say of undergrowth were in. To me, the silver lining is that our new baseline of margins and cash flow is materially higher than at any point over the past 10 plus years. We're returning more money to shareholders than ever, and we continue to have ample capacity to do the right M&A while keeping the balance sheet in great shape.

Todd A. Adams: During this current period I'll say of undergrowth we're in, to me the silver lining is that our new baseline of margins and cash flow is materially higher than at any point over the past 10 plus years.

Todd A. Adams: We're returning more money to shareholders than ever, and we continue to have ample capacity to do the right M&A while keeping the balance sheet in great shape.

Todd Adams: Which brings me to the last point I'll make before turning it over to Dave. The thing that people either underestimate or understand about Zurn is the culture or really how foundational our business system is to our success. The pillars of people, plan, process, performance, and purpose aren't just things we throw in a chart to talk about with people. It's deeply rooted in how we run our business and ground it in the spirit of our letless continuous improvement. Over the last few weeks, we've gotten some questions regarding Dave's promotion and Mark's new role, all with the hint of what's the story behind the story.

Todd A. Adams: Which brings me to the last point I'll make before turning it over to Dave. The answer lies in how we actually deploy and do the real work around the first pillar of the Zurn LK business system, which is people. We've promoted an extraordinarily talented guy to CFO who was ready, 42 years old, been here for 12 years, knows the business inside and out, and has tremendous We're in an enviable position to have affected this kind of organizational maneuver, but it wasn't by accident. It's just how we approached it. Dave, congratulations and well-earned. Go ahead and hit the Outlook on page.

Todd A. Adams: Which brings me to the last point I'll make before turning it over to Dave. The thing that people either underestimate or don't understand about Zurn is the culture, or really how foundational our business system is to our success.

Dave: The pillars of people, plan, process, performance, and purpose aren't just things we throw on a chart to talk about with people.

Dave: It's deeply rooted in how we run our business and grounded in the spirit of relentless, continuous improvement.

Dave: Over the last few weeks we've gotten some questions regarding Dave's promotion and Mark's new role all with a hint of what's the story behind the story.

Todd Adams: The answer lies in how we actually deploy and do the real work around the first pillar of the Zurn OK business system, which is people. By truly recruiting, developing, and retaining the best talent, it requires an intention, discipline, and selfless perspective to do what's right for the business and the individuals to create long-term sustainability. And when I say sustainability, I mean in the context of the ability of continuing to perform at a high level without any decline in quality, and that's exactly the situation we have with Dave and Mark. We've promoted an extraordinarily talented guy to CFO, who was ready, 42 years old, been here for 12 years, knows the business inside and out, and has tremendous runway.

Dave: The answer lies in how we actually deploy and do the real work around the first pillar of the Zurn LK business system, which is people.

Dave: By truly recruiting, developing, and retaining the best talent, it requires an intention, discipline, and selfless perspective to do what's right for the business and the individuals to create long-term sustainability.

Speaker Change: And when I say sustainability, I mean it in the context of the ability of continuing to perform at a high level without any decline in quality. And that's exactly the situation we have with Dave and Mark.

Speaker Change: We've promoted an extraordinarily talented guy to CFO who was ready, 42 years old, been here for 12 years, knows the business inside and out, and has tremendous runway.

Todd Adams: And we get to leverage Mark's talent, experience, and understanding of the business system into a bunch of new areas, after having been here for 18 years, including 13th CFO. or an enviable position to have affected this kind of organizational maneuver, but it wasn't on accident; it's just how we approach things. So, Mark, I'll see you in about 15 minutes. Dave, congratulations and well-earned. Go ahead and hit the outlook on page 8.

Speaker Change: And, we get to leverage Mark's talent, experience, and understanding of the business system into a bunch of new areas after having been here for 18 years, including 13 as CFO .

David Pauli: Thanks, Todd. Please turn to slide 8, and I'll cover our outlook for the third quarter and an update on our high-level guideposts for calendar year 24. For the third quarter, we are projecting year-over-year pro forma core sales growth to be in the low single digits, and we anticipate our adjusted EBITDA margin to be approximately 25 percent for the quarter, which represents an approximate 90 basis point margin expansion over the prior year. Taken as a whole, Q3 will look a lot like our second quarter just finished.

David Pauli: Thanks, Adam. Please start to slide 8, and I'll cover our outlook for the third quarter and update to our high-level guidepost for calendar year 24. For the third quarter, we are projecting year-over-year pro-forma contract core sales growth to be in the low single digits, and we anticipate our adjusted EBITDA margin to be approximately 25% for the quarter, which represents an approximate 90 basis point margin expansion over the prior year. Taken as a whole, Q3 will look a lot like our second quarter we just finished.

Mark: Thanks, Todd. Please turn to slide 8 and I'll cover our outlook for the third quarter and update to our high-level guideposts for calendar year 24.

Speaker Change: For the third quarter, we are projecting year-over-year pro forma core sales growth to be in the low single digits, and we anticipate our adjusted EBITDA margin to be approximately 25% for the quarter.

Speaker Change: which represents an approximate 90 basis point margin expansion over the prior year. Taken as a whole, Q3 will look a lot like our second quarter we just finished.

David Pauli: For the full year, we are seeing no changes to the sales assumptions we outlined at the beginning of the year and still believe we will generate positive pro-forma core sales growth year over year. With respect to our adjusted even a margin, we are again raising our outlook and now expect adjusted even a margin expansion to be between 200 and approximately 250 basis points year over year. Our free cash flow expectation has also improved, as we are now expecting cash flow to exceed 250 million.

Speaker Change: For the full year, we are seeing no changes to the sales assumptions we outlined at the beginning of the year and still believe we will generate positive pro forma core sales growth year over year.

David Pauli: Before we open the call for questions, just a reminder that we have included on page 8 our third quarter of assumptions for interest expense, non-cash stock compensation expense, depreciation and amortization, adjusted tax rate, and diluted shares outstanding. In addition, we have included the prior year third quarter sales adjusted for the executed 80-20 product line exits to calculate pro-forma core sales growth in 2024.

Speaker Change: Before we open the call for questions, just a reminder that we have included on page 8 our third quarter assumptions for interest expense, non-cash stock compensation expense, depreciation and amortization, adjusted tax rate, and diluted shares outstanding.

Speaker Change: In addition, we have included the prior year third quarter sales adjusted for the executed 8020 product line exits to calculate pro forma core sales growth in 2024. The third quarter is the last quarter that we will have an impact from the previously announced product line exits.

David Pauli: The third quarter is the last quarter that we will have an impact from the previously announced product line exits.

Operator: We will now open the call up for questions. We will now begin the question and answer session. In order to ask a question, press start followed by the number one on your telephone keypad.

Speaker Change: We will now open the call up for questions.

Operator: We will now begin the question and answer session. In order to ask a question, press the star followed by the number 1 on your telephone keypad.

Speaker Change: We will now begin the question and answer session. In order to ask a question, press start followed by the number 1 on your telephone keypad.

Bryan Blair: Your first question comes from the line of Brian Blair with Oppenheimer. Please go ahead. Thank you. Morning, guys. Good morning, Brian.

Speaker Change: Your first question comes from the line of Bryan Blair with Oppenheimer.

Speaker Change: Please go ahead.

David Pauli: Dave, congrats on the promotion. Thanks, Brian. Of course, and Mark drives basically. You guys mentioned end markets are generally tracking as expected. So I'm going to offer some finer points on that front.

Speaker Change: Thank you. Morning, guys. Morning, Bryan. Morning.

Speaker Change: Dave, congrats on the promotion.

Todd A. Adams: Of course, and Mark, drive safely. You guys mentioned end markets are generally tracking as expected. I was hoping you'd offer some finer points on that front, perhaps drill down on what your team is seeing across institutional versus commercial non-res verticals, the resing market, and whether you anticipate any sequential change in underlying demands through the back.

Dave: Thanks, Bryan.

Speaker Change: Hey, you guys mentioned end markets are generally, you know, tracking as expected. I was hoping you'd offer some finer points on that front. Perhaps drill down on...

David Pauli: Perhaps drill down on what your team is seeing across institutional versus commercial non-rise verticals, the resin market, and whether you anticipate any sequential change in underlying demands through the back. Well, I think the perspective that I would give you, Brian, is we've had a view that commercial was weak, and I'll remind everyone that it has been weak really since 2020. So we've been absorbing the news, if you will, of this headwind quarter by quarter year by year for a while. And so I think our ability to understand how that's going to roll through our results.

Speaker Change: What your team is seeing across institutional versus commercial non-res verticals, the resing market, and whether you anticipate any sequential change in underlying demands through the back half.

Speaker Change: Well, I think the perspective that I would give you, Bryan, is, you know, we've...

Todd A. Adams: had a view that the commercial was weak. And I'll remind everyone that it has been really weak since 2020. So we've been absorbing the news, if you will, of this headwind, quarter by quarter, year by year for a while. And so I think our ability to understand how that's going to roll through our results, I think we've baked that into our perspective. We don't expect, I think, any sort of significant change. In our view, it may be worse sequentially. But I think from an institutional standpoint, we continue to see strength.

Speaker Change: had a view that commercial was weak, and I'll remind everyone that it has been weak really since 2020. So we've been absorbing the news, if you will, of this headwind.

Speaker Change: Quarter by quarter year by year for a while and so I think our ability to Understand how that's going to roll through our results. I think we've baked that into our perspective that we don't expect

David Pauli: I think we've baked that into our perspective. We don't expect, I think, any sort of significant change, if you will, to our view. It may be worse sequentially, but I think from an institutional standpoint, we continue to see strength. I also think it's important to understand that inside of the commercial vertical itself, about 40 to 45% of that is actually retrofit, replace, brake, fix. So, while the headline on commercial construction is bad, and I think there's a lot of reaction to that day by day, week by week, when you look at the pockets that we're in, we are not big in warehouses.

Speaker Change: I think any sort of significant change, if you will, to our view. It may be worse sequentially, but I think from an institutional standpoint, we continue to see strength.

Todd A. Adams: I also think it's important to understand that inside of the commercial vertical itself, about 40 to 45% of that is actually retrofit, replace, break, and fix. So while the headline on commercial construction is bad, and I think there's a lot of reaction to that day by day, week by week, you know, when you look at the pockets that we're in, you know, we are not big in warehouses. So that news that's rolling through the top line number, you know, has relatively little impact on us because the content that we provide to a warehousing building is relatively low.

Speaker Change: I also think it's important to understand that inside of the commercial vertical itself,

Speaker Change: About 40-45% of that is actually retrofit, replace, break, fix.

Speaker Change: You know, the headline on commercial construction is bad, and I think there's a lot of reaction to that.

Speaker Change: Day by day, week by week.

Speaker Change: You know, when you look at the pockets that we're in, you know, we are not big in warehouses. So that news that's rolling through the top line number, you know, has rarely little impact on us because of the content that we provide to a warehousing.

David Pauli: So that news that's rolling through the top line number has rarely little impact on us, because the content that we provide to a warehouse. Billing is relatively low. So you got to look beneath the headline number and into the pockets, and we do that, and we do that by region. And I think we've done a pretty good job of trying to, you know, assess how that may impact our growth. And so, you know, when you take a giant step back and hopefully that 10 year chart gives you perspective, you know, there is probably a two point headwind to our overall growth because of what we're saying.

Todd A. Adams: So you have to look beneath the headline number and into the pockets, and we do that, and we do that by region. I think we've done a pretty good job of trying to, you know, assess how that may impact our growth. And so, you know, when you take a giant step back, and hopefully, that 10-year chart gives you perspective, there is probably a two-point headwind.

Speaker Change: building is relatively low. So you got to look beneath

Speaker Change: The headline number and into the pockets and we do that and we do that by region. I think we've done a pretty good job of trying to

Speaker Change: you know, assess how that

Speaker Change: May impact our growth. And so, you know, when you take a giant step back and hopefully

Speaker Change: That 10-year chart gives you perspective. You know, there is probably a two-point headwind.

David Pauli: We're seeing and absorbing through that commercial headwind, but I don't think we're seeing anything that gives us pause that the perspective going forward is different than what we've already baked into our thinking. Understood. Appreciate the detail.

Speaker Change: to our overall growth because of what we're seeing and absorbing through that commercial headwind. But I don't think we're seeing anything that gives us pause that the perspective going forward is different than what we've already baked into to our thinking.

David Pauli: You know, margin performance has been quite strong in the last four quarters. You mentioned the, you know, synergy realization is the plus of the 15 million plus. So I wonder if you're willing to quantify that.

Speaker Change: Understood. Appreciate the detail.

Speaker Change: Margin performance has been quite strong in the last four quarters. You mentioned the synergy realization is the plus of the $50 million plus.

David Pauli: I'm wondering if you're willing to quantify that. And then looking forward, how should we think about normalized core incrementals? We've always thought low 30s is kind of the right range, given the structurally improved profitability of Zurn LK. Is that still the right normalized incremental to think about? And then finally, we know there's a lot of supply chain action underway. Perhaps you can speak to the drop through that we may see

David Pauli: And then looking forward, how should we think about, you know, normalized core incrementals? We've always thought, you know, low 30s is kind of the right range given the, you know, structurally improved profitability. Of Zernel case, is that still the right, you know, normalized incremental to think about.

Speaker Change: So I'm wondering if you're willing to quantify that, and then looking forward, how should we think about, you know, normalized core incrementals? We've always thought, you know, low 30s is kind of the right range, given the, you know, structurally improved profitability.

Speaker Change: of Zurn LK. Is that still the right, you know, normalized, incremental to think about? And then finally, you know, we know there's a lot of supply chain, you know, action underway. Perhaps you can speak to, you know, the drop through that we may see going forward.

David Pauli: And then finally, you know, there's a lot of supply chain. You know, action underway. Perhaps you can speak to the drop through that we may see going forward. Yeah, I think you've, you've got it all. Obviously, the 50 million plus, you know, I think it's something we've committed to two years ago. You know, the first year we spent sort of attacking some of the more addressable things and doing the work to get to that next 25, which we clearly, I think, the work is done and now it's just simply going to read to the results.

David Pauli: Yeah, I think you've got it all. Obviously, the $50 million-plus, you know, I think it's something we committed to two years ago. You know, the first year we spent sort of... And obviously, there's a handful of supply chain actions that we've been working on that are essentially complete and will begin to accrue some of those benefits into next year. So I would say from an execution standpoint in and around the LK Synergies and some of the potential things we've done, we feel like we're very much on track to accelerate margins going forward from here and to achieve

Speaker Change: Yeah, I think you've you've got it all. Obviously the the 50 million plus, you know, I think it's something we've we committed to two years ago, you know, the the first year we spent sort of

Operator: Understood. Thanks again.

Speaker Change: attacking some of the more addressable things and doing the work to get to that next 25 which we clearly

David Pauli: And so whether it's 50 or 55 or 60, I'm not sure that it matters all that much other than to know that the business is entirely integrated. And we've sort of stopped keeping score on the discreet synergies because they just keep, they just keep coming through as a consolidated number. In terms of what's, what's what to think about as an incremental margin going forward. I would say that, you know, we've always said 30 to 35. I think that, you know, given some of the structural things that we've done and maybe some of the mixed positive attributes of drinking water, that number is probably closer to 35 than 30.

Speaker Change: I think the work is done and now it's just simply going to read through the results and so whether it's

Speaker Change: 50 or 55 or 60, I'm not sure that it matters all that much other than to know that the business is entirely integrated.

Speaker Change: And we've sort of stopped keeping score on the discrete synergies because they just keep coming through as a consolidated number. In terms of what's...

Speaker Change: What to think about as an incremental margin going forward.

Speaker Change: I would say that, you know, we've always said 30 to 35.

Speaker Change: I think that, you know, given some of the structural things that we've done, and maybe some of the mixed positive...

Speaker Change: Attributes of drinking water, that number is probably closer to 35 than 30.

David Pauli: And obviously, there's a handful of supply chain actions that we've been working on that are essentially complete and will begin to accrue some of those benefits into next year. So I would say, from an execution standpoint, in and around the LK synergies, the structural changes we've made as a result of combining the two businesses. And some of the prospective things we've done, we feel like we're very much on track to accelerate, you know, margins going forward from here. And the incremental, the incremental earnings growth will be that 35% plus or minus. Understood. Thanks again. Yep.

Speaker Change: And obviously, there's a handful of supply chain actions that we've been working that are essentially complete and we'll begin to accrue some of those benefits into next year.

Speaker Change: So, I would say from an execution standpoint, in and around the Elkay synergies,

Speaker Change: The structural changes we've made as a result of combining the two businesses.

Speaker Change: And some of the prospective things we've done, we feel like we're very much on track to accelerate, you know, margins going forward from here and the incremental earnings growth.

Speaker Change: will be that 35% plus or minus.

Speaker Change: Understood. Thanks again.

Andrew Buscaglia: And the next question comes from the line of Andrew Buscaglia with the NP Parabuss. Please go ahead. Hey, good morning, guys. Good morning. So, yeah, it's the line of the lines of those margin comments. I'm just wondering, you know, you're so you guide to 25% or so in keep three, three bit on margins, which would imply a little bit of a takedown. I'm just wondering what you can walk through the puts and takes there?

Speaker Change: Yep.

Speaker Change: The next question comes from the line of Andrew Buscaglia.

Operator: with BNP Paribas.

Andrew Buscaglia: with BNP Paribas.

Speaker Change: Please go ahead.

Andrew Buscaglia: Hey, good morning, guys.

David Pauli: So, you know, just along the lines of those margin comments, I'm just wondering, you guide to 25% or so in Q3, freebie down margins, which would imply a little bit of a tick down. Can you walk through the puts and takes there? Maybe it's seasonal, your historicals sometimes move differently, but I'm just trying to understand why the tick down or, you know, what's behind that comment.

Speaker Change: Good morning.

Speaker Change: So, you know, it's along the lines of those.

Speaker Change: margin comments. I'm just wondering, you know, so you guide to 25% or so and keep three, three bid on margins.

Speaker Change: Which would imply a little bit of a tick down. I'm just wondering, can you walk through the puts and takes there? Maybe it's seasonal, your historicals sometimes move differently, but I'm just trying to understand why the tick down or, you know, what?

David Pauli: Maybe it's seasonal, but you're just historical sometimes who differently, but I'm just trying to understand why the takedown or what behind that comment. Nothing. I mean, I think when you look through it, you know, approximately 25 is 25, 3. I mean, you know, so I don't think we're trying to be too cute. I can't I can't give you a reason why it goes to 25 other than, you know, we're trying to guide with some with less precision, if that makes sense. And so there's nothing discrete that that that I can give you to to get to it lower number.

David Pauli: Nothing. I mean, when you look through it, you know, approximately 25 is. 25-3. I mean, you know, so I don't think we're trying to be too cute. I can't, I can't give you a reason why it goes to 25 other than, you know, we're trying to guide you with some less precision, if that makes sense, and so there's nothing discreet that I can give you.

Speaker Change: behind that comment.

Speaker Change: Nothing. I mean, I think when you when you look through it, you know.

Speaker Change: Approximately 25 is...

Speaker Change: 25-3 I mean you know so I don't think we're trying to be too cute I can't I can't give you a reason why it goes to 25 other than you know we're trying to guide with some

Speaker Change: With less precision, if that makes sense. And so there's nothing discreet that I can give you to...

David Pauli: Yeah, I would just say, Andrew, I think H1 and H2 margins can look a lot of light based on the guidance framework we gave.

Andrew: Andrew, I think H1 and H2 margins can look a lot alike based on the guidance framework we gave. I think Q4 typically is a step down in margin.

David Pauli: I think Q4 typically is a step down in margin from what you see in Q3, just given the seasonality and the lower sales volume in Q4. But overall, I say H1 and H2 can look a lot alike.

David Pauli: From what you see in Q3, just given the seasonality and the lower sales volume in Q4, but overall, I'd say H1 and H2 could look a lot alike.

Andrew: From what you see in Q3, just given the seasonality and the lower sales volume in Q4. But overall, I'd say H1 and H2 can look a lot alike.

David Pauli: Okay. And, you know, you talked a little bit by end market, some of the trends you're seeing. Can you talk a little bit more how, you know, how you guys would define things on the business division level with water safety, low distance, hygienic and drinking water. Can you talk about some of the trends you're seeing versus last quarter, improving or worsening? Yeah, I would say that there's no substantial change. I mean, when you look at our business and the revenues, I mean, if we participate across the whole build cycle. So I would say each of the, you know, business segments or sectors or whatever you want to call it, you know, it's performing sort of as you'd expect, given where they participate in a particular cycle and in a particular vertical.

Speaker Change: Okay.

David Pauli: You know, by end market, some of the trends you're seeing. Can you talk a little bit more about how you guys would define things on a business division level with water safety, flow systems, hygiene, and drinking water? Can you talk about some of the trends you're seeing versus last quarter improving or worsening? Yeah, I would say that there's no

Andrew Buscaglia: Okay and you know you talked a little bit

Andrew Buscaglia: You know, buy-end market, some of the trends you're seeing. Can you talk a little bit more...

Speaker Change: How, you know, how you guys would define things.

Speaker Change: On the business division level with water safety, flow systems, hygienic, and drinking water, can you talk about some of the trends you're seeing versus last quarter improving or worsening?

David Pauli: Yeah, I would say that there's no substantial change. I mean, when you look at our business and the revenues. I mean, we participate across the whole build cycle.

Speaker Change: Yeah, I would say that there's no substantial change. I mean, when you look at our business and the revenues, I mean, we participate across the whole build cycle.

David Pauli: So I would say each of the business segments or sectors or whatever you want to call them is performing sort of as you'd expect, given where they participate in a particular cycle and in a particular vertical. So I would say there's no change across the board. There is some seasonality in drinking water based on the school year and when that work can actually be done, but aside from that, there was no significant change to how the business groups were performing inside of the verticals from last quarter.

Speaker Change: So I would say each of the

Speaker Change: business segments or sectors, or whatever you wanna call it, is performing sort of as you'd expect given where they participate in a particular cycle and in a particular vertical. So,

David Pauli: So, you know, I would say there's no change across the board. You know, there is a there's some seasonality to drinking water based on the school year. And when that work can actually be done, but aside from that, no, no significant change to how the business groups are performing inside of the verticals from last quarter. Okay. All right. Thank you, guys.

Speaker Change: You know, I would say there's no change across the board. You know, there is a, there's some seasonality to drinking water based on the school year.

Speaker Change: and when that work can actually be done. But aside from that, no significant change to how the business groups are performing inside of the verticals from last quarter.

Speaker Change: Okay.

Andrew Creole: The next question comes from the line of Andrew Creole with Deutsche Bank. Please go ahead. Hey, thanks. Good morning, everyone. And congrats again today.

Operator: The next question comes from the line of Andrew Krill with Deutsche Bank.

Speaker Change: Alright, thank you guys.

Speaker Change: The next question comes from the line of Andrew Krill with Deutsche Bank.

Andrew Jon Krill: Hey, thanks. Good morning, everyone, and congrats again to Dave.

Speaker Change: Please go ahead.

David Pauli: I want to circle back on the orders commentary that they were kind of off in line with the company gross this quarter. So I think that means most single digits. Just like, can you give any color on, you know, was that steady throughout the quarter? Or maybe was there any changes as the months progressed? And if you're willing, like anything on July would be helpful. Yeah, I don't think there's anything to talk about. I think the order rates that we saw throughout the quarter were consistent. They remained consistent through July to sort of deliver the kind of guidance and outlook that we've provided.

Andrew Jon Krill: Hey, thanks. Good morning, everyone. And congrats again to Dave. I wanted to circle back on the orders commentary, that they were kind of up in line with the company growth this quarter. So I think that means low single digits.

David Pauli: I want to circle back on the orders commentary that they were kind of up in line with the company growth this quarter. So I think that means low single digits. Can you give any color on, you know, was that steady throughout the quarter? Maybe there were any changes as the months progressed? And if you're willing, anything on July would be helpful. Thank you.

Speaker Change: Can you give any color on, you know, was that steady throughout the quarter, maybe was there any changes as the months progressed, and if you're willing, like anything on July would be helpful. Thank you.

David Pauli: Yeah, I don't think there's anything to talk about. I think the order rates that, you know, we saw throughout the quarter were consistent. They remained consistent through July to sort of deliver the kind of guidance and outlook that we've provided. So I don't think there's anything to worry about in the first, you know, seven months of the year.

Speaker Change: Yeah, I don't think there's anything to talk about. I think the order rates that, you know, we saw throughout the quarter were consistent. They remained consistent through July to sort of deliver the kind of guidance and outlook that we've provided. So, I don't think there's anything...

David Pauli: So I don't think there's anything to me that was at all surprising or different. It was very steady; has been very steady really throughout what's now the first seven months of the year. Okay, great. That's helpful.

Speaker Change: To me that was at all Surprising or different it was very steady has been very steady really throughout What what what's now the first? You know seven months of the year

David Pauli: And then on the supply chain, I think things looking ahead. I know in the past have been quantified as potentially around $10 million of a net benefit in kind of 2025. Is that still a good framework to think about those benefits, or has that changed at all? Yeah, I think that the framework is correct. I think that the only qualitative thing is the run rate is probably closer to 10. You know, I think there's a lot of moves that are that are done. There's some that are underway, and obviously we've prioritized. You know, the larger impact things towards the front end.

Speaker Change: Okay, great, that's helpful. And then on the supply chain, I think Sadie's looking ahead. I know in the past...

Sadie: have been quantified as potentially around $10 million of a net benefit in kind of 2025. Is that still a good framework to think about those benefits or has that changed at all?

Speaker Change: Yeah, I think that the framework is correct. I think that the only qualitative thing is the run rate is probably closer to 10.

David Pauli: You know, I think there's a lot of moves that are done; there are some that are underway, and obviously, we've prioritized the larger impact things towards the front end. There may be some things that take a little bit longer to work their way through. But I think from a yield perspective in 2025, I think, you know, somewhere between 5 and 10 is the right way to think.

Speaker Change: You know, I think there's a lot of moves that are done, there's some that are underway and obviously we've prioritized.

Speaker Change: You know, the larger impact things towards the front end. There may be some things that take a little bit longer to work their way through, but I think from a yield perspective in 2025, I think, you know, somewhere between 5 and 10 is the right way to think about it.

David Pauli: There may be some things that take a little bit longer to work their way through. But I think from a yield perspective in 2025, I think, you know, somewhere between five and ten is the right way to think about it. Okay, great. Thank you.

Operator: Okay, great. Thank you.

Speaker Change: Okay, great. Thank you.

Nathan Jones: Your next question comes from a line of Nathan Jones with a stifle. Who's glad.

Operator: Your next question comes from the line of Nathan Jones with Stiefel. (inaudible)

Andrew Jon Krill: Your next question comes from the line of Nathan Jones with Stiefel.

Nathan Jones: Good morning, everyone. You guys are making it tough to come up with questions with you know strong margins and no change in any of her outlook. So I guess I'll ask a couple questions around capital allocation. And you have been fairly consistent repurchaser over the last couple of years since the okay deal was done. But I've stepped it up in the first half of 24. Can we anticipate a continuation that this kind of run rate. Do you anticipate being a net repurchaser shares more than offsetting deletion? I think the way we've approached it, Nathan, is, you know, we look at the intrinsic value of what we think the company is worth.

Speaker Change: Please go ahead.

Nathan Hardie Jones: You guys are making it tough to come up with questions with, you know, strong margins and no change in any of your outlook. So I guess I'll ask a couple of questions around capital allocation. You have been a fairly consistent repurchaser over the last couple of years since the OK deal was done, but you have stepped it up in the first half of 24. Can we anticipate a continuation at this kind of run rate? Do you anticipate being a net repurchaser of shares more than offset by delusions?

Nathan Hardie Jones: Good morning, everyone.

Nathan Hardie Jones: So I guess I'll ask a couple questions around capital allocation and you have been fairly consistent repurchaser over the last couple years since the okay deal was done.

Nathan Hardie Jones: Can we anticipate a continuation at this kind of run rate? Do you anticipate being a net repurchaser of shares more than offsetting dilution?

Todd A. Adams: I think the way we've approached it, Nathan, is we look at the intrinsic value of what we think the company is worth. And when we feel like it's undervalued, relative to that, we do a little bit more. When we think it's getting closer, we do a little bit less. I think, on balance, we are going to be a repurchaser of shares, I think, somewhat consistently moving forward. What that means in the third quarter and second half, we'll have to find out.

Nathan Hardie Jones: I think the way we've approached it, Nathan, is, you know, we look at the intrinsic value of what we think.

Nathan Jones: And when we feel like it's undervalued relative to that, you know, we do a little bit more. When we think it's getting closer, we, you know, we do a little bit less. I think, on balance, you know, we are going to be a repurchaser of shares. I think somewhat consistently moving forward. What that means in the third quarter and second half will have to find out. But I think that if you look at last year, we did 125 days. You know, we're sitting at 80. I think it's entirely realistic to think that we get close to that.

Speaker Change: The company is Worth.

Speaker Change: And when we feel like it's undervalued, relative to that, you know, we do a little bit more. When we think it's getting closer, we...

Speaker Change: We do a little bit less. I think on balance, we are going to be a repurchaser of shares, I think, somewhat consistently moving forward. What that means in the third quarter and second half, we'll have to find out. But I think that if you look at last year,

Todd A. Adams: But I think that if you look at last year, we did 125, Dave. Yeah. You know, we're sitting at 80. I think it's entirely realistic to think that we could get close to that. This year, we'll have to, we'll have to take a look, but that's how we think about it.

Dave: We did 125, Dave? Yeah. You know, we're sitting at 80. I think it's entirely realistic to think that we get close to that, you know, this year. We'll have to take a look, but that's how we think about it, Nathan.

Nathan Jones: You know, this year, we'll have to, we'll have to take a look. But that's how we think about it.

Todd A. Adams: I guess a follow-up question I'll ask on growth initiatives. Can you talk about the major growth initiatives that you've got going on out there? I know there are some in the drinking water business, but maybe just any commentary around growth investments, and growth initiatives that you're focused on in other parts of the business.

Todd Adams: I guess follow-up question I'll ask on growth initiatives. Can you talk about, you know, the major growth initiatives that you've got going on out there and other something in the drinking water business that maybe just any commentary around growth investments, growth initiatives that you're focused on in other parts of the business. We're trying to cover a few of those. Last Quarter. So we have some substantial growth runway in our commercial brass business. So think about sensor products that would go and compete against somebody like a Sloan. We've got a number of growth initiatives there, a combination of new products and penetration with some critical key customers and verticals.

Nathan Hardie Jones: I guess a follow-up question I'll ask on growth initiatives. Can you talk about the major growth initiatives that you've got going on out there? I know there's some in the drinking water business, but maybe just any commentary around growth investments, growth initiatives that you're focused on in other parts of the business.

Todd A. Adams: We tried to cover a few of those last quarter. So we have some substantial growth runway in our commercial brass business. So think about sensor products that would go and compete against somebody like Sloan. We've got a number of growth initiatives there, a combination of new products and penetration with some critical key customers and verticals. That's moving along quite well. We have an initiative on our flow systems side where we've developed a bunch of new products over the course of the last two or three years, driven the specification, and we're now seeing those commercialized.

Speaker Change: We tried to cover a few of those.

Speaker Change: Last quarter, so we have some substantial growth runway.

Speaker Change: in our commercial brass business. So think about sensor products that would go and compete.

Speaker Change: against somebody like a Sloan.

Speaker Change: We've got a number of growth initiatives there, a combination of new products and penetration with some critical key customers and verticals. That's moving along quite well. We have an initiative on our flow systems side where we've...

Todd Adams: That's moving along quite well. We have an initiative on our flow systems side where we've developed a bunch of new products over the course of the last two or three years. Driven the specification, and we're now seeing those commercialized. So that's got nice momentum this year and doing quite well. And then obviously the drinking water thing. And I'll let Dave talk a little bit about the drinking water thing. But that is going to be for us, you know, the most important thing that you hear from us over the next couple of years. And obviously, the amount of time and effort we're putting into both the new product development that will occur later in the year and in the first part of next year.

Speaker Change: Developed a bunch of new products over the course of the last two or three years Driven the specification and we're now seeing those commercialized. So that's gotten nice momentum this year and doing, you know quite well

Todd A. Adams: So that's got nice momentum this year and is doing, you know, quite well. And then obviously the drinking water thing, and I'll let Dave talk a little bit about the drinking water thing, but, you know, that is going to be, for us, the most important thing that you hear from us over the next couple of years. And obviously, the amount of time and effort we're putting into both the new product development that will occur later this year and the first part of next year, and the commercialization through K-12 schools and healthcare will be a big deal. And a lot of it is, you know, legislation-driven, and Dave's been, I would say, in lockstep with that part of the business. Yeah, so

Speaker Change: And then obviously the drinking water thing, and I'll let Dave talk a little bit about the drinking water thing, but...

Dave: You know that is going to be...

Dave: For us,

Dave: You know, the most important thing that you hear from us over the next couple of years.

Dave: And obviously the...

Dave: the amount of time and effort we're putting into both.

Dave: the new product development that will occur later in this year in the first part of next year and the commercialization through

David Pauli: And the commercialization through K through 12 schools and health care will be a big deal. And a lot of it is, you know, legislation-driven and Dave's, Dave's been, I would say, in lockstep with that part of the business. I'll let him talk about it.

Dave: K-12 schools and healthcare will be a big deal, and a lot of it is, you know, legislation-driven. Dave's been, I would say, in lockstep with that part of the business, so I'll let him talk about it.

David Pauli: Yeah, so maybe a couple comments on drinking water, Nathan. You know, in the quarter, we continued to see double-digit growth within the installed base of filtered units here in the U.S. So for us and our team, the focus is really on increasing the number of filtered units and then increasing the attachment rate of filters to those units. From a legislative perspective, you know, we've talked about Michigan having passed the Filter First legislation requiring all K-12 schools and daycare facilities to have filtered water available.

David Pauli: Yeah, so maybe a couple of comments on drinking water, Nathan. You know, in the quarter, we continue to see double-digit growth within the installed base, the filtered units here in the US. So for us and our team, the focus is really on increasing the number of filtered units and then increasing the attachment rate of filters to those units. From a legislative perspective, you know, we've talked about Michigan having passed the filter first legislation requiring all K through 12 schools and daycare facilities to have filtered water available. That was passed into law last October. Michigan still in the process of rolling out just how schools get funding. The bills funded by the state of Michigan.

Dave: Yeah, so maybe a couple comments on drinking water, Nathan. You know, in the quarter, we continue to see double-digit growth within the

Nathan Hardie Jones: installed base of filtered units here in the US. So for us and our team the focus is really on increasing the number of filtered units and then increasing the attachment rate of filters to those units.

David Pauli: That was passed into law last October. Michigan's still in the process of rolling out just how schools get funding. The bill's funded by the state of Michigan. And then there are three other states that currently have legislation that was proposed either late in 23 or early in 24 that looks a lot like the Michigan Filter First legislation, and those three states are Wisconsin, Minnesota, and Pennsylvania.

Nathan Hardie Jones: From a legislative perspective, you know, we've talked about Michigan having passed the filter first legislation requiring all K through 12 schools and daycare facilities

Nathan Hardie Jones: to have filtered water available that was passed into law last October .

Nathan Hardie Jones: Michigan's still in the process of rolling out just how schools get funding.

David Pauli: And then there's also three other states that currently have legislation that was proposed either late in '23 or early in '24 that looks a lot like the Michigan filter first legislation, and those three states being Wisconsin, Minnesota, and Pennsylvania.

Nathan Hardie Jones: The bill is funded by the state of Michigan.

Nathan Hardie Jones: And then there's also three other states that currently have legislation that was proposed, either late in 23 or early in 24, that looks a lot like the Michigan Filter First legislation, and those three states being Wisconsin, Minnesota, and Pennsylvania.

Nathan Jones: Thanks very much for taking the questions.

Operator: Thanks very much for taking the question.

Speaker Change: Thanks very much for taking the questions.

Mike Howerin: Question comes from the line of Mike Howerin with Baird. Good morning, guys. So first question, just on, you know, you counted on the stability on the aftermarket side, the MRO side of the portfolio. Are you seeing much of a trend difference between the MRO side right now and the original equipment side and the portfolio?

Operator: The next question comes from the line of Mike Halloran with Baird.

Nathan Hardie Jones: Question comes from the line of Mike Halloran with Baird. Please go ahead.

Operator: So first question: just on, you know, you commented on the stability of the...

Michael Patrick Halloran: Morning, guys.

Michael Patrick Halloran: So, first question, just on, you know, you commented on the stability on the...

Michael Patrick Halloran: Aftermarket side, the MRO side of the portfolio, are you seeing much of a trend difference between the MRO side right now and the original equipment side on the portfolio?

David Pauli: When you say original equipment, I'm guessing you mean new build construction. I think it depends by vertical, you know. I think when we look through the retrofit, replace, or break fixed part of our business, that's pretty steady. All of it. on. I think when you go to the new build side of life, obviously institutional is stronger than commercial and residential, so I think it's sort of, you have to unpack it by that mic, and I don't think there's any change to that. I would say that an aggregate at present retrofit replace is growing less than new build institutional, but more than commercial new build, and probably a touch better than residential.

Todd A. Adams: Well, when you say original equipment, I'm guessing you mean new build construction. I think it depends on vertical.

Speaker Change: When you say original equipment, I'm guessing you mean new build construction.

Todd A. Adams: You know, I think when we look through the retrofit replacer brick fix part of our business, that's pretty steady all the time. I think when you go to the new build side of life, obviously, institutional is stronger than commercial and residential. So I think it's sort of, you have to unpack it by, by that, Mike, and I don't think there's any change to that. I would say that, at present, retrofit replace is growing less than new build institutional but more than commercial new build and probably a touch better than residential. So that's, you know, 45% of the business is retrofitted and replaced, growing, you know, steadily in the low single digits.

Speaker Change: I think it depends by vertical. I think when we look through the retrofit replacer brick fix part of our business, that's pretty steady all the time.

Speaker Change: I think when you go to the new build side of life.

Speaker Change: Obviously institutional is stronger than commercial and residential so I think it's sort of you have to unpack it by

Speaker Change: By that Mike and I don't think there's any change to that I would say that an aggregate

Speaker Change: At present, Retrofit Replace is growing less than New Build Institutional, but more than commercial New Build, and probably a touch better than residential.

David Pauli: So that's, you know, 45% of the business is retrofit replace, growing steadily in the low single digit range. Makes sense.

Speaker Change: So that's, you know, 45% of the business is retrofit replace, growing, you know, steadily in the low single-digit range.

Operator: make sense and then kind of a growth algorithm question if you think longer term now that you've more or less gotten through all the product rationalizations. You've had Alkane in the portfolio for a while now. How do you think about what your market outgrowth looks like? Is this a few points per year, given all the initiatives you have relative to whatever the end markets are growing?

Todd Adams: And then kind of a growth algorithm question, if you think longer term now that you've gotten through all the product rationalizations, you've got Alcane portfolio for a while now, how do you think about what your market growth looks like? Is it a few points per year, given all the initiatives you have? Well, to what I mean, and markets are growing, and maybe just unpack that a little bit. Well, if you look back over those 10 years, and probably even a longer time frame, the growth algorithm has been, you know, a couple points of market, a couple points of price, and a couple points of out growth taken as a whole.

Speaker Change: Makes sense. And then kind of a growth algorithm question, if you think longer term now that you've...

Speaker Change: More or less gotten through all the product rationalizations. You've had Alkane in the portfolio for a while now. How do you think about what your market outgrowth looks like? Is this a few points per year given all the initiatives you have relative to whatever the end markets are going and maybe just unpack that a little bit.

Todd A. Adams: And maybe just unpack that a little bit.

Todd A. Adams: Well, if you look back over those 10 years, and probably even a longer time frame, the growth algorithm has been, you know, a couple points of market, a couple points of price, and a couple points of output, taken as a whole. And I think when you roll that through the various cycles between institutional, commercial, and residential, they'll each have their own way of saying it. Institutional be all stronger at times, commercial be a little bit stronger at times, residential be a little bit stronger at times, and in parts of the cycle, one will be stronger or weaker.

Todd Adams: And I think when you roll that through the various cycles between institutional, commercial, residential, they'll each have their own, what's the right word it would say? Institutional be a little stronger at times, commercial be a little bit stronger at times, residential be a little bit stronger at times, and parts of the cycle one will be stronger or weaker. And so, you know, the blended way to think about this is it's a country of 330 million people that are moving in value, education, and health care. So that's sort of a steadying force, and there's a massive installed base of things that, you know, need to be replaced on a somewhat regular basis or break and need to be repaired.

Todd A. Adams: And so you know the muddled way to think about this is that it's a country of 330 million people that are moving and value education and health care. So that's sort of a steadying force, and there's a massive installed base of things that, you know, need to be replaced on a somewhat regular basis or break and need to be repaired.

Todd A. Adams: And so when you roll that through, that's two points about the market, two points about price, and a couple of points about growth. I don't think anything has changed. If anything, longer term, the drinking water part of our portfolio should grow faster than the market. And it will grow faster, as Dave pointed out. That's something that's been true for a long time.

Todd Adams: And so when you roll that through, that's two points of market, two points of price, a couple points of out growth. I don't think anything has changed. If anything longer term, the drinking water part of our portfolio should grow faster than the market. And it will grow faster, as they pointed out. That's been something that's been true for a long time, and with the amount of effort and innovation we've been putting into it. I think I'm confident to say that I think it changes and probably gets a little bit better. So the current 3%, you know, we're undergrowing by 3%. A lot of that is, you know, we're not as, we haven't been as aggressive on price in the moment, and, you know, we're absorbing some of the commercial headwinds, but still growing it 3%.

Operator: And with the amount of effort and innovation we've been putting into it, I think I'm confident to say that I think it changes and probably gets a little bit better. So the current 3%, we're undergrowing by 3%. A lot of that is we haven't been as aggressive on price in the moment, and we're absorbing some of the commercial headwinds but still growing at 3%. So I think we see the opportunity to migrate back to that mid-single digit growth rate with everything I see and the addition of drinking water.

Todd Adams: And so I think we see the opportunities to migrate back to that, you know, mid-single digit growth with everything I see, and, you know, the addition of drinking water. Great. Appreciate it, Todd. Thanks. Yep.

Speaker Change: Great I appreciate it thanks.

Michael Patrick Halloran: Yes.

Jeff Hammond: Next question comes from the line of Jeff Hammond with KeyBank Capital Market. Hey, good morning, guys. Just a couple of clean-ups here. In the Q, I think you break down commercial institutional, all other and all other, I think was down 8. I think he said Rezzy was flat. So I just wanted to understand what the pressure was within that all other.

Operator: Your next question comes from the line of Jeff Hammond with KeyBank Capital Markets.

Michael Patrick Halloran: Your next question comes from the line of Jeff Hammond with Keybanc capital markets.

Jeffrey David Hammond: Hey, good morning, guys. In the queue, I think you break down commercial, institutional, all other, and the all other, I think was down eight. I think you said Resi was flat, so I just wanted to understand what the pressure was within that all other.

Jeffrey David Hammond: Please go ahead, hey, good morning, guys.

Jeffrey David Hammond: Just a couple of clean ups here I'm in the in the Q I think you break down commercial institutional all other in the all other I think it was down eight.

Speaker Change: I think you said resi was flat so I just wanted to understand what what the pressure was within that all other and then just on the C. E. O. You know move congrats to Dave and Mark on the new roles.

David Pauli: And then just on the CAO move, congratulations to Dave and Mark on their new roles. Maybe just speak to some of the things Mark's going to really be focused on in that new role. Yeah, I'll take the first part of your question.

Todd Adams: And then just on the CAO, move congrats to Dave and Mark on the new rules. Maybe just speak to some of the things you know, Mark's going to really be focused on in that new rule.

Speaker Change: Maybe just speak to some of the things.

Michael Patrick Halloran: You know mark is going to really be focused on in that new rule.

David Pauli: I'll take the first part of your question, Jeff, just on the all-others. What you're seeing in the 10-Q is the GAP reported number. So you've got to remember there's the skew rationalization that's impacting that number. And that's what's causing that to be

Todd Adams: Yeah, maybe I'll take the first part of your question, Jeff, just on the all others. So what you're seeing in the 10-Q is the gap reported number. So you got to remember there's the ski rationalization that's impacting that number. And that's what's causing that to be down. Yeah, so with respect to Mark, obviously, you know, Mark and I have worked together for more than 20 years. He's been here 18; CFO for 13. And, as you reminded me yesterday, I did 50 earnings calls. So the nice thing about Mark is he understands our business inside and out.

Speaker Change: Yes, maybe I'll take the first part of your question, Jeff just on the all others. So what youre seeing in the 10-Q is the GAAP reported number. So you got to remember Theres, a SKU rationalization, that's impacting that number.

Speaker Change: And thats whats, causing that to be.

Michael Patrick Halloran: Down.

Todd A. Adams: Yeah, so with respect to Mark, obviously, you know, Mark and I have worked together for more than 20 years. He's been here 18, CFO for 13. And, as you reminded me yesterday, he did 50 earnings calls.

Michael Patrick Halloran: Yeah, so with respect to Mark obviously.

Mark: Mark and I have worked together for more than 20 years. He's been here 18, CFO for <unk> and as you reminded me yesterday did 50 earnings calls so the nice thing about mark as he understands our business inside and out.

Todd A. Adams: So, the nice thing about Mark is he understands our business inside and out, and he is a tremendous resource to both Dave and I, and the broader company, as we think about growing the business going forward. So, one of his biggest focus areas is going to be on the continued organizational and talent development process that we have, and it's working effectively, but I think we think about it as, you know, how much more can we do? Because obviously, as we acquire and grow, we're going to need more talent.

Todd Adams: And he is a tremendous resource to both Dave and me and the broader company as we think about growing the business going forward. So one of his biggest focus areas is going to be on the continued org and talent development process that we have and is working effectively. But I think we think about it as, you know, how much more can we do? Because obviously, as we acquire and grow, we're going to need more talent. And so the ability to do that organically will be really important for us. And particularly when you get into a situation like an LK where, you know, the reality is it requires a significant amount of resource and talent from the zern side to get to the synergies, the pivot to make some tough choices.

Michael Patrick Halloran: And he is a tremendous resource.

Michael Patrick Halloran: Both Dave and I and the broader company as we think about growing the business going forward. So.

Michael Patrick Halloran: One of his biggest.

Speaker Change: Focus areas is going to be on the continued org and talent development process that we have and it's working effectively but I think we think about it as how much more can we do because obviously as we acquire and grow we're going to need more talent and so the ability to do that organically.

Todd A. Adams: And so, the ability to do that organically will be really important for us, and particularly when you get into a situation like an LK where, you know, the reality is it requires a significant amount of resources and talent from the Zurn side to get to the synergies, to pivot, to make some tough choices, and we want to be in a position to do that, and Mark is going to be at the forefront of that. And so, you know, and when you think about an integration of a larger, more significant business down the road, you know, he's someone who could step in day one, be ready to communicate how we do things, bring people along in terms of implementing a business system and things like that.

Speaker Change: We will be really important for us and particularly when you get into a situation like an L. K.

Speaker Change: Where the reality is.

Speaker Change: It requires significant amount of resources talent from those earn side to get to the synergies the pivot.

Speaker Change: To make some tough choices and we want to be in a position to do that and mark is going to be at the forefront of that and so.

Todd Adams: And we want to be in a position to do that. And Mark is going to be at the forefront of that. And so, you know, when you think about an integration of a larger, more significant business down the road, you know, he's someone who can step in day one, be ready to communicate, you know, how we do things, bring people along in terms of implementing the business system and things like that. So that's where his focus is going to be. And, you know, the three of us sit approximately eight feet apart. So it's nice to have Mark in the full doing some really important things for us for the future.

Speaker Change: And when you think about an integration of a larger more significant.

Speaker Change: Business down the road.

Mark: He's someone who can step in day, one be ready to communicate how we do things bring people along in terms of implementing the business system and things like that so that's where his focus is going to be.

Todd A. Adams: So, that's where his focus is going to be, and, you know, the three of us sit approximately eight feet apart, so it's nice to have Mark in the fold doing some really important things for us in the future.

Mark: And.

Speaker Change: The three of us sit approximately eight feet apart.

Speaker Change: It's nice to have mark in the full doing doing some really important things for us for the future.

Jeff Hammond: Okay, thanks.

Speaker Change: Okay. Thanks.

Brett Lindsey: In next question comes from line of Brett Lindsey with Mizzouvo. Please go ahead. Hey, good morning, and congrats to Dave and Mark. I wanted to follow up on the margin out performance. So above the high end of the guidance range, was hoping you could dimension the positive variances versus the internal forecast for the second quarter. And then thinking about the forward guide, so you're betting some continued margin expansion in Q3; looks like it flattens out in Q4.

Operator: Your next question comes from the line of Brett Linzey with Mizzou.

Speaker Change: The next question comes from the line of Brett Linzey.

Brett Logan Linzey: With Mizuho.

Brett Logan Linzey: Please go ahead. Hey, good morning, and congrats to Dave and Mark. I wanted to follow up on the margin outperformance, so above the high end of the guidance range. I was hoping you could mention the positive variances versus the internal forecast for the second quarter. And then thinking about the forward guide, so you're betting on some continued margin expansion in Q3. But it looks like it flattens out in Q4. Is that simply just reflective of the tougher sales comparison? Or is there conservatism?

Brett Logan Linzey: Please go ahead, hey, good morning, and congrats to Dave and Mark.

Brett Logan Linzey: Wanted to follow up on the margin outperformance so above the high end of the guidance range was hoping you could dimension the positive variances versus the internal forecast for the second quarter and then thinking about the forward guidance. So you're betting some continued margin expansion in Q3, it looks like it flattens out in Q4 is that simply just.

David Pauli: Is that simply just reflective of the tougher sales comparison, as their conservatism in any color to be great? Well, Brett, I think we try to communicate that look, you know, what's driving the margin performance, I think, are a lot of the structural things that we've talked about that are rolling through. And I also think that, you know, the continuous improvement that we are doing. So when we measure the number of continuous improvement activities we're doing, right? And we don't measure it to measure it. We measure it to deliver better earnings, better cash flow, improved lead times, and things like that.

Speaker Change: Reflective of the tougher sales comparison is there conservatism any any color would be great.

David Pauli: Any color would be great.

Todd A. Adams: Well, Brett, I think we tried to communicate that, look, you know, what's driving the margin performance, I think, are a lot of the structural things that we've talked about that are rolling through. And I also think that, you know, the continuous improvement that we are doing. So when we measure the number of continuous improvement activities we're doing right, and we don't measure it to measure it; we measure it to deliver better earnings, better cash flow, improved lead times, and things like that. And so sitting here today through the first half.

Speaker Change: Well, Brett I think we.

Speaker Change: We tried to communicate that look.

Speaker Change: What's driving the margin performance I think there are a lot of the structural things that we've talked about that are rolling through and I also think that the continuous improvement that we are doing so when we measure the number of continuous improvement activities, we're doing right and we don't measure it.

Speaker Change: To measure it we measure it to deliver.

Speaker Change: Better earnings better cash flow improve lead times and things like that and so sitting here today.

David Pauli: And so sitting here today through the first half, the number of continuous improvement activities is up 42% year over year. So there's not one big thing with that compounding benefit of our 2400 people getting up every day and doing just something just a little bit better is what is driving the outperformance. I think it's not like we got surprised and bought materials that are a whole lot cheaper than we thought going into the quarter. You can't turn it off. It's just sort of that constant engine that's creating, you know, more and more productivity and cost savings.

Speaker Change: Through the first half.

Todd A. Adams: The number of continuous improvement activities is up 42% year over year. So there's not one big thing, but the compounding benefit of our 2,400 people getting up every day and doing just something just a little bit better is what is driving the outperformance. I think it's not like we got surprised and bought materials at a whole lot cheaper than we thought going into the quarter. You can't turn it off. It's just sort of that constant engine that's creating, you know, more and more productivity and cost savings.

Speaker Change: The number of continuous improvement activities are up 42% year over year. So there's not one big thing, but that compounding benefit of our 2400 people getting up every day and doing just something just a little bit better is what is driving the outperformance I think it's not like we got surprised and bought materials.

Speaker Change: A whole lot cheaper than we thought going into the quarter.

Speaker Change: You can't turn it off.

Speaker Change: It's just sort of that constant engine, that's creating more and more productivity and cost savings and so that's to me the biggest reconciling item.

Todd A. Adams: And so, that's, to me, the biggest reconciling item that we think about because, you know, up 42% in a lot of small things adds up. And so, I don't think it's going to slow down in the third quarter. I don't think it's going to slow down in the fourth quarter, I don't think it slows down in the 25, but I don't think that there's anything that we're going to give you that's going to... that's going to answer the question other than it's just relentless continuous improvement across the board.

David Pauli: And so that's, to me, the biggest reconciling item that we think about because, you know, up 42% in a lot of small things. Adds up, and so I don't think it's going to slow down in the third quarter. I don't think it's going to slow down on the fourth quarter. I don't think it slows down on 25.

Speaker Change: That we think about because up 42% and a lot of small things.

Speaker Change: Adds up and so I don't think it is going to slow down in the third quarter. I don't think is going to slow down in the fourth quarter I don't think it slows down in 'twenty five.

David Pauli: But I don't think that there's anything that we're going to give you that's going to answer the question other than it's just relentless, continuous improvement across the board. Yeah, that's great. No, appreciate the color.

Speaker Change: But I don't think that there's anything that we're going to give you that's going to.

Speaker Change: That's going to answer the question other than it's just relentless continuous improvement across the board.

Operator: That's great. No, I appreciate the color.

Speaker Change: Yeah, that's great I appreciate the color and then just one follow up on tariffs. So certainly more topical given the political landscape could you just level set us on your sourcing exposure to China, and Mexico, specifically and is there more work to do and how can you modulate if the tariffs.

David Pauli: And then just one follow-up on tariffs is certainly more topical given the political landscape. Could you just level set us on your sourcing exposure to China and Mexico specifically? And, you know, is there more work to do? And how can you modulate if, you know, the tariffs, you know, do step up here, you know, post November? Yeah, I think one of the big things to recall is, you know, back in 2016, when the tariff situation all began, you know, we took the position of, you know, the long-term position of trying to find a supply chain for us that vastly deemphasized China.

Speaker Change: Do step up here post November.

Todd A. Adams: And then just one follow-up on tariffs is certainly more topical, given the political landscape. Could you just level set us on your sourcing exposure to China and Mexico specifically? And, you know, is there more work to do? And how can you mitigate if, you know, the tariffs do step up here, you know, post November?

Speaker Change: Yeah, I think one of the big.

Speaker Change: Things to recall is back in 2016, when the tariff situation all began.

Speaker Change: We took the position of.

Todd A. Adams: Yeah, I think one of the big things to recall is, you know, back in 2016, when the tariff situation all began, we took the position of, you know, the long-term position of trying to find a supply chain for us that. Vastly de-emphasized China, and we've been working at that continuously for, I would call it, eight years. And so, you know, we feel like our supply chain, with the work we've done over that time frame, and it's been a terrific job by our team, puts us in a spot to, I don't want to say skate around, but clearly become more advantaged than we are today with respect to tariffs and, and that's in China and Mexico. So I think we feel like we're well positioned to absorb what may or could We we've We've altered over the last, you know, really eight years.

Speaker Change: The long term position of trying to find the supply chain.

Speaker Change: For us that.

Speaker Change: Vastly deemphasize China.

Todd Adams: And we've been working at that continuously for, I would call it eight years. And so, you know, we, we like our supply chain with the work we've done over that time frame. And it's been a terrific job by our team puts us in a spot to, I don't want to say skate around. But clearly become more advantage than we are today with respect to tariffs. And that's in China and Mexico. So, I think we feel like we're well positioned to absorb what may or could happen. If it's different than that, we'll have to manage through it.

Speaker Change: And we've been working at that continuously for I would call. It eight years and so we feel like our supply chain with.

Speaker Change: With the work we've done over that timeframe and it's been a terrific job by our team puts us in a spot to.

Speaker Change: I want to say skate around but clearly.

Speaker Change: Become more advantage than we are today with respect to tariffs and that's in China and Mexico. So I think we feel like we're well positioned.

Speaker Change: To absorb what may or could happen.

Speaker Change: If it's different in that we will have to manage through it but I think we're in a terrific spot too to begin to reap some of the benefits of the supply chain.

Todd Adams: But I think we're in a terrific spot to begin to reap some of the benefits of the supply chains. We've we've altered over the last, you know, really eight years. All right, got it. Congrats on the quarter again. Yep, thanks.

Speaker Change: We've altered over the last really eight years.

Speaker Change: Okay.

Operator: All right, I got it. Congratulations on the quarter again.

Speaker Change: Alright got it congrats on the quarter again.

Speaker Change: Thanks.

Bryan Wendland: I will now turn the call back over to Brian Wendlin for closing remarks. Please go ahead. Thanks everyone for joining us on the call today. We appreciate your interest in Zurn L.K.

Bryan Francis Blair: I will now turn the call back over to Bryan Wendlandt for closing remarks. Please go ahead. Thanks, Jeff.

Speaker Change: I will now turn the call back over to Brian Wendling for closing remarks. Please go ahead.

Bryan Francis Blair: Thanks to everyone for joining us on the call today. We appreciate your interest in Zurn LK Water Solutions, and we look forward to providing our next update when we announce our third quarter results in late October.

Bryan Francis Blair: Thanks, Darren and thanks, everyone for joining us on the call today. We appreciate your interest in the <unk> water solutions and we look forward to providing our next update when we announce our third quarter results in late October have a good day.

Operator: Water Solutions and we look forward to providing our next update when we announce our third quarter results and wait up to over. Have a good day.

Operator: Have a good day!

Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.

Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining, and we may now discriminate. Thank you all for joining us on the call. Thank you all for joining us on the call today. Thank you all.

Speaker Change: Ladies and gentlemen that concludes today's call. Thank you all for joining and you may now disconnect.

Speaker Change: [music].